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Operator: Good day, and welcome to the AMERISAFE Third Quarter 2025 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Kathryn Shirley. Please go ahead. Kathryn Shirley: Thank you, operator, and good morning, everyone. Welcome to the AMERISAFE 2025 Third Quarter Investor Call. If you have not received the earnings release, it is available on our website at amerisafe.com. This call is being recorded. A replay of today's call will be available. Details on how to access the replay are in the earnings release. During this call, we will be making forward-looking statements intended to fall within the safe harbor provided under the securities laws. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Actual results may differ materially from the results expressed or implied in these statements if the underlying assumptions prove to be incorrect or as the results of risks, uncertainties and other factors including factors discussed in the earnings release and the comments made during today's call and in the Risk Factors section of our Form 10-K, Form 10-Qs and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement. I will now turn the call over to Janelle Frost, AMERISAFE's President and CEO. G. Frost: Thank you, Kathryn, and good morning. We are pleased that our growth strategy in this competitive market is yielding a healthy 20.5% return on average equity and a 90.6% combined ratio for the quarter. Our continued success in the market reflects the strength of the AMERISAFE value proposition. At our core, we are a profitable underwriter, focused on knowing our risk, pricing them appropriately and servicing our policyholders and their workers. In doing so, we are a better carrier for our agents and create long-term value for our shareholders. This is our sixth consecutive quarter of top line growth. Voluntary premiums on policies written in the quarter grew 10.6%. Combined with audit premiums, our gross premiums written grew 7.2% and net earned grew 6.2% over the third quarter of 2024. We are seeing the compound benefits of disciplined underwriting, robust new business production and strong renewal performance. Turning to losses. Our accident year loss ratio was in line with the prior year end quarter at 71%. Frequency remains at historically low levels, while severity continues to not higher on a year-over-year basis. We are confident that our claims handling practices, coupled with upfront risk selection remain consistent and disciplined in the current environment. Thus, the company experienced $8.9 million of favorable reserve development on prior accident years, primarily accident years 2020 and prior. In addition to announcing the quarterly results, we also announced the Board of Directors declared both a regular quarterly dividend of $0.39 per share, and a $1 special dividend payable on December 12, 2025, to shareholders as of record as of December 5, 2025. The Board takes a comprehensive approach when evaluating capital deployment, considering both the regular quarterly dividend, share repurchases and any special dividend within the broader framework of AMERISAFE's capital position operating performance and future growth opportunities. This balanced strategy ensures that we continue to reward shareholders while maintaining the flexibility to invest in the business and support long-term value creation. Our capital management philosophy remains consistent. Profitability drives capital and capital is deployed with discipline. We are proud of our track record. Over the past 13 years, AMERISAFE has declared nearly $50 per share in total dividends, including $12.68 in regular dividends and $37.25 in special dividends per share. Along with managing capital, the continued investment we are making in our people and technology is reflected in our solid top line growth at industry-leading returns, delivering long-term value to our shareholders. With that, I'll turn the call over to Andy to discuss the financials. Anastasios Omiridis: Thank you, Janelle, and good morning to everyone. For the third quarter of 2025, AMERISAFE reported net income of $13.8 million or $0.72 per diluted share and operating net income of $10.6 million or $0.55 per diluted share. During the third quarter of 2024, net income was $14.3 million or $0.75 per diluted share and operating net income was $11.1 million or $0.58 per diluted share. Gross written premiums were $80.3 million in the quarter compared with $74.9 million in Q3 of 2024, increasing 7.2%. Audit premiums increased the top line by $2.5 million compared with $4 million in the prior year quarter. Despite the audit premium headwinds, voluntary premium grew -- growth of 10.6%, fueled by new business production and strong retention is driving top line growth. Our total underwriting and other expenses were $22.1 million in the quarter compared with $21.3 million in the prior year quarter, which resulted in an expense ratio of 31.1% compared with 31.7% in the prior year quarter. The expense ratio reflects ongoing investment in AMERISAFE's growth as we see elevated opportunity in our target markets. Our effective tax rate was 21% compared with -- to 19.5% in the prior year quarter. Turning to our investment portfolio. In the third quarter, net investment income decreased 12.3% to $6.6 million, driven by a decrease in average investable assets following the payment of the special dividend in the fourth quarter of 2024. At quarter end, we held approximately $817 million in investments cash and cash equivalents compared to $899 million at September 30, 2024. The reinvestment rate environment remains fairly strong with some moderation compared to the second quarter of 2025. Yields on new investments exceeded portfolio roll-off by 77 basis points, driving the portfolio tax equivalent book yield to 3.9%, relatively flat versus the third quarter of 2024. The yield on cash held in money market funds ended the quarter at 4% compared to 4.8% at the end of the prior year quarter. The unrealized gain for the equity securities was $4.1 million compared to $3.9 million in the prior year quarter. Both periods were driven by strength in the U.S. equity market. Our investment portfolio remains high quality, carrying a double an average AA minus credit rating with a duration of 4.3 years. The composition of the portfolio is 61% of municipal bonds, 21% in corporate bonds, 3% in U.S. treasuries and agencies, 7% in equity securities and 8% in cash and other investments. Approximately 45% of the portfolio is classified as held to maturity, which maintains a net unrealized loss position of $7.6 million. As a reminder, these securities are carried at amortized costs, and therefore, unrealized gains and losses are not reflected in our reported book value. Our capital position is strong with a high-quality balance sheet, solid loss reserve position and conservative investment portfolio. During the third quarter, the company repurchased roughly 31,000 shares at average cost of $43.72 per share totaling $1.3 million. And finally, a couple of other topics. Book value per share increased to $14.47, up 7.1% year-to-date. Statutory surplus was $259 million compared to $235.1 million at year-end 2024. Lastly, we will be filing our Form 10-Q with the SEC later today, October 30, 2025, after the close of the market. With that, I'd like to turn the call over to the operator for the question-and-answer portion. Operator? Operator: [Operator Instructions] And our first question is going to come from Matt Carletti. Matthew Carletti: Janelle, I was hoping maybe to start off, obviously, voluntary premium growth has been kind of solid double digits for a couple of quarters now, which is a great kind of emerging trend. Could you talk a little bit about where you're seeing success where that growth is coming from, if it's kind of any particular areas? Or maybe it's just more broad-based and it's pretty evenly across kind of all aspects of your business? G. Frost: Thank you for noticing. And I'm also pleased to say it's more broad-based. We have grown policy count in the quarter over second quarter, we grew policy count roughly 2.7%. On a year-to-year basis, it's more like 11% year-over-year for policy count. So we're growing policy count, which is very important. Our insured payrolls are expanding as well, which is also a positive and particularly in this market when you read all of the headlines about things that are happening in unemployment and wage growth expectations. Our skilled labor jobs in our high-hazard industries are faring pretty well, so that helps support premiums in terms of payroll growth. We're seeing still very strong retention on a renewal basis for the quarter. Our renewal retention for the policies for which we offered renewal was 93.6%, and very healthy number. I think actually, that was the same number we had prior year quarter, so good. Even in this crazy competitive market that we're in, we're able to maintain those accounts that we want to maintain through a lot of collaborative effort from the AMERISAFE employees. So I can't emphasize that enough. We have a seasoned sales staff the way we utilize our safety services as part of the risk selection process is truly a value add, not only for our underwriters and helping our underwriters understand the risk and price the risk appropriately. But I'll say a value-add for our policyholders and their agents. The fact that, that is an AMERISAFE contact that they have and that builds relationships with those policyholders and with those agents. So it's critical to what we do, and it's unique to AMERISAFE. So I think that's huge on our part. And then I can't -- I certainly can't not mention our claims handling experience. From a renewal retention standpoint, I truly believe the way we handle claims benefits us from a renewals perspective. If you've had a claim and it's handled by an AMERISAFE employee, we handle it, I think, the right way, and we treat those injured workers well, and that's meaningful to a policyholder. So all of those things together, I think, is really adding to the growth effort in terms of just the amount of collaboration that we're having. We've really been focused on ease of doing business, speed to market and it's just compounding and bearing fruit now in those growth numbers. And I'll caveat that by saying all without -- we're not adding -- we haven't added class codes. We haven't added -- we haven't expanded geographically. It's really market penetration and better serving -- better working with our agents. Matthew Carletti: Great. And then if I kind of try to tie it one step further. So as I look at your business, like, I mean, financially kind of earnings returns have been strong for many years now and really unchanged if you want to look at ROE or something like that. So really strong kind of where the business is. you talked a little bit about the special dividend at the outside of the call and it is a little bit smaller than kind of some of the previous years. So would I be correct to kind of interpret that maybe an output of that is expression of your guys' confidence in the kind of the durability of that growth or that growth going forward and that that's where you'd prefer to allocate capital versus giving it back to those growth opportunities are there? G. Frost: Well said, Mr. Carletti, that is exactly what you should infer into the dividend. I mean I'm excited about the dollar dividend by no question. But I think it definitely infers that we believe what we have going here in terms of our growth strategy is not short-lived that I believe it has longevity. And we've said since the very beginning when we started paying out the special dividend, part of the reason that we were returning that capital to shareholders is because we had internally made the decision. It wasn't the right time to really pour that into organic growth because we wanted that growth to be profitable growth. So now we've had these quarters of top line growth, and it's starting to flow through on the earnings. And so that dividend, we're using that capital and deploying that capital towards that organic growth. Matthew Carletti: Fantastic. I'm glad I put those puzzle pieces together okay. Thanks for the color. Operator: [Operator Instructions] And our next question is going to come from Mark Hughes from Truist. Mark Hughes: Janelle or I'll say, Andy, in the spirit of the question about the special dividend and the growth opportunities. How do you view your leverage now? And how much flexibility do you have on the balance sheet? And this would be underwriting leverage. Anastasios Omiridis: It is going up, but it's at $1. I mean from our standpoint, I don't think it's really changed. It's -- I think it's increased a little bit, but it's right at $1. Mark Hughes: Yes. And then what would you see as kind of the upper bound kind of comfortably where would you be able to take that. Anastasios Omiridis: I would say about $1.5 mark. Mark Hughes: Okay. The -- what's the latest on medical inflation. G. Frost: There's been quite a few articles. AM Best actually put out a segment report on workers' compensation, and they spoke to medical inflation. Certainly, everyone has their eye on it. we're not immune to medical inflation. At the same time, I believe the fee schedules and the fee structure and workers' compensation is probably abating that to some degree for workers' compensation much more than it is for nonworkers' compensation things people are seeing in their health care renewals and those kinds of things. So I do think we have some relief from the fee schedules in terms of medical inflation. Utilization is something -- and I think we talked about this on the last call, utilization is something NCCI sort of pointed to when they talked about the 6% increase based on medical inflation, something certainly we're keeping our eyes on, particularly home health, I've been talking about for a number of years, and I'll continue to talk about home health. But even in terms of physician visits, what we've kind of noticed a little bit more PA visits, our physician assistance visits, which sometimes lead to additional visits because a doctor has to sign off on a release of a patient. So we're just keeping our eye on that. I don't know if there's anything that's more anecdotal than in the data yet, but utilization is something we want to keep our eye on since the fee schedules seem to be doing their job, and we know that there is a shortage in the health care industry, so in terms of some services being available. So those are the things we're watching out for. Mark Hughes: Yes. What's been latest trend in terms of the approved state loss costs, the most recent ones, any trend there? G. Frost: Great question. So we have, I think, 4 states that head increases, Missouri, D.C., Nevada, California, and we talked about California on the last call. Those are the ones that I think had increases. On average, what we're seeing and most of the loss costs for 2026 are already in and approved. And what we're seeing is pretty steady state mid-single-digit declines. I did look at the CIAB study because they survey agents and ask them what they're seeing in terms of their clients' renewals. And I noticed -- and they haven't put their third quarter data out, but in their second quarter data, more than 50%, we're basically seeing no change. So that would say, if that's an accurate depiction of what agents are seeing or what's actually happened in the marketplace, that would lead you to believe that carriers are being relatively disciplined about the loss cost may be down in terms of the absolute loss cost. But what they're using in terms of their average pricing is sort of flat, at least based on that agent survey. So that's a sign of, I would speak to relative discipline in the marketplace. Mark Hughes: Yes. You'd mentioned your insured payrolls are expanding. Any specific comments on wage growth how wage growth is compared to in 3Q last few quarters? G. Frost: Right. So wage growth in the quarter, we saw about 6.7%. As the total was about 8.9%. 6.7% was actual wage changes and a new employee count was 2%. So I was happy to see that 2% in new employee count. If you recall, last quarter, it was actually slightly negative and I wondered, okay, is this a blip? Or is this a data point in terms of is there something happening with integration with our particular employee base, but it sort of bounced back to norms this quarter, so I feel pretty confident about that, that was just a blip last quarter. Mark Hughes: Yes. What was the wage last quarter, wage growth? G. Frost: 5.7%. Yes, if I look at the last 4 quarters, it was 5.5%, 6.3%, 5,7%, 6. 7%. Mark Hughes: Okay. Very good. How about the large losses in the quarter? G. Frost: We ended the quarter with 17 large loss is over $1 million. Mark Hughes: That's year-to-date? G. Frost: Year-to-date, yes. Mark Hughes: Yes. That's up a little bit, isn't it. G. Frost: I think at this point last year, we were at 13, if I recall correctly for 2024, but then we had an uptick in the fourth quarter. Again, I I'll go to my favorite saying, unfortunately, these things are lumpy. I never know what quarter they're going to happen in. And I'll also say this, when you -- when we file the Q later today, I believe, you'll look at claim counts. Reported claim counts on a year-to-date basis are ever so slightly up. And -- but I think it's a pretty remarkable number when you think about how much we've grown policy count, yet the claim counts really haven't varied very much. So I think that speaks to what I was saying earlier about frequency is low. I mean there's no denying there. Mark Hughes: Yes. And then anything on the competitive front, Brand X talking more about getting into high hazard? G. Frost: Great question. It is still extremely competitive. We haven't -- there hasn't been a lot of movement in terms of competitors either increasing or decreasing their appetite. I think we see it occasionally in a particular class, maybe in a given state, but it's usually because maybe they've had a bad experience in that particular state or class code. That's actually one of the selling points for AMERISAFE with our agents is the fact that we are so consistent about our approach. We've been doing this since 1986. And if you look at our footprint and the classes of business that we underwrite, there's a lot of stability there. And that's actually, to me, one of the value propositions for agents for AMERISAFE. Mark Hughes: Yes. Any thoughts when we think about audit premium. Obviously, that's led to some just a little bit of a headwind in terms of the written premium but corrected for that, obviously, you've been up double digits. If you're seeing a little more wage growth, is that a positive for audit premium? Or should that continue to moderate, what are the puts and takes there? G. Frost: That's a really interesting way to look at it. This is just my take on it. I do feel that the wage growth numbers that we're seeing now, speak well to future audit premium. At the same time, I have to be very cognizant of all the things that are happening in the economy right now with inflation and everybody is talking about jobs, jobs, jobs, and we're seeing these headlines of major layoffs. I feel our industry groups being the skilled labor is somewhat protected from the types of layoffs that we seem to be seeing nationwide. A lot of those are at least being anecdotally been pointed to things like AI is helping us gain efficiencies, et cetera, et cetera, and that's why we're lowering head count. But I do think companies are looking for efficiencies as well. That being said, with skilled labor jobs, a little bit of a different story there. So if we can maintain the wage growth, it should bear well for future audit premium moderating, I would think, over time. Mark Hughes: Yes. Yes. Okay. And then last cantered question. How about the construction end market, the next job being important, any observations there? G. Frost: Yes. Based on the payrolls that are being reported to us and the fact that I'll point to that new employee count number kind of bouncing back to normal, the economies for our insured base are holding up really well as of right now. Operator: [Operator Instructions] And our next question is going to come from Bob Farnam from Janney. Robert Farnam: There was -- Mark Hughes asked the question about the claims count, given the growth in the top line in the graph and the number of policies. Actually, I had a question on your claims staff. I mean did you -- have you increased claims staff to be able to handle an influx of more claims, even though I understand that the frequency down it really hasn't happened yet, but I'm just kind of curious how your claims staff is situated in case claims do start to increase. G. Frost: No, we have not really increased the number of claims staff, but I'll backtrack on that a little bit to say we run a very lean organization. But at the same time, when our claim counts were dipping down, we also did not decrease our claims staff because of the expertise they bring to the table and we want to keep those inventories really low, that's not something that we felt like we should dial down and dial back -- and then try to dial back up. So the number of claims staff has not changed. Robert Farnam: Okay. I figured they have -- I mean I understand they have a lower volume of claims they already handled. So I didn't -- I wasn't surprised that they will be able to handle it in-house, but just curious. Do you guys -- are you actively looking to expand into any other states? And if so, what's causing you not to at this point? I'm just kind of curious if you're even looking at this point. G. Frost: We are constantly looking. We have a committee here that is always looking at geographies of where we're not and maybe where we should be or where we are and maybe we're not having a great experience, whatever the case may be. And so I would always say that we are continually considering that, nothing on the near horizon. Robert Farnam: Right. Okay. And the last question I had was on the fee schedules. Obviously, it sounds like that's helping to contain medical costs. I just didn't know, on average, how long do fee schedules stay in place before they're renewed? And do you see that fee schedules are renewed, will they have an impact? G. Frost: Yes, very, very appropriate. They are updated somewhat regularly. And of course, a lot of them are based off -- there's a lot of things based off Medicare and Medicaid. So however, how often that gets updated. And plus it also there's also a political side to that. If I can say if workers' compensation becomes an issue in any given state, legislatively, they will get involved to make some things happen. And as of right now, and I'll knock on this wooden desk, I say workers' comp doesn't seem to be at the top of anyone's agenda because there are so many other things happening in the P&C space, particularly with homeowners and auto, that legislators are more apt to try to find solutions for and workers' comp has been pretty kind of steady state. So I think employers are relatively happy with the things that are happening. Carriers are pretty much satisfied with the way things are happening. So as of right now, it doesn't seem to be on the top, at least to my knowledge, on the top of any legislative agendas in a large way that would cause the fee schedules to change. Robert Farnam: Yes. No, it can make sense. Don't fix what's not broken at this point. Operator: And there appears to be no further questions in the queue at this time. I'd now like to turn the conference back over to Janelle Frost, CEO, for any additional or closing remarks. G. Frost: Thank you. We are pleased with this quarter's results and the successes we're having in adding small incremental growth while maintaining the standards that make AMERISAFE a profitable underwriter of high hazard workers' compensation. Thank you for joining us today. Operator: And this concludes today's call. Thank you for your participation. You may now disconnect.
Operator: Hello, and welcome to this webcast with Rottneros, where CEO, Lennart Eberleh; and CFO, Monica Pasanen will present the report for the third quarter of 2025. After the presentation, there will be a Q&A. [Operator Instructions] And with that said, I hand over the word to you, Lennart. Lennart Eberleh: Thank you very much, Ludwig, and hello, everybody, to this quarter 3 of 2025 on the 30th of October, a rainy and autumn-like day in Sweden. And like the weather, our results are really not as summer like as the picture on the first slide. It has been a challenging market that we've seen during the quarter. We are still struggling with very high raw material prices, although they have peaked, and they are starting to come down. The pulp market has not really improved since the spring. On the contrary, it has moved sideways, and with some lackluster in China. And as a result of that, we've seen a result, which is really not anything we are happy with. As a consequence, we continue to focus on the things we can control ourselves. We have a very strong cost focus. The reorganization is in place. We will see the result of that program towards the end of the year with a full effect of some SEK 35 million to SEK 40 million. We do not stop there. We will work further to see if we can achieve further savings. We have a working capital, which is too high that we have seen some reductions in that we will work with to continue further going onwards. And of course, we go also through all the variable costs we have to see if additional savings can be achieved in those areas. So this is a time where to put up our sleeves and really show that we can be a part of turning this around. If we look into the market, it's, as I've said, a very challenging climate. If we look at the prices in U.S. dollars for the chemical grades, it has come down after a pickup at the beginning of that year, which we thought was the beginning of the cycle. It has stopped then. Stocks have increased. They have now decreased. But if we look into the various grades, which are in stock, short fiber and long fiber, the short fiber has had a better run, and there have been some increases in the short fiber pricing in Asia with 2x $20 during the summer break and the stocks have been coming down to a more normalized level, whereas the long fiber sulfate kraft pulp has increased its stock to a slightly over a balanced level, and thus, the prices have come under pressure. This is valid for the standard grades. If we look into the chemical pulp grades that we make in niches for browned whitened porose grades for filters, we still see a very good and continued good demand in those niches with increased demand from our customers. We'll come back to that in a short while. Translating prices into Swedish krona is, of course, important. And here, we see the effect of the krona that has strengthened over the last months as well. So in addition of reduced list prices in U.S. dollars, these prices also have come down even further if we translate them back to the Swedish krona. And that is, of course, an effect of the weak market that we've seen where it simply has not been possible to forward the price and cost increases that we have seen lately. But if we look into how the market has developed as it is weak, as I've said, mainly in Europe, we see all across the board that all grades are struggling with a small exception of containerboard, which mainly is self-sufficient on recycled fibers. That's not a big market for fresh fibers. And Europe is Rottneros' biggest market with some 65% to 70% of our sales. 2024 for downward production was still a good year. But the first 8 months of 2025, we have seen a slowdown of activity, and this slowdown has increased since May. The slowdown already shown up in the first 4 months, it has accelerated then and especially in the cartonboard area, which is important for us. We've seen that the activity hasn't really come back, and that is weighing on our high-yield pulp production and deliveries. And translating this into the chemical deliveries, we see that Europe is down as much as the U.S. as well. And the entire uptake of some 5% is from China, where we see a strong restocking as the Chinese buyers expect the current prices to be the low price. And if there's anything to be good to be said about the current prices, we are at levels which are not sustainable for the high-cost producers. And thus, I believe that the Chinese buyers are right in assuming that this is the bottom of the cycle. It's time to start buying, and this should have some positive momentum going forward. But there are some imbalances. There is an oversupply or a lack of demand, and that has to be rectified before we will see a strong uptick in the development going forward. And on top of the imbalances as a consequence of a weak downstream market in Europe, we have also seen an emergence of pulp production in China itself. China is still the biggest market for market pulp, both from Europe, Canada and Latin America for short fiber-based products. But they have started over the last decade to make more and more of their own pulp and also integrated pulp and board, which you will see on the next slide. So you see here the availability of domestic wood that until the early 2010s has been the primary raw material for making pulp domestically up until some 10 million tonnes, which is the dotted line. That availability of domestic wood has increased during the last 5 years year-over-year. And that is a consequence of the building market that is weak and down. So a lot of wood is going into building buildings. And as the entire property market has come to hold, these fibers are now finding their ways into the pulp and paper market. So the increase in Chinese production of pulp is fueled by availability of local fibers. And on top, of course, you see that there is also an increased import of wood chips, which are certainly more price sensitive, but they are weighing on the market sentiment in China quite strongly. And if we translate the pulp production in China also into what this means for paper and board output from China, you see the same picture here since 1920, that has moved up to larger volumes, quite strong increase during the first month of 2025. And this is a level of production that cannot be consumed domestically in China. So we have seen exports out of China, both from paper and board into Asia and Europe and other markets where we historically have our customers. So our customers have been -- are meeting these kind of low cost producers from China and had to reduce their own production and thus weighed on the demand for market pulp. There are actions being in place. India, for example, has put duties and tariffs in place to stop this import of low-priced Chinese products. And also, there are discussions in Europe to start antidumping actions against the import of Chinese production. So we will have to see how this is playing out going forward. This is, however, more for standard bulk grades of pulp, hard and softwood bleached grades of standard quality. And if we look into the Rottneros qualities, we still see a strong and increasing demand for our UKP grades for filter and electrotechnical applications, but also ECF grades for specialties or tissue. Printing and writing, an area that we have not been so active in for the last years is now coming back as we have to find new outlets for the volumes that we cannot place within cartonboard. And also a new segment is emerging, which is fiber cement, where our fibers are substituting asbestos fibers to give some strength to cement. So we do see a good development on the sales of our chemical specialty grades, which have grown in the quarter and outpaced the production levels. So we've seen for Rottneros some reduced stocks. The challenge here is to find the market outlets for our high-yield pulp where we have a very cost-efficient mill now after all the changes we had during the last years. We are very efficient when it comes to head count per tonne of pulp produced. The energy efficiency has increased over the last years. So everything is really in place to be performing very well, and we do see good production on those days when we are running. And now with these tariffs being in placed, for example, in India, we see also that some of the export markets are coming down -- coming back and then improving our order books. So there are some lights of hope going forward also for the high-yield pulp area. And with that, I leave over to Monica to guide us through the results for the third quarter and the first 9 months. Monica Pasanen: Thank you, Lennart. One of the highlights is that we have a strengthened balance sheet, thanks to the rights issue during the quarter, but we'll come back to that later on. And we'll start with the profit and loss for the third quarter. We see here that we go from a plus SEK 70 million in EBITDA to minus SEK 21 million. And this is, of course, where we see a very disappointing development. The majority is due to price and currency of our prime product, pulp. Lennart went through the graph, so you could all see the sloping trend, and that is also what we can see in our own pricing when we are looking at the waterfall here. We are also selling a bit less, but that's mainly on the high-yield pulp side. We exited the Asian market earlier on this year when prices were at a level where we were not really covering our variable costs. And now we are getting some volumes back, but we have lost some on volume. We see some positive signs on variable costs. In the previous quarters, we have showed big negative numbers when we have been comparing quarter this year to quarter last year, but now it is evening out. Behind this 0, we have a slight negative impact from higher wood costs, but they are offset by slightly lower other variable costs like chemicals and fuels. What is really positive to see is that we are improving our fixed cost position. We are working very actively, very hard with our fixed costs, and we start seeing improvements. We have to admit that some of the improvements are also due to when our annual maintenance shuts are and when the costs for these annual maintenance costs come into our profit and loss statement. But the majority of the positive improvement is from our cost saving program. We see a fairly large number, minus SEK 34 million for byproducts and other things. And we had lower variable costs for fuels, but at the same time, we get a lower price for our byproducts, mainly tall oil and bark that we are selling. We also sold some emission rights last year, which we didn't do in the last quarter. So those are the main reason behind the minus SEK 34 million. Then if we look at the same picture, but for the first 9 months, we see a similar -- very similar trend. Price and currency having the major impact. On this slide, we see that the variable costs for the first 9 months this year are higher than last year. And if we break it up between wood and other variable costs, it's approximately SEK 100 million higher costs from wood, and then we have positive impact from other variable costs. On these 9 months, we are still seeing higher fixed costs, but that is what we are addressing at the moment, plus that we have some one-off items affecting the comparability. With that, we can continue looking at the wood costs a bit more. 76% of the variable cost for producing pulp is today the cost of wood. If we look 5 years back and would have had a similar picture, the percentage would have been approximately 1/3. And if we take this into SEK 1 million, in a 12-month period, we use approximately SEK 1.2 billion for variable costs to produce our pulp -- sorry, SEK 1.6 billion. The SEK 1.2 billion is the cost for wood. And if we would have had the same wood cost as 5 years ago, this number would have been a bit more than SEK 600 million. So we have a higher cost for wood of approximately SEK 580 million for the volume we are producing now in a 12-month period. And that's, of course, a very big number when you're thinking of what our EBIT is normally. And if we compare it to the cost for our personnel in the last 12 months, that was a bit more than SEK 300 million. So this is -- the cost increase is more than double of that. On the next slide, you will see how the wood prices have evolved. So the comparison year that I talked about was 2021, and it's really from 2022 and forward, we had seen the huge increase in the cost of wood. This is from official numbers from Skogsstyrelsen for the price of spruce wood, pulp wood to our industries. We see here that we have -- that the prices are starting to peak. We don't have the statistics yet for the third quarter. But when looking at our own costs, we see that they were marginally higher in the third quarter of this year compared to last year. And there have been several announcements of price decreases in the market. So it will be interesting to see what the picture looks like when we have the official statistics also for the third quarter. Then we go into the balance sheet. At the beginning of this quarter in July, we successfully concluded the rights issue of approximately SEK 300 million that we raised. That, of course, improved our equity to assets ratio. We're back at 63%, above the 60% line. We used part of the rights issue to reduce our debt. So our net debt position has improved. What is really positive to see during the last 2 quarters is that we have had a positive cash flow from operations before investments. We have had a negative EBITDA, but that has been more than offset with working -- on our working capital and reducing our stocks, and that is something that we are continuing to doing, and we see that we still have good potential to improve our working capital position further. With that, I hand back to Lennart. Lennart Eberleh: Yes. Thank you very much, Monica. And we cannot say anything, but it's very tough times, and it's not only for us, Rottneros, but certainly for the entire industry, which is under stress currently. But we all believe that fiber do have their natural place in business, in packaging, in other convenience products. It's a renewable product. We are self-sufficient when it comes to its sourcing. We do not import anything from outside Europe. We create a lot of energy based on the raw material that we are harvesting. There's more forest standing today in the Nordics than it used to be 100 years ago. So it's responsible managed forests that supply us with renewable fibers that we can turn into lots of various different products. Tissue is a growing area in general, currently a little bit under pressure in Europe, but with more people having more disposable income, the demand for tissue is -- continues to grow. More people are consuming more products and fiber-based packaging materials are the most and best packaging materials that are available. You can recycle them. So the primary fiber that we are harvesting here in the Nordic is then coming into the market and can be recycled down on the continent, various times to create new products and new values. I was into renewable energy. Of course, the energy that is produced as a residue from our sulfate kraft mills is renewable based on biofuels, but also the entire investment in electrifying our society, rebuilding the grids is asking for more cables. Cables need more paper as paper is an insulator in the cable construction. And also in transformers, a lot of fibers is being used. And here, we see one of the very strong end users where we have an excellent position. We are one of the cleanest producers of pulp with extremely low or no conductivity, which is a key performance for these kind of end users. And of course, everything about sustainability, both when it comes of using fibers, but also when it comes to using fibers as a raw material, for example, molded fiber packaging, where we're also working with. And Rottneros packaging is that area where we do put a lot of efforts into. We are now performing the customer evaluation and qualifying trials in Poland. We believe those will be finalized by the end of the year, so we can actually start moving production from Sweden to Poland and then scaling it up. And of course, we also see the emergence of a lot of other players in the market, one of them we have invested into when it comes to dry molding as opposed to the wet molding process that we are having. But we see also a lot of activities with various different players. And I think that is a sign of that there is a belief and need for molded fiber products in the market as a complement to all kinds of other products and especially in light of the single-use plastic directive and the packaging and packaging waste directive, which we are soon to be implementing and customers are asking for solutions that are more suitable than purely plastic-based packaging materials. So to summarize it, we have seen a very challenging market during this year with some imbalances that need to be leveled out before we will see a good pickup, but it seems that we are coming closer to that point. We have definitely seen an increased supply of raw material over the last month. Monica has explained to you the monetary impact of it. And the public statistics will come soon, but we know the deals that we have closed with our suppliers, and we see that these prices are coming down. They will take some time to drill through the stocks which are in the forest along the forest roads in the mills before you see it in the profit and loss statements, but it is coming down. We have done our homework when it comes to stabilizing our operations, making them more efficient, working on operational efficiency. And everything is in place. There are no further big investments needed. We can be very conservative looking forward in controlling our CapEx for the next period. And we are, of course, working extremely hard to both control our cost, but also free up working capital in order to secure the cash that we have in the company. And wrapping all that up, I think even though it is very dark at the moment, there is some light at the end of the tunnel, and we believe we are soon entering a more positive period again. And with that, we leave the word back to Ludwig to guide us through some questions and answers. Operator: Thank you so much for the presentation. And as you mentioned, now it's time for Q&A. So if you have any questions to Lennart and Monica here, you can send them in via the form to the right. And the first question here is, how do you plan to strengthen profitability after the sharp drop in EBITDA this quarter? Monica Pasanen: Should I take that or? Lennart Eberleh: Yes, please. Please go ahead. Monica Pasanen: I think we are on the right track, and we have seen that -- we saw already at the beginning of the year that the market was getting tougher with lower prices. After a while, the Swedish crown strengthened, and the wood prices were increasing at that time. So that is why we have initiated the cost saving program that is now showing that we are decreasing our fixed costs. We are also looking at our variable costs other than wood to be more efficient and to improve on the variable cost side. And not the least, it's not part of profitability, but it's part of the cash flow to be efficient with working capital. And we have had -- we do have a good track record for the last 2 quarters, and we have clear targets to improve even further on the working capital side. Lennart Eberleh: And if we fill in here also, of course, there's a huge potential in fully utilizing the capacity that we have installed in our high-yield pulp and Rottneros mill. We see some markets coming back that have been closed down for some time, but we're also working very hard in introducing new grades based on the entire raw material basket that is available. So we're talking about both the traditional softwood, higher pulp grades, but there are also opportunities for us as we have the technical equipment to make blends of soft and hardwood or pure hardwood and there are various grades of hardwood as well. So there's a good demand for those. And of course, that will generate additional sales and contribution and quickly improve then once it's working out our profits. Operator: What will the cost reduction of SEK 35 million to SEK 40 million have on margins going forward? Monica Pasanen: They will, of course, translate directly into operating profit. So they will be part of the improvement program as will also other actions. As I mentioned when we talked about the wood costs, the SEK 35 million to SEK 40 million on fixed cost is very much is personnel costs and also some other fixed costs, SEK 35 million to SEK 40 million. But if we compare that to the cost of wood, that has increased by approximately SEK 600 million in 4 years or from the lower levels to the very high peaks. The big impact will come when we see that we have lower raw material prices going forward. Operator: How will the proceeds from the rights issue support further growth or stability? Lennart Eberleh: Those proceeds have been used to improve our cash position, balance sheet and pay down debt. As I've said, there are no ongoing big investments planned. We have restructured Rottneros mill from a mill that had 2 pulp lines for newsprint grades and cartonboard grades. Newsprint as we saw has been structurally very much declining, exited that. So now it's one line with 1/3 of the manning working only for cartonboard grades, which is over time growing market area and also Valvik has proven that it is very efficient, and all major reinvestments are completed. So this is really, proceeds to strengthen our balance sheet, make sure we have a good net debt-to-equity ratio and necessary cash funds available to finance the ongoing business. Operator: When do you expect lower wood prices to start improving your earnings? Lennart Eberleh: As we've seen here, we are peaking now, and that will happen over the coming quarters. Operator: And moving on to the last question here. What financial potential do you see in packaging project in Poland? Lennart Eberleh: This is now a milestone 2 of our project. The first one was to finalize the technical development in Sweden. Milestone 2 is to make sure and prove that we can scale up on to an industrial scale and make sure that all these bits and pieces are working together and filling that line, which can produce once fully operational, 100 million trays of any kind of packaging. But compared to the pulp business we have, it is still a marginal contribution to our results. So the result and impact of that will be further down the road. Operator: Thank you so much for presenting here today, Lennett and Monica, and thank you all for tuning in. I wish you a pleasant weekend. Lennart Eberleh: Thank you very much, everybody, and looking forward to talk to you after our Q4 results early on next year. All the best.
Operator: Thank you for standing by. My name is Greg, and I will be your conference operator today. At this time, I would like to welcome everyone to today's Cloudflare Q3 2025 Earnings Call. [Operator Instructions] I would now like to turn the call over to Phil Winslow. Phil? Philip Winslow: Thank you for joining us today to discuss Cloudflare's financial results for the third quarter of 2025. With me on the call, we have Matthew Prince, Co-Founder and CEO; Michelle Zatlyn, Co-Founder and President; and Thomas Seifert, CFO. By now, everyone should have access to our earnings announcement. This announcement as well as our supplemental financial information may be found on our Investor Relations website. As a reminder, we will be making forward-looking statements during today's discussion, including, but not limited to, our customers, vendors and partners, operations and future financial performance, our anticipated product launches and the timing and market potential of those products, our anticipated future financial and operating performance and our expectations regarding future macroeconomic conditions. These statements and other comments are not guarantees of future performance and are subject to risks and uncertainties, much of which is beyond our control. Our actual results may differ significantly from those projected or suggested in any of our forward-looking statements. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. For a more complete discussion of the risks and uncertainties that could impact our future operating results and financial condition, please see our filings with the SEC as well as in today's earnings press release. Unless otherwise noted, all numbers we talk about today, other than revenue, will be on an adjusted non-GAAP basis. You may find a reconciliation of GAAP to non-GAAP financial measures that are included in our earnings release on our Investor Relations website. For historical periods, a GAAP to non-GAAP reconciliation can be found in the supplemental financial information referenced a few moments ago. We would also like to inform you that we will be participating in RBC's Global Technology, Internet, Media and Telecommunications Conference on November 18 and Needham's 6th Annual Tech Week on November 24. Now with that, I'd like to turn the call over to Matthew. Matthew Prince: Thank you, Phil. We had an extremely strong Q3. We achieved revenue of $562 million, up 30.7% year-over-year. Great companies innovate and execute, and I think we owe our reacceleration of revenue growth to doing both of these things very well. We now have 4,009 large customers, those that pay us more than $100,000 per year, a 23% increase year-over-year. Revenue contribution from large customers grew 42% year-over-year, contributing in total 73% of our revenue during the quarter, up from 67% in the third quarter last year. Our dollar-based net retention was 119%, up 5 percentage points quarter-over-quarter. Our gross margin was 75.3%, within our long-term target range of 75% to 77%. We delivered an operating profit of $85.9 million, representing an operating margin of 15.3%, and we generated strong free cash flow of $75 million during the quarter, again exceeding expectations. Our go-to-market transformation, evolving from purely product-led growth to true enterprise sales continue to track along. Growth in net capacity of our sales force grew at its fastest pace year-over-year in more than 2 years. Sales productivity increased year-over-year for the seventh consecutive quarter. Close rates ticked up notably both year-over-year and quarter-to-quarter. Bookings from partner-initiated opportunities doubled year-over-year. Gross retention levels increased year-over-year and quarter-to-quarter. And new pipeline attainment again exceeded our expectations. Across the company, the team is firing on all cylinders. One bit of disappointing news is that CJ Desai is going to be leaving Cloudflare. CJ called me some time ago to talk about an opportunity he's been approached to be the CEO of an exceptional public technology company. He was torn because he loved his team, the work and the mission at Cloudflare. But since his first job in technology over 25 years ago, he dreamed one day of being the CEO of a great public company. We talked through the opportunity, his career goals and what's great and not so great about being a public company CEO. In the end, while I'm sad to see him go, I'm excited for him to get to helm his own ship. I want to give CJ an opportunity to say something on this call, in some ways, as practice for his many earnings calls to come. CJ? Chirantan Desai: Thank you, Matthew. This was an extremely hard decision for me as I love the team and mission of Cloudflare, and I see incredible opportunities ahead. I really appreciate the support as I figured out what was right for me. This job at Cloudflare is the coolest Product & Engineering job in tech today. And I will help ensure whoever feels the seat next will be world-class. I'm incredibly bullish, as you know, on Cloudflare's future. I'll miss you all, but will always be among your biggest fans. Matthew Prince: Thanks, CJ. I appreciate how you brought a customer-first focus to Cloudflare's already powerful innovation engine. That's made us a better company able to win bigger deals. It's now part of our DNA that you deserve credit for having helped shape. And while I'm bummed you're leaving, I'm proud that Cloudflare is a place that has trained the leaders of other great technology companies. You're our second product leader in a row to be recruited away to be CEO somewhere awesome. We can't say yet where you're going, but they're lucky to have you, and I have no doubt you'll bring some of Cloudflare's relentless culture of innovation to them. With that out of the way, let's talk about some of our wins in the quarter. A Global 2000 digital media platform expanded its relationship with Cloudflare, signing a 3-year $22.8 million pool of funds contract for application services and workers. This contract marks the culmination of a powerful comeback story. We actually lost this customer to a competitor in 2016, but the Internet and Cloudflare evolved. We earned their trust back in 2023, starting with our Zero Trust portfolio. During 8 months of testing before signing this deal, our world-class security, unmatched product breadth and powerful Workers platform ran circles around the incumbent. But that's not the whole story. The decisive factor of the win was AI. This customer looked at the landscape and correctly identified Cloudflare is the only company building the essential platform to protect and manage content for the emerging AI-driven web. This strategic win established us as the customer's clear forward-looking partner and creates a direct on-ramp for Pay Per Crawl, which could transform Cloudflare from a vendor they pay for services into a powerful revenue generator for their business. We and they believe that this is what the future looks like. A leading European technology company expanded its relationship with Cloudflare, signing a 5-year $34.3 million contract, representing an upsell of $6.8 million for Workers platform and application services. This customer is fully redesigning their architecture to move their front end on to Workers and Durable Objects. The decision to commit to a 5-year term underscores the customer's view of Cloudflare as a critical long-term strategic partner. A rapidly growing media platform expanded its relationship with Cloudflare, signing a 3-year $15 million contract for Workers and Application Performance. This customer was experiencing significant egress fees, high latency for its global customer base and vendor lock-in with a hyperscale public cloud provider. Moving to Cloudflare will enable data to be processed and served closer to their end users, delivering superior performance and eliminating egress fees. With our unified platform, this customer will be able to drive down their total cost of ownership by more than 30%. A Fortune 500 financial technology company expanded its relationship with Cloudflare, signing a 2-year $16.1 million pool of funds contract with an upsell of $4.6 million for application services and workers. As a textbook land-and-expand journey across 3 apps, this customer started with Cloudflare's application services in 2022, expanded with our Zero Trust platform in 2023 and has been adding a number of products from our Workers platform over the last 2 years. Another Workers deal is already underway for AI use cases. A Global 2000 European pharmaceutical company expanded its relationship with Cloudflare, signing a 3-year $12.4 million contract with an upsell of $4.5 million. This is a great example of platform adoption as the customer is utilizing products from our first 3 apps, application services, SASE and Developer. This customer views Cloudflare as a critical strategic partner choosing to displace services from 2 hyperscale public clouds and multiple-point solution providers because according to them, "It's so much easier to build on Cloudflare." A U.S. cabinet-level agency expanded its relationship with Cloudflare, signing a 2-year contract exceeding $20 million for our complete FedRAMP portfolio. The agency is standardizing its network and security platform on Cloudflare, displacing over a dozen legacy point solutions and generating more than $10 million in annual cost savings. We are seeing more traction than ever before across U.S. government as it looks to modernize its digital infrastructure. A Fortune 100 financial services company signed a 3-year $4 million contract for Magic Transit and Advanced Magic Firewall. Recent outages, capacity limitations and a lack of automation features with 2 legacy incumbents left this customer with DDoS vulnerabilities at their network layer in a time when we're seeing new record-breaking DDoS attacks every few weeks, like the nearly 30-terabit per second attack we mitigated earlier this month. Cloudflare won because our fundamental architecture advantage gives us literally 4x the capacity of all our scrubbing center-based competition combined. As the Internet gets scary and scarier, customers are realizing Cloudflare is the only network engineered to survive. A global industrial company signed a 3-year $2.2 million contract for a complete SASE portfolio, including Access, Gateway, Browser Isolation, CASB, DLP, Magic WAN and Magic Firewall to consolidate and modernize their security stack. We're displacing a first-generation Zero Trust vendor as well as a legacy on-premise VPN provider, which were expensive and difficult to maintain across their global operations. This customer chose Cloudflare for the operational simplicity of our unified platform that delivers both superior performance and significant cost reduction. A global web infrastructure platform expanded its relationship with Cloudflare, signing a 14-month $1.2 million contract for AI Crawl Control and Bot Management. This customer is experiencing a massive surge in AI scrapers and malicious bots hitting their origin servers, inflating costs without revenue conversion and obscuring visibility into legitimate traffic. They selected Cloudflare for our innovative best-of-class bot blocking capabilities in addition to seamless expedited deployment by our deep platform integration. We're already exploring a much larger opportunity with this customer for Pay Per Crawl. We talked last quarter about how the rise of AI would impact media companies. Cloudflare has emerged as a strategic partner to these firms as they work through what the new business model of the Internet will be. But it goes beyond just media. Businesses of all shapes will be transformed by the rise of AI. I don't think people yet appreciate how AI is another massive information consumption platform shift, just as we move from consuming information via a browser on a desktop to social media and then to apps on mobile devices, AI is another information consumption platform shift. It changes where and how we will consume and interact with information. With the last 3 platform shifts, the business model of the Internet remains the same: create content, generate traffic and then sell things, subscriptions or ads. With AI, for the first time in a long time, the fundamental business model is going to change. Human eyeball traffic is unlikely to be the currency of the Internet's future. We already can see glimpses of that future. It's represented in SciFi. When George Jetson asks his helpful robot Rosie for a recipe for cookies, the response isn't 10 blue links to hunt through. It's a recipe for cookies. Most of us are increasingly living in some version of that future now with tools like ChatGPT, and it seems inevitable that more and more commerce will be facilitated by AI-powered agents working on our behalf. As that happens, new questions will arise. What happens to small businesses? What happens to brands? Brands, of course, are just shortcuts for humans to be able to assess quality and value. What do they mean in the world of agentic commerce? I don't know what the future business model of the Internet will look like, who the winners and losers will be, but I do believe Cloudflare will help shape it. We estimate 80% of the leading AI companies already rely on us. A huge percentage of the Internet sits behind us. The agents of the future will inherently have to pass through our network and abide by its rules. And as they do, we will help set the protocols, guardrails and business rules for the Agentic Internet of the future. And we'll make sure the tools to participate in that future are available to all businesses, large and small. It's what we've always done. Again, we don't know exactly what the future will look like, but I believe Cloudflare will be one of the key players helping shape it. What we are playing for is a world with as many AI companies, media companies and businesses, large and small, competing fairly to best serve customers anywhere and everywhere they and their agents transact. I'm really excited for that future, and I'm optimistic about it. But to bring it back to the present, let me hand it off to Thomas to walk through this quarter's financials. Thomas, take it away. Thomas Seifert: Thank you, Matthew, and thank you to everyone for joining us. We are pleased with our strong third quarter results that underscore how our strategy for delivering continued innovation and accelerating growth while also maintaining a relentless focus on operational excellence is working. Revenue growth accelerated for the second consecutive quarter to 31% year-over-year, providing clear evidence of the momentum building in our business. We complemented this robust growth with a highly balanced operating plan, investing significantly in our innovation pipeline and expanding our go-to-market capacity while simultaneously remaining committed to the strong unit economics of our business to drive operating leverage and deliver compounding shareholder value. Turning to revenue. Total revenue for the third quarter increased 31% year-over-year to $562 million. From a geographic perspective, the U.S. represented 50% of revenue and increased 31% year-over-year, which is up nearly 10 percentage points sequentially. Growth in the U.S. region was primarily driven by strength with partners, our workers developer platform and large customers, including pool of funds. EMEA represented 27% of revenue and increased 26% year-over-year. APAC represented 15% of revenue and increased 43% year-over-year. Turning to our customer metrics. In the third quarter, we had approximately 296,000 paying customers, representing a record net addition of nearly 30,000 paying customers sequentially and an increase of 33% year-over-year, driven by an uptick in customers, including those graduating from the free tier to small paid accounts for developer platform products around our AI Week and birthday week. We ended the quarter with more than 4,000 large customers, representing an increase of 23% year-over-year. Revenue contribution from large customers increased to 73% of revenue during the quarter, up from 67% in the third quarter last year. We again saw particular strength in our largest customer cohorts. For the fourth consecutive quarter, we added a record number of our largest customers year-over-year, those that spend over $1 million and $5 million with Cloudflare annually. Accelerating sequential and year-over-year revenue growth from both of these cohorts served as a significant tailwind to our expansion business. As a result, our dollar-based net retention rate accelerated to 119% during the third quarter, up 5% sequentially and 9% year-over-year. Moving to gross margin. Third quarter gross margin was 75.3%, remaining within our long-term target range of 75% to 77% and representing a decrease of 100 basis points sequentially and a decrease of 350 basis points year-over-year. During the third quarter, paid versus free customer traffic again increased both year-over-year and quarter-to-quarter, resulting in a higher allocation of expenses to cost of goods sold from sales and marketing. Our Workers developer platform continues to deliver outsized growth with the world's most innovative companies increasingly adopting Workers for running AI inference tasks as well as building AI agents and full stack applications. While the relative revenue contribution across our 4 Acts can impact near-term gross margin, the unit economic margin of our business remains very consistent. Network CapEx represented 14% of revenue in the third quarter. We expect network CapEx to be approximately 13% of revenue for full year 2025. Turning to operating expenses. Third quarter operating expenses as a percentage of revenue decreased by 4% year-over-year to 16%. Our total number of employees increased 16% year-over-year, bringing our total headcount to roughly 4,800 at the end of the quarter. Sales and marketing expenses were $201.2 million for the quarter. Sales and marketing as a percentage of revenue decreased to 36% from 37% in the same quarter last year. Research and development expenses were $82.5 million in the quarter. R&D as a percentage of revenue decreased to 15% from 16% in the same quarter last year. General and administrative expenses were $53.5 million for the quarter. G&A as a percentage of revenue remained consistent at 10% compared to the same quarter last year. Operating income was $85.9 million, an increase of 35% year-over-year compared to $63.5 million in the same period last year. Third quarter operating margin was 15.3%, an increase of 50 basis points year-over-year. Turning to net income and the balance sheet. Our net income in the quarter was $102.6 million or diluted net income per share of $0.27. Free cash flow was $75 million in the quarter or 13% of revenue compared to $45.3 million or 11% of revenue in the same period last year. We are comfortable with consensus free cash flow estimates for the fourth quarter of fiscal 2025. We ended the third quarter with $4 billion in cash, cash equivalents and available-for-sale securities. Remaining performance obligations, or RPO, came in at $2.143 billion, representing an increase of 8% sequentially and 43% year-over-year. Current RPO was 64% of total RPO. Moving to guidance for the fourth quarter and full year 2025. For the fourth quarter, we expect revenue in the range of $588.5 million to $589.5 million, representing an increase of 28% year-over-year. We expect operating income in the range of $83 million to $84 million, and we expect an effective tax rate of 20%. We expect diluted net income per share of $0.27, assuming approximately 377 million shares outstanding. For the full year 2025, we expect revenue in the range of $2.142 billion to $2.143 billion, representing an increase of 28% year-over-year. We expect operating income for the full year in the range of $297 million to $298 million, and we expect an effective tax rate of 20%. We expect diluted net income per share over that period to be $0.91, assuming approximately 370 million shares outstanding. In closing, the strength of our third quarter results confirms that our strategy to deliver continued innovation with accelerating growth and strong unit economics is driving significant and measurable value. At the beginning of the year, we committed to reaccelerating revenue growth over the course of 2025 on the way to our goal of achieving $5 billion in annualized revenue by the fourth quarter of 2028. Our performance over the last 2 quarters demonstrates that we are effectively executing against both of these objectives. In fact, we expect to reach a $3 billion annualized revenue run rate in the fourth quarter of 2026 on our journey to $5 billion and beyond. This trajectory reinforces our conviction in our strategy and our ability to deliver exceptional long-term value for our shareholders and customers. Before opening it up for questions, I would also like to extend my personal thanks and congratulations to CJ. The processes, discipline and leadership bench she established at Cloudflare will enable our innovation engine to continue to scale well beyond his tenure. All of us at Cloudflare with CJ continued success in his next chapter. And with that, operator, please poll for questions. Operator: [Operator Instructions] And our first question today comes from the line of Matt Hedberg with RBC Capital Markets. Matthew Hedberg: Congrats on the results. And CJ, we look forward to hearing about your future role. Matthew, there were a lot of strong metrics this quarter, but 43% RPO growth that accelerated. I think that was the highest RPO growth that you guys have reported since 2022, certainly stood out. I'm wondering if you could provide a bit deeper dive into what drove that acceleration this quarter. Matthew Prince: Yes. I'll start, and I think Thomas can probably add to it as well. I think we try to be a place that says what we do and do what we say. And so I think the real thing that's happening is we are transforming from being a product-led growth company to being a true enterprise sales company. So you're seeing the average tickets tick up. You're seeing the large deals tick up. And that's driving just success in taking what have always been exceptional products and getting them in the hands of customers. And so I think our sales team deserves a lot of credit for really just driving great execution. Thomas Seifert: What I would add is we are -- I think the RPO growth points to primarily 2 drivers, the customer quality and the platform expansion. We are seeing exceptional strength with our large customer cohorts, specifically those that spend more than $1 million or $5 million with us, both delivered record growth this quarter. And in addition to that strength is increased consumption of our large pool of fund customers, demonstrating I think, the increasing strategic importance of our platform for those large enterprises globally. And in addition to that, our Workers platform, the developed platform, including Workers AI is just providing to be a significant new vector for long-term commitment and with that growth. Matthew Hedberg: That's great. Actually, could I double-click just Thomas, you mentioned the pool of funds, and I know you mentioned in your prepared remarks. But specifically, like how is that showing up in the results? You introduced that several, I think, years ago at this point now. But how is that driving some of this as well? Thomas Seifert: The share of pool of funds deal this quarter was again up. It's now low double digits of total ACV. And we are seeing now across our pool of Funds contracts an extremely balanced consumption of these contracts. On average, we're slightly ahead and that delivered to the strong performance in the quarter. So if you have a platform like ours with more than 55 revenue-contributing products now, you need a vehicle that allows frictionless adoption and consumption of these products. And I think the sales team and the organization at Cloudflare has become quite good at deploying these contracts and driving consumptions with customers. Matthew Prince: The other thing that I'd add is I think where we saw downward pressure on things like dollar-based net retention as we rolled out pool of funds. As those pools are now getting consumed, you can see our dollar-based net retention is ticking back up. And so I think pool funds will show up in RPO, pool of funds as it initially puts downward pressure on things like dollar-based net retention, but you can see that, that's now ticking up again. And so just to reiterate what Thomas said, these are an indication of customers trusting us as a strategic vendor, making larger, bigger bets on us, and it is an undoubtedly positive sign for us as a strategic vendor to more and more large customers. Operator: And our next question comes from the line of Adam Borg with Stifel. Adam Borg: Maybe for Matthew, on the sales productivity gains, it's been great to see that continue. Are we at a point now where these gains are beginning to flatten out? Or is there still room for this to continue to trend higher in the coming quarters? Matthew Prince: I think that we think that these will continue -- that the productivity will continue to tick up in coming quarters. I think that the caliber of the team that we're bringing on, their ability to sell much larger deals, all of which contribute to having a much higher productivity from the sales team. And so we think that there is still headroom there. And then I think importantly, in addition to that headroom, we've turned the corner starting last quarter on having the ramped rep capacity also ticking up again. So I think we've gotten through what was a period of time where we really needed to revamp the sales team, and we're -- and now we're seeing the benefits of that coming out the other side. Adam Borg: That's great to hear. And maybe just as my follow-up, it was really interesting to see a few weeks back the integration with Oracle OCI that was announced. Maybe talk a little bit about what advantages does it provide to those OCI customers? Matthew Prince: Yes. So we're really excited to work with Oracle. They've been a terrific partner for us over the years. They evaluated Cloudflare's products and realized that we were really the best of breed for what they could offer to their customers. And so Cloudflare will be natively available within Oracle's OCI platform, including across hybrid, multi-cloud and OCI hosted workloads, which gives us access to a large pool of customers and gives Oracle's customers access to Cloudflare's world-class tools. I think one of the things that we're particularly aligned on is that we and Oracle both see the future as a multi-cloud future, where customers are going to have many different cloud providers. And what they need is one consistent interface where they can apply security rules, have consistent network performance. And Cloudflare is the best in the world at doing that. And so I think the fact that we have been able to work with Oracle, integrate our products directly into Oracle and Oracle's customers are going to be able to enjoy the benefits of that. That's great for us, but it's also great for Oracle, and we're excited to have them as an even more deeply integrated partner. Operator: And our next question comes from the line of Gabriela Borges with Goldman Sachs. Gabriela Borges: Congrats on the quarter. Matthew and Thomas, I wanted to revisit your comment from earlier in the year about doubling your network capacity this year. So my question is, do you think that you're capacity constrained in Workers? To what extent are the capacity decisions that you're making this year essentially dictating a range of outcomes on what Workers revenue could be next year? And I know you have some really interesting thoughts on fungibility of workloads between CPUs, older gen GPUs and newer gen GPUs. So I would love to hear your comments there as well. Matthew Prince: Sure. I don't think we're capacity constrained because of somewhat the nature of how we've architected Cloudflare and the philosophy of how we make CapEx and network investments. We always have tried to invest behind demand, not ahead of demand. And the thing that allows us to do that is that what we are selling is not a particular box in a particular place or a fraction of a particular box in a particular place. What we're selling is the ability to get work done across our network. And so Cloudflare itself is effectively a giant scheduler where we can move workloads to wherever we have capacity anywhere in the world. And the nature of the network is that it's always somewhere it's the middle of the night, and there's always excess capacity there. Now that's not ideal, but the good news is that for some of our smaller customers or low-end customers or free customers, we can move them to places across the network that has that free capacity, still gives them a great performance. but then reserve the capacity that we have as close as possible to our largest customers. As we see that growth, that then means that we can invest behind it and be able to just make sure that we're getting the most utilization possible. The other thing that I think is unique about us is that certainly versus the hyperscalers, the primary business of the hyperscaler is to essentially rent you a server or a fraction of a server, and they try to effectively get whatever they pay for the server back 5x over the life of the server. That's their business. Whereas we're about, again, getting work done for our customers. We're selling something different, which is a sort of level of abstraction up from that. What that means is that we believe it's our job, not our customers' job to make the utilization rates as high as possible, make our systems as efficient as possible. And so it's been remarkable to see over the last 15 years, how our team has been able to squeeze as much as possible out of the CPU capacity that we have, where we can run that CPU capacity at 70% to 80% utilization and get more out of every CapEx dollar we spend. But what's fascinating is we're sort of speed running the last 15 years now with GPUs, where we're figuring out how to make GPUs multi-tenant, how to make them load and unload models more quickly and driving the utilization of GPUs up substantially. And so that is still well below what we have with CPUs, but we see no reason that we can't get GPUs also up to that 70%, 80% utilization. And that, again, just means that every CapEx dollar that we spend, both can be behind the demand that we see. And then secondly, that we'll get more out of it, more effective value out of it for the services that we're delivering our customers versus some of the legacy hyperscaler models. Thomas Seifert: The additional point I would make is in addition to what Matthew said is that the supply chain within Cloudflare is so optimized to a large degree because we use off-the-shelf equipment and parts that we can deploy hardware, especially in Tier 1 cities and generate revenue even before we start to pay for the equipment. So not only do we have the flexibility that Matthew described really well at length, our reaction time to deploy hardware where we need it is really, really fast. Gabriela Borges: That makes sense. The follow-up is on competition for Cloudflare in the enterprise for securing those inference workloads and winning those inference workloads in particular. Matthew, I would love to hear you comment how do you think competition is evolving in the enterprise as you build out some of the breadth and depth of your functionality? And on the flip side, are you seeing anything new from newer platforms, newer cloud platforms that are AI native or inference focused? Matthew Prince: I think that the primary competition for inference workloads continues to be the hyperscalers. And it continues to be the model of do you want to do this work yourself and have to optimize yourself or do you want to hand it off to Cloudflare. And I think in the cases where we're in the conversation, we're able to show that there's just a much better TCO, total cost of ownership, a much lower cost, much better performance when we manage that for you. And so there's kind of a standard way people do things, which is the hyperscaler way. We're having to teach them that there is a different way that's out there. But the primary competition still comes from the hyperscalers. And I think that we are finding, though, that once somebody learns that there's a better way that Cloudflare is very, very sticky, and we keep those customers over the long term. Operator: And our next question comes from the line of Shaul Eyal with TD Cowen. Shaul Eyal: Congrats on the quarterly results. So many new product announcements in recent weeks during Cloudflare Connect and Birthday Week. Specifically, Matthew, I wanted to ask about NET Dollar. We have received many questions about this product. It could become a meaningful long-term growth driver. How should we think about the regulatory framework around it? And what has been maybe the early reception kind of out there? And maybe along these lines, my follow-up will be maybe a word about AI gatekeeper. I know you started discussing it more vocally last quarter. Lots has changed over the past few months. You've indicated some initial activity, some contract wins around the guardrails from publishers and AI companies. So can you talk to us about what has changed in recent months? And is there anyone else out there emerging with a similar offering? Matthew Prince: So let's start with NET Dollar. So as we have really interacted with AI companies, but also the merchants and media companies and the real long tail of the Internet, much of which sits behind us. What we realized was that as we move into a world of agentic commerce, we're going to need a currency to pay for the commerce that is done between agents that is really designed specifically for that task. And that's the spirit with which we started the NET Dollar project. Now we're not -- we're unlikely to do it entirely ourselves for some of the regulatory reasons that you're familiar with, but there are lots of opportunities. And if you think about someone like Stephanie Cohen on our team, who is very familiar with the challenges of working in the financial services space, I think we're approaching it in a thoughtful way and are confident that we can execute in a way that is both going to help facilitate agent-to-agent commerce and be something that it fits well within any of the regulatory regimes that we have both in the U.S. and around the rest of the world. At the same time, that is only one of our bets in this area. And I think a little bit the way that we're thinking about this is that we want to be the Babel fish of AI, sort of the universal translator, whether you're using MCP, the Anthropic protocol or Google's version of it or Microsoft's version of it, Cloudflare supports all of those. And so I think in addition to the excitement that we've seen around NET Dollar, I am equally excited about the partnerships that we're doing with Coinbase around X402, with Visa, Mastercard, American Express, around how you can create agent-to-agent payments. And I think that Cloudflare is a network, and what you want networks to be able to do is facilitate the ability for connection to happen and do it regardless of what makes sense. So we think there are potentially some advantages to what we're building with NET Dollar, but we're not all in on any one of these things. We want to make sure that we support everything, and we can meet both customers and merchants and media companies, small, large, everything in between, wherever it is that they exist. And I think that's something that is unique about our approach. It's actually very similar to the answer to the previous question. We really do believe in multi-cloud and that we can be the facilitator of that. We also believe that there are going to be multiple different ways to pay. There are going to be multiple different agentic protocols, and they are going to be hopefully many, many, many AI companies interacting with many media and businesses to create a more frictionless and AI-powered future of commerce. And I think that we see ourselves in the center of that. In terms of sort of gatekeeper, so we have a product that's called AI Gateway. I don't think that's what you're asking about. I think you're asking about the product around us thinking about how do we help media companies figure out a new business model for the future. I think that, yes, I think that's going just extremely well. Like the number of media companies that are signed up and engaged is powerful. We're hearing from them about how the deals that they are able to do with AI companies have gotten markedly better, and we are getting a lot of praise for that. There will be others that compete with us in this space. But I think one of the things that has really set us apart is -- and this is thanks to our over time, just significant investment in public policy and the side of the house that maybe doesn't always get as much attention. But I think we have been thought leaders in thinking about what does the future business model of the Internet look like. And that is getting us into a number of different conversations. And as we have done that, it's been clear that it's not just traditional media companies. But frankly, at banks, the research departments they're a little nervous because they're seeing ticks down in the amount of research that people are paying for because the AI companies are slowing that up. So that's open conversations with financial services companies. We're seeing challenges with brands that are worried about what does a brand mean in the future of Agenta commerce. We're seeing challenges from small businesses. And I think one of the things that I am passionate about is how do we make sure that as this new paradigm, as this new platform emerges, how do we make sure that everybody has a fair shot to be able to participate in it. And so we will continue to do what we always have done, which is make our tools available to everyone, large and small. Operator: And our next question comes from the line of Fatima Boolani. Fatima Boolani: Matthew, I wanted to ask you about the AI native ecosystem. It is embryonic, but on an absolute tear, there's so much capital flowing into the space, and you have taken a very active interest in bringing these AI natives on to the Workers and Workers AI platform. So what I wanted to ask you specifically was, can you help us think about the AI native exposure that you have today in the business? Anything that we should worry about from a concentration standpoint at this present time? And then maybe at a higher level, some of the engagement that you are seeing from a pool of funds perspective, how much of that is drawing in more AI-native eyeballs specifically because of the differentiation that you provide from an architectural standpoint at the edge for AI inferencing? Matthew Prince: Yes. So I think that even though we're excited about AI and AI inference, it is still a relatively de minimis portion of our overall revenue, growing fast, but not -- I don't see any current concentration risk that's there. And what we're seeing is actually sometimes it's not the inference products that initially get interest from the AI native companies. It's actually the security products. And the reason why is the cost of AI, every query can be so high that making sure that you don't have fraudulent queries running through your system is critical in order to make sure that you can continue to operate cost effectively. And so many of the AI companies, we estimate that about 80% of AI companies use us in one way or another. But a lot of the times, that's using us for actually securing some of our -- really our Act 1 products. And then we are working on getting more and more of them to use the inference products as well. In terms of what we can do that others can't do, I think you're absolutely right that being able to be close to users is important for a latency perspective. And that's -- and when you have human computer interaction, especially with something that is seems almost alive when you're interacting with it. Every millisecond counts because it breaks that illusion if things slow down, especially as you get to things like voice communication and other things that need to have kind of a natural rhythm to them. And so I think we're well positioned for that. But in addition to that, because of the fact that we are taking the responsibility for driving utilization, and we're better at that than most customers are on their own, we can often, in addition to giving better performance, also give a lower cost of functioning. And again, I think that, that keeps us in a pretty healthy space. And so I have no doubt that there's going to be kind of ups and downs in AI over the coming months and years. But it's clear to me that there is something very, very real here that it is going to be transformative that a lot of inference will run on your handset or your driverless car directly there, but that if it can't run there, it needs to run somewhere else, the next best place for it to run is in the network. And Cloudflare is the only network that gives you that capability on a global basis today. And I think that, that's going to continue to allow us to win workloads regardless of what happens to AI generally. Thomas Seifert: One comment I want to make, just to make sure we have no misunderstanding. When we say de minimis, we mean that no customer is bigger than 2% of revenue. Operator: And our next question comes from the line of Mark Murphy with JPMorgan. Mark Murphy: So Matthew, we noticed that Cloudflare is upgrading its security to be quantum safe so that data stays protected even when quantum computers eventually arrive, whenever that's going to be. I'm wondering if you can just describe the work you're doing? And do you think this is more of a long-term science project that won't matter for, say, 5 to 10 years? Or do you think it's something that could have some implications in the medium term? And then I have a quick follow-up. Matthew Prince: Yes. I have sort of mixed feelings on quantum, where I think there's a sort of a lot of fear, uncertainty and doubt in the marketplace where people are going to say on quantum changes everything and it's going to be apocalyptic. That is not my opinion. I think quantum changes some interesting things. I think it's likely that you'll have more efficient package delivery that you'll be less likely to be delayed on your flight. And it does -- it will cause problems for some of the older generations of cryptography. But that's a very solvable problem. And I think the thing that is unique about Cloudflare is that we have the scale on the content side to help figure out what the right solution is. And so we have partnered in the past and are continuing to partner with Google, who has scale on the eyeball side with Chrome browsers to be able to figure out what is a future-proof version of cryptography that will stand up even as we eventually have powerful quantum computers. And so we've worked together. We helped submit the data that went back to the Internet Engineering Task Force, the IETF and to NIST to standardize some of the new protocols that have been released. We have rolled that out across our entire network for every customer, whether they pay us or not, because we believe that everybody should have the foundational levels of the best of security at no cost. And as you all upgrade your browsers on your phones and your laptops, all of them now are supporting post-quantum cryptography. The reason it's important to do now, even if we don't think that there are going to be quantum computers that can factor giant numbers, which is what you need to do in order for it to affect cryptography is the risk of storing the data. So if you just hoovered up a bunch of Internet data and then held on to it, you could, in the future, replay that and decrypt it. And so for most of our customers, like it's no big deal. Like if your credit card number today gets compromised 10 years from now, it doesn't really matter because your credit card number has probably changed several times in that period of time. But for some of our customers, including the U.S. government cabinet level agency that we did a renewal with, this is incredibly important. And the reason it's important to do it broadly is you need to make sure that you're doing it in a way which is still fast, isn't burning a ton of battery life on phones. And what we can do in partnership with organizations like Google is actually roll out real-world tests and prove that it's possible and cost effective to do it. So I think -- I don't think science project is the right thing. I do think forward leaning is the right thing. And I think it is an example of how Cloudflare is always trying to live up to our mission of helping build a better Internet. Mark Murphy: Yes, that is pretty fascinating. Just as a very quick follow-up. You mentioned egress fees I think last call and again, this call, I should say, the elimination of egress fees. It feels like you're winning some real business that's partly tied to that. Can you just touch on the economics that, that would unlock for the customer by removing those fees? Matthew Prince: Yes. I mean, so egress fees are the cost that -- when we talk about them, the cost that hyperscalers charge you every time your data leaves their system. And hyperscalers have been notorious at keeping egress fees high. And it's actually one of the places where there's the most leverage because at scale, bandwidth becomes extremely inexpensive and really gets close to being free. And that's a longer conversation than we probably have time for but that's just the fact. And yet, even as the hyperscalers bandwidth costs have dropped and dropped and dropped, they've not passed those savings on to customers. The reason they don't pass those savings on to customers is because they don't want the data to leave. They like to hoard all of a customer's data. And so what we believe is that it's the right thing to let customers take their data wherever. We believe that a multi-cloud universe is the right universe. And so products like R2, which is our object store, allow customers to take their data, their heavy object data that they usually have to pay a lot for if they have to move it around and move it onto our network where they can move it anywhere they need and be able to access it. And so I think that what we're trying to do is say customers should be able to use whatever combination of clouds makes sense for them and that Cloudflare is the network that connects them all together and gives them the controls they need in order to do so safely, securely, efficiently, reliably and quickly. Operator: And our next question comes from the line of Jackson Ader with KeyBanc Capital Markets. Jackson Ader: The first one, Matthew, certainly losing CJ is a real loss, even if it is a great opportunity. And I'm just curious, whether you feel comfortable with the bench that he leaves behind and how you kind of ensure maybe that he either is or will be replaceable? Matthew Prince: Yes. So first of all, I mean, CJ is terrific. And we can't talk about where he's going, obviously, but they are lucky to have him. And while we are bummed that he's leaving, I'm also really proud and excited for him. And this has definitely been a career goal of his for a long time. And so I'm glad that he's found his way to what I think is an outstanding technology company that he'll be leaving. What's the good news for us is that when CJ came in, he actually didn't make many changes or even hire all that many people to Cloudflare. He looked around our engineering team and said, these are exceptional engineers. These are exceptional product leaders. What they need is someone who can come in and really focus them on being customer obsessed. And CJ has done a great job of implicating that customer obsession into our product and engineering team. And that's something that we're not going to forget. But there isn't -- I don't think that there's a significant flight risk of people fleeing because they came for CJ and now CJ has gone. They came for Cloudflare. CJ was great as a member of Cloudflare. And I think that, that bench continues to be strong. And then both CJ as well as our team, now that we've got the news out of the way, I think that this is the most exciting job if you're a product or engineering leader anywhere in the world working in tech, you get to help build the future. You get to help invent what the business model of the future of the Internet is going to be. There is nothing that is more exciting than that. And so I think we'll have -- CJ is one of a kind, but we will have no trouble finding someone else who is world-class. And I think the thing that will be the real legacy of CJ is that you will have taught us how important in product and engineering being customer-obsessed is and whoever comes next, I bet that's going to be something that you'll say, wow, that person has that quality as well. Jackson Ader: Okay. That makes sense. And then a real quick follow-up. Matthew, you mentioned earlier the move from a product-led growth company to more of an enterprise company. The other side of that coin is now seasonality matters, right? We're heading into a fourth quarter. If you're selling more enterprises, that makes December all that much more important than prior December. So I'm curious about how the pipeline has built through the year and what you're kind of expecting as you're going into a more enterprise-ready fourth quarter than is typical for Cloudflare. Thomas Seifert: Let me get started, and Matthew can jump in. We gave the guidance we gave for the fourth quarter in light of what we are seeing. So we are very encouraged by the pipeline buildup for the fourth quarter, but guidance and foreshadowing what is going to come is more than just pipeline. We look at sales productivity. We look at the net sales capacity we add. We look at the motion and velocity in the developer business and all the indicators that we are currently seeing are reflected in how we guide for the quarter. So pipeline is encouraging, but there are more factors contributing to the picture we have of what is in front of us. And you heard from both of us that we are quite optimistic in how we look at the future. Matthew Prince: Yes. And we've had -- we have lived with some level of seasonality for quite some time. You can see that historically, Q4 performs more than earlier quarters. But having gotten pipeline review meetings, I think we feel very good about where the coverage is for what we have in Q4. And again, it's just part of the journey of being more and more of a true enterprise sales company. Operator: And our final question today comes from the line of Mike Cikos with Needham. Michael Cikos: Matthew, first for you. I just wanted to see, can you please provide an update on the trends you're seeing in the SASE market specifically? Would just love to get an update on traction you're seeing out there as well as how the competitive landscape is changing, if at all, from where we were a couple of months ago. Matthew Prince: Yes. I mean I think our SASE product when we're in consideration is performing extremely well. We don't see significant changes in the competitive landscape. We think we are very competitive. I think the biggest change for us has been just a kind of the proverbial forehead slapping moment of just looking at Netskope's S1 seeing that 95% of their sales are through channel, seeing the same thing for a while, we thought that, that was sort of an aberration for Zscaler and realizing the way that you sell these products is through partners. And so we are doubling down on that. You see that we're seeing a significant uptick in the partner-led opportunities. We have always, I think, had good kind of willingness to partner, but we haven't always made it as easy as possible to partner with us. I think we're cleaning that up and doing a good job getting that in shape. And that, I think, will be the big unlock for those products to be able to be sold. And those are critically important products for us because their gross margins are so high. And so as we're seeing strength in parts of our business like Workers, the best way to balance that out is also sell SASE as well because, again, it's something that has just extraordinarily high gross margins to it. Whereas products like Workers, the gross margins are good and will get better and better over time. But because they are newer products, they're not as optimized in that space. So I think this is a really opportune time, and I'm excited about sort of the partner-first strategy, especially with our SASE products. Operator: And with that, I will now turn the call back over to CEO and Co-Founder, Matthew Prince, for closing comments. Matthew? Matthew Prince: I just want to thank our entire team for an incredible quarter. It takes a ton of effort of people executing, of people innovating and us being able to deliver results like this. Thank you so much and we'll see you back here again next quarter. Operator: Thanks, Matthew. And that concludes today's conference call. You may now disconnect. Have a great day, everyone.
Operator: Welcome to EPR Properties Q3 2025 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the call over to Brian Moriarty, Senior Vice President of Corporate Communications. Brian Moriarty: Thank you, Sophie. Thanks for joining us today for our Third Quarter 2025 Earnings Call and Webcast. Participants on today's call are Greg Silvers, Chairman and CEO; Greg Zimmerman, Executive Vice President and CIO; and Mark Peterson, Executive Vice President and CFO. I I'll start the call by informing you that this call may include forward-looking statements as defined in the Private Securities Litigation Act of 1995, identified by such words as will be, intend, continue, believe, may, expect, hope, anticipate or other such comparable terms. The company's actual financial condition and the results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of those factors that could cause results to differ materially from these forward-looking statements are contained in the company's SEC filings, including the company's reports on Form 10-K and 10-Q. Additionally, this call will contain references to certain non-GAAP measures, which we believe are useful in evaluating the company's performance. A reconciliation of these measures to the most directly comparable GAAP measures are included in today's earnings release and supplemental information furnished to the SEC under Form 8-K. If you wish to follow along, today's earnings release, supplemental and earnings call presentation are all available on the Investor Center page of the company's website, www.eprkc.com. Now I'll turn the call over to Greg Silver. Gregory Silvers: Thank you, Brian. Good morning, everyone, and welcome to our third quarter 2025 earnings call and webcast. The third quarter marked another period of steady progress as we continue to position the company for accelerated growth and expansion. We are pleased to report a 5.4% increase in FFO as adjusted per share versus the same quarter last year and an increase at the midpoint in our FFO as adjusted guidance for the current year. Our disciplined deployment strategy is enabling us to expand our portfolio of experiential properties. Our team is leveraging both existing relationships and new partnerships, and we have a pipeline of investments that are actionable over the next 90 to 120 days. However, given the fluidity of timing, we felt it prudent to not raise investment spending guidance at this time. Larger opportunities are now accessible, and we're moving decisively to capture them as we look towards 2026. During the quarter, we also made continued progress on our strategic capital recycling program. This program has largely been focused on planned noncore theater and opportunistic education dispositions with targeted reinvestment in growth experiential sectors. Our work here has materially strengthened our portfolio and provided for accretive reinvestments. Turning to our portfolio and industry health. Our third quarter consolidated coverage remained strong at 2.0, reflecting continued portfolio stability. At the Box Office, we anticipate a robust fourth quarter and expect 2025 to set a new post-COVID high. The continued recovery of the Box Office has led to a significant increase in percentage rent from our Regal lease. We believe this percentage rent feature has strong upside in the future as we anticipate continued growth at the Box Office. We continue to be pleased with the resilience that our tenants have exhibited as consumers prioritize experiences. At the same time, to mitigate potential economic pressures on consumers, many of our tenants have launched new initiatives. These include annual pass programs with bundled discounts, dynamic daypart pricing and group discount offerings. We are also seeing widespread adoption of enhanced technology across our tenant base, which has the potential to both improve the customer experience and create greater efficiencies. I'd also like to remind everyone that we've successfully navigated many economic cycles over the past 25 years. During this time, we've witnessed the importance and resilience of congregate value-oriented entertainment and leisure in the daily lives of consumers. Lastly, I would like to comment on the status of the proposed transaction involving the sale of our Catskills Land affiliated with the Resorts World Gaming property. We've been advised that the bond transaction, which we understand will be used to fund the exercise of the purchase option will be delayed pending the recently announced proposed merger among Genting gaming entities. While our tenant has indicated their desire to complete a bond transaction and option exercise in 2026, the timing and outcome of such a transaction remains uncertain. Regardless of whether the option is exercised, our strong balance sheet and clear visibility into future opportunities position us to materially accelerate investment spending in 2026. Now I'll turn it over to Greg Zimmerman to go over the business in greater detail. Gregory Zimmerman: Thanks, Greg. At the end of the quarter, our total investments were approximately $6.9 billion with 330 properties that are 99% leased or operated. During the quarter, our investment spending was $54.5 million. 100% of the spending was in our experiential portfolio. Our experiential portfolio comprises 275 properties with 53 operators and accounts for 94% of our total investments, or approximately $6.5 billion. And at the end of the quarter was 99% leased or operated. Our education portfolio comprises 55 properties with 5 operators and at the end of the quarter was 100% leased. Turning to coverage. The most recent data provided is based on June trailing 12-month period. Overall portfolio coverage remains strong at 2x. Turning to the operating status of our tenants. Q3 Box Office was $2.4 billion, down from $2.7 billion in Q3 2024. 7 titles grossed over $100 million, led by Superman, Jurassic World: Rebirth, and a Fantastic Four: First Steps. The Q3 2025 comparison was difficult because Q3 2024 was anchored by the strong performance of from Deadpool & Wolverine, Despicable Me, Twisters and Beetlejuice Beetlejuice. The slate for the fourth quarter is anchored by 3 films projected to gross over $200 million, Zootopia 2, Wicked: For Good, and Avatar: Fire & Ash. Box Office through the first 3 quarters was $6.5 billion, a 4% increase over the first 3 quarters of 2024. Our estimate of North American Box Office for calendar year 2025 is between $9 billion and $9.2 billion, an increase of approximately 6% at the midpoint from 2024. Turning now to an update on our other major customer groups. Andretti Karting opened strongly in Oklahoma City in mid-July. The Kansas City location opens in mid-November and Schaumburg, Illinois is expected to open in the second quarter of 2026. Our second Pinstack located in Northern Virginia is also expected to open in Q2. Notwithstanding macro pressures on consumers, our Eat & Play coverage remains strong and above pre-COVID levels, and metrics are stable when compared to Q3 2024. We saw increased EBITDARM across our Attractions portfolio, buoyed by strong performance in our Canadian assets and at Enchanted Forest Water Safari. As we have said for some time, we see a lot of momentum and investment potential in the Hot Springs space. We are very pleased with the performance of all 3 of our Hot Springs investments. Driven by attendance growth and the $90 million expansion at the Springs Resort in Pagosa Springs, EBITDARM and revenue for the portfolio are up year-over-year. Both Iron Mountain Hot Springs and Murietta Hot Springs Resort continue their attendance and revenue growth. Because of the strong performance at Iron Mountain Hot Springs, in Q3, we funded $18.25 million in accordion financing, which reflects our conservative acquisition underwriting practices. Our underwriting thesis was that this asset would continue to grow and outperform expectations. We work with our operator to include in accordion feature, which contemplated additional investment once the asset achieved agreed-upon metrics. The expansion of our Jellystone Kozy Rest RV Resort near Pittsburgh, helped drive overall growth in our experiential lodging portfolio with gains in EBITDARM and revenue across the portfolio in Q3 over Q3 2024. Our ski properties experienced revenue growth over the summer months. It's too early for any indication of the upcoming ski season. Our education portfolio continues to perform well. Our customers' trailing 12-month revenue for Q2 was essentially flat, with EBITDARM down due to expense increases. Our investment spending for Q2 was -- Q3 was $54.5 million, entirely in experiential assets and includes funding for projects that we have closed, but are not yet open. Our year-to-date investment spending is $140.8 million. During the quarter, in addition to the $18.25 million accordion funding in Iron Mountain Hot Springs, we made our first investment with the high-end Canadian fitness firm, Altea Active, providing approximately $20 million in mortgage financing secured by their club in Winnipeg, Manitoba. We are excited to start a new relationship with one of the best fitness operators in Canada and to provide growth capital to Altea as they look to expand their brand. We anticipate continuing to increase our investment spending cadence in the coming quarters. We continue to see high-quality opportunities in both acquisition and build-to-suit development in our target experiential categories. As Greg noted, our disciplined deployment strategy has enabled us to expand the depth and breadth of our portfolio of experiential properties. As we have mentioned frequently, we are especially bullish on the fitness and wellness space. And given our deep relationships, the increased focus on fitness and wellness among multiple generations and demographics and the wide range of investment opportunities from hot springs to spas to fitness. Our investment spending this quarter reflects these deep relationships and high-quality investment opportunities. As we approach year-end, we are narrowing our investment spending guidance for funds to be deployed in 2025 from the range of $200 million to $300 million to the range of $225 million to $275 million. We have committed over $100 million for experiential development and redevelopment projects that have closed, but are not yet funded to be deployed over the next 15 months. We anticipate approximately $25 million of this amount will be deployed in Q4, which is included at the midpoint of our 2025 guidance range. Our team is leveraging both existing relationships and new partnerships to develop a pipeline of investments actionable over the next 90 to 120 days. Given that some could fall into 2026, we did not think the timing was right to raise investments in any guidance now. As we look forward into 2026, we are also seeing larger opportunities and are moving decisively to capturing. As we noted on our Q2 call, early in Q3, we sold our last vacant AMC theater in Hamilton, New Jersey to the Children's Hospital of Philadelphia. We also sold a vacant parcel in Q3. Combined net proceeds were approximately $19.3 million with a combined gain of approximately $4.6 million. In the past 4 years, we have sold 31 theaters. We have one remaining vacant theater. Subsequent to the end of the quarter, we received approximately $18 million in a paydown of our mortgage with Gravity Haus, resulting from their sale of their asset in Steamboat Springs. Through the end of Q3, we sold approximately $133.8 million of assets. We are increasing our 2025 disposition guidance to the range of $150 million to $160 million from a range of $130 million to $145 million. I now turn it over to Mark for a discussion on the financials. Mark Peterson: Thank you, Greg. Today, I will discuss our financial performance for the third quarter, provide an update on our balance sheet and close with an update on 2025 guidance. FFO as adjusted for the quarter was $1.37 per share versus $1.30 in the prior year, an increase of 5.4% and AFFO for the quarter was $1.39 per share compared to $1.29 in the prior year, an increase of 7.8%. Before I walk through the key variances, I want to explain 2 offsetting items excluded from FFO as adjusted and AFFO. First, with regard to dispositions for the quarter, net proceeds totaled $19.3 million. We recognized a net gain on sale of $4.6 million. Also included in gain on sale for the quarter was a $3.5 million gain related to the exercise of an early termination option of a ground lease. Second, provision for credit losses net was $9.1 million for the quarter, and related to fully reserving one mortgage note receivable for $6 million related to our only investment with 1 small borrower, and changes in our estimated current expected credit losses, mostly due to macroeconomic conditions. Now moving to the key variances. Total revenue for the quarter was $182.3 million versus $180.5 million in the prior year. Within total revenue, rental revenue increased $6.2 million versus the prior year, mostly due to the impact of investment spending, rent bumps and higher percentage rents. Percentage rents for the quarter were $7 million versus $5.9 million in the prior year, and the increase was due primarily to higher percentage rent recognized from one of our theater tenants, offset by lower percentage rents recognized from our attraction properties. Both other income and other expense related primarily to our consolidated operating properties, including The Kartrite Hotel and Indoor Water Park and our 4 operating theaters. The decrease in other income and other expense versus prior year is due primarily to the sale of 3 operating theater properties in the first half of this year. On the expense side, G&A expense for the quarter increased to $14 million versus $11.9 million in the prior year, due primarily to higher estimated incentive pay, including noncash share-based compensation expense. Interest expense net for the quarter increased by $371,000 compared to the previous year, due primarily to an increase in our weighted average interest rate on outstanding debt to -- due to additional borrowing on our unsecured revolving credit facility to pay off lower-rate senior unsecured notes at their maturity last quarter. Equity and income from joint ventures for the quarter was $2.9 million compared to a loss of $851,000 in the prior year. This increase is due to our decision to exit our joint ventures in Broadridge, Louisiana and St. Pete, Florida in late 2024 as well as better performance at our 2 RV Park joint ventures. FFO as adjusted for the 9 months ended September 30 was $3.81 per share compared to $3.64 in the prior year, an increase of 4.7%. And AFFO for the same period was $3.83 per share compared to $3.61 in the prior year, an increase of 6.1%. Turning to the next slide, I read some of the company's key credit ratios. As you can see, our coverage ratios continue to be very strong with fixed charge coverage at 3.6x in both interest and debt service coverage ratios at 4.2x. Our net debt to annualized adjusted EBITDAre was 4.9x at quarter end, which is below the low end of our targeted range. Additionally, our net debt to gross assets was 38% on a booked basis at quarter end, and our common dividend continues to be very well covered with an AFFO payout ratio of 64% for the third quarter. Now let's move to our balance sheet, which is in great shape to support our expected growth. At quarter end, we had consolidated debt of $2.8 billion, of which $2.4 billion is either fixed rate debt or debt that has been fixed through interest rate swaps with an overall blended coupon of approximately 4.3%. During the quarter, we amended our unsecured revolving credit facility agreement to remove the SOFR index adjustment, which decreased our all-in interest rate by 10 basis points. Our liquidity position remains strong with $13.7 million cash on hand at quarter end and $379 million drawn on our $1 billion revolver. While our leverage is below the low end of our range and our 2025 guidance continues to have no equity issuance assumed, we plan to finalize our new ATM program in Q4. We currently have a direct share purchase plan in place for equity issuance, but the ATM program will provide us with an additional tool in our toolbox for raising such capital. We are increasing our 2025 FFO as adjusted per share guidance to a range of $5.05 to $5.13 from a range of $5 to $5.16, represented an increase over the prior year of 4.5% at the midpoint. Please note that as in prior years, our fourth quarter FFO as adjusted per share is expected to be lower than our third quarter primarily due to the seasonality related to The Kartrite Hotel and Indoor Water Park and our joint venture RV properties. We're also narrowing our 2025 investment spending guidance to a range of $225 million to $275 million from a range of $200 million to $300 million. We are increasing guidance for disposition proceeds for 2025 to a range of $150 million to $160 million from a range of $130 million to $145 million. On the next slide, we are narrowing our percentage rent and participating interest income to a range of $22.5 million to $24.5 million from a range of $21.5 million to $25.5 million, and raising the low end of our estimate for G&A expense to a range of $54 million to $56 million from a range of $53 million to $56 million. We are also updating the guidance for our consolidated operating properties, which is provided by giving a range for other income and other expense. Guidance details can be found on Page 23 of our supplement. Now with that, I'll turn it back over to Greg for his closing remarks. Gregory Silvers: Thank you, Mark. As our results demonstrate, our portfolio continues to be strong and resilient. We have executed on a very aggressive capital recycling plan this year with our guidance implying over $150 million of sales. Notwithstanding this capital recycling, we are projecting to deliver over 4.5% growth in FFO as adjusted. As a result of this recycling and cash flow generation, we have positioned ourselves to materially accelerate our capital deployment in 2026. We are very pleased and excited as we bring 2025 to an end and look forward to 2026. With that, why don't I open it up for questions? Sophie? Operator: [Operator Instructions] We'll take our first question from Smedes Rose from Citi. [Operator Instructions]. Bennett Rose: I wanted to ask a little bit more about the credit losses that you're reserving for? You mentioned a $6 million mortgage note, and then just some changes -- expectations around the broader macro economy. Could you maybe just talk about that a little more? And any sort of incremental detail around what happens with the underlying property there? Gregory Silvers: Sure, Smedes. I think, first of all, again, it's a small tenant that we will -- we will see how they continue to perform. We just thought it was prudent to reserve that. If not, we have assets related to that, that we can look to take control and sell. Then the larger macro issue is just, I'm going to get this wrong, Mark, it's CECL so how that works. And there's a lot of factors that go into that. Mark, maybe you can give some more detail on them. Mark Peterson: Yes. So there's macroeconomic indicators that go into that. That can move up and down as it does every quarter, sometimes positive, sometimes negative. So really, I think just the outsized number this quarter was really the $6 million note that, as Greg said, that we determined we needed to reserve. Again, it's the only investment we have with that small tenant. Bennett Rose: Okay. And then, I just wanted to ask you, too, you've talked a little bit about accelerating acquisition volumes in 2026. Could you maybe just put some sort of scope around that in terms of where you think volume could go and let's putting aside the whole Genting thing for a minute, but if you wanted to stay leverage-neutral for '26? Gregory Silvers: Well, I think that's the question. And I think we need to be really clear about this that we -- in this acceleration plan, the Genting was never ever requirement for us to do that. Again, and Mark can detail this, we've significantly moved leverage down to below -- at or below the low end of our leverage range. So when we think about taking that up to what is our natural kind of in the midpoint of that at 5.3, and looking at our cash flow generation, we feel comfortable that we can go to that $400 million, $500 million range without any additional need of capital recycling. So when we talk about those levels, we're very comfortable without Genting or without any transaction involving that property being able to do that. So I think the narrative that we need that to occur in order to allow us to do those levels is factually inaccurate. But Mark, maybe. Mark Peterson: Yes. And just to add to that, if you just do the math, forget Genting, do the math on, say, $500 million investment spending when you utilize our cash flow, a little bit of disposition kind of do the math. You end up still probably below the midpoint of our targeted leverage range, again, because we're beginning so low at about 5x. So we'll be below 5.3 if you just do the math. The Genting thing purely becomes an opportunity to delever our balance sheet by about 0.3 turns if you do the math on that. So again, as Greg said, we view Genting as an opportunity, not an overhang, not necessary to execute our plan, but would provide us additional dry powder, but again, not necessary to execute our plan next year to grow significantly. Operator: We'll take our next question from Kathryn Graves with UBS. [Operator Instructions]. Kathryn Graves: My first, I'm wondering if you could just provide some capital on the duration of the mortgage financing investment with Altea Active? And then, maybe just talk a bit about how that kind of investment fits within your larger array of investments that you have available to you? Gregory Silvers: Sure. Greg, do you want to... Gregory Zimmerman: Yes. So it's structured as a mortgage mostly because of implications of Canadian currency, et cetera. And the idea is to provide growth capital for Altea as they grow their business. It's structured as, I believe, a 20-year mortgage. So long-term mortgage, not short-term financing, and we expect to be in a long-term partnership with Altea. Gregory Silvers: I would say, I would echo what Greg said. What we found often in Canada is for taxation purposes, mortgage structures, allowing you to have a more efficient structure. And so we've leaned into that, but I would just tell you that mortgage is probably more like a synthetic mortgage, it reads like a lease -- synthetic lease, I'm sorry, synthetic lease. Kathryn Graves: Got it. That's helpful. And then my second question, several of your more retail-focused peers have reported seeing increased competition for deals from private players, family offices, et cetera. I'm wondering if you've also seen any of this competition in your acquisition landscape or whether you're asset class and sort of the uniqueness of it, maybe it helps buffer from some of that competition. And then has that also allowed cap rates to kind of stay where they are? Have you seen some compression more recently in your current pipeline? Gregory Silvers: I'll let Greg also jump in. But I would say always, I think there's competition out there. I don't think it's as many debt play in our spaces as do in the retail space, but I do think there is -- as we talked about, there's been increased deal flow. I think that's starting to work in our favor. And I think cap rates have fairly -- been fairly stable, right? Gregory Zimmerman: Yes. I think cap rates are stable, for sure. And again, we'll run into all those kind of investors in larger deals. But as we say repeatedly, we've got a pretty granular approach, our team is out all over the country in Canada, looking for deals. So that's how we're able to find great assets like Altea Active and some of our Hot Springs resorts. So I think we're pretty comfortable that in that space, we've got a very nice run rate, and as we increase our ability to participate in larger ticket deals, we'll probably run into more of the competitors the change. Operator: We'll take our next question from Upal Rana with KeyBanc Capital Markets. [Operator Instructions]. Upal Rana: Could you touch on the larger investment opportunities that you're seeing in the market today? Gregory Silvers: Well, without disclosing any specific, I think it's pretty broad-based. I think we're seeing nice large opportunities in several of our verticals, so it's not limited to kind of one area. And like I said, we think of those as over $100 million and over. And I think, there's probably somewhere between 3% and 5% in the market right now. So I think it's, again, somewhat of a change from what we've seen from the first half of the year, no doubt. So it's both exciting. And as we talked about in the spaces that we play, we're very much known to all the players. And so we're seeing all these deals, and we're excited about the opportunity set. Upal Rana: Okay. Great. That was helpful. And then I appreciate the ATM program status update you provided. Could you provide some color on your strategy and how you plan to issue equity in terms of what your pricing is and when? Mark Peterson: Yes. As we mentioned, we're not dependent on equity for next year's plan with just debt financing and our free cash flow, et cetera. We'd be under the midpoint of our range. That said, opportunistically, we may decide to raise equity. Certainly, the price has to be at a point where it makes sense, and that would just allow us to delever further and provide more dry powder. And our ATM program will allow us to do that in an effective way, currently, we have a direct share purchase plan, and we can also dribble out stock, but we are excited about the ATM program and the ability to do forward-type deals and so forth. So -- but it's entirely contingent on the market and the market is in a good place, a good price for us, and it doesn't make sense to issue equity to lower our leverage. Operator: Our last question comes from Jana Galan with Bank of America Merrill Lynch. Jana Galan: Thank you for quantifying the larger deals on the market that you're looking at. Can you also give some color on the smaller ones and then maybe kind of yield differentials between the large and smaller investment opportunities? Gregory Silvers: Yes. And I'll let Greg also join in. I mean, we've made a lot of our path over the last several years of kind of what we would say is the $25 million to $75 million deals, and those are still very much out there. Those are the, what I would say, much more of the bespoke relationship deals that we have, and those have always been part of what we have done. I think those are less -- they're less competitive and they're, again, because of this bespoke nature, how we get those deals, but I think those are still comfortably in the 8s. I think it gets a little more competitive when you get into larger deals, and people looking for volume. It doesn't mean that those are materially moving that may be 25 basis points, but I think we feel like we're in a position to be competitive with those given our understanding of those deals. But Greg, probably... Gregory Zimmerman: No, I think, you covered this. Jana Galan: Great. And then just maybe on the new Altea mortgage loan, and maybe it's due to the discussion you had about the way it was structured, but just curious on the yield there. Is that more representative of the Canadian market? Gregory Zimmerman: No. I mean, the number we quoted is in U.S. dollars. And so if you use U.S. dollars, the yields we're getting are similar to what we would get in the U.S. Operator: This completes the allotted time for questions. I will now turn the call back over to Greg Silvers for any closing remarks. Gregory Silvers: Thank you, everyone. We appreciate your time and attention. Look forward to talking to you guys many times in the fall, and have a great day. Thank you. Gregory Zimmerman: Thank you.
Operator: Welcome to the Societe Generale Conference Call. Mr. Slawomir Krupa, Chief Executive Officer; and Mr. Leopoldo Alvear, Chief Financial Officer, will present the group's third quarter and nine months 2025 results. [Operator Instructions] Ladies and gentlemen, welcome to the Societe Generale Conference Call. Gentlemen, please go ahead. Slawomir Krupa: Good morning, everyone. Welcome to our nine-month 2025 financial results presentation. I am pleased you could join us today. In line with previous quarters, we are once again achieving a solid performance. The financial indicators remain above our annual financial targets. Our quarterly and nine-month revenues have grown significantly compared to last year. This is happening while we continue to demonstrate discipline with regards to RWA organic growth, strict cost control and risk management. Over the first nine months of the year, revenues were up by 6.7% compared to last year, reaching EUR 20.5 billion at the end of September, excluding asset disposals. This highlights the strength and relevance of our commercial franchises and validates our strategic decision to be a more compact and synergistic group that focuses on its strengths. At the same time, we remain committed to reducing our cost base in a structural and sustainable manner. Costs are down by more than 2% for the first nine months of the year, excluding asset disposals versus nine months '24. The result, very strong positive jaws and the cost-to-income ratio of 63.3% over the first nine months of the year. That's better than our 2025 target of below 65%. In terms of credit risk, for the first nine months, the cost of risk remains in line with our guidance at 25 basis points. Asset quality remains sound as we continue to navigate the macro environment. Overall, the group net income reached EUR 4.6 billion in nine months ' 25 and a group return on tangible equity of 10.5%. That represents an increase by 3.4 percentage points versus nine months '24, and it puts us well on track to meet our 2025 target of a ROTE around 9%. These solid earnings contribute to the further strengthening of our capital position. The CET1 ratio is up by 20 basis points this quarter despite a slight increase in organic RWA. And ultimately, the CET1 ratio stands at 13.7% at the end of September 2025. As mentioned last quarter, it takes into account the EUR 1 billion additional share buyback program, which was completed this month. This performance keeps us above the updated targets we set for 2025. It marks another step in the right direction, but our goal is to do better, and we will. Making the bank even stronger will require continued focus, perseverance and determination. A little more than two years ago, we held our CMD. And since then, we have made tangible progress. First and foremost, the bank has a much stronger capital base. This is a cornerstone of our strategic road map to ensure greater stability amid the inherent fluctuations of the macro environment. And with a CET1 ratio of 13.7% in the Basel IV regulatory environment, the group is well above its target of 13%. This allows us to successfully pursue our dual ambitions of supporting our sustainable growth and providing additional returns to shareholders. With regards to operational efficiency, there is certainly more to do. But to date, the group has already significantly improved its operating leverage. That is reflected in the sharp drop in the cost-to-income ratio, which improved from more than 70% on average over the five years before the CMD to 63.3% over the first nine months of 2025. Again, this is primarily the result of our relentless and successful execution of our cost-saving initiatives across all businesses. This is also the result of the solid and improving commercial performance of our core businesses. Consequently, the group significantly increased its profitability, its ROTE, which almost doubled despite a higher denominator as it rose from 5.8% on average over the 2018-2022 period to 10.5% in nine months '25. Coupled with the implementation of share buyback programs, which have been increasing for two years, this has resulted in a substantial boost in EPS. When you compare the nine months 2025 with the average nine-month period during the five years preceding the CMD, that EPS rose almost 180%. Increasing profitability in a sustainable manner and ensuring greater value creation for shareholders are at the heart of our commitments. In this, we are at the beginning of a rewarding journey. There is still a lot to do to get where we want to be, but real tangible results have pointed us in the right direction. Now let me hand over to Leo, who is going to take you through our Q3 '25 performance. Leopoldo Alvear: Thank you, Slawomir, and good morning, everyone. As usual, let's now dig into the financial performance for the third quarter. The group results once again are a very solid set of results this quarter with a group net income of EUR 1.5 billion, second highest third quarter since 2006, leading to a quarterly return on tangible equity at 10.7% versus 9.6% in the same quarter last year. This excellent performance is the result of sustained strong commercial activity, which led to another solid increase in revenues, combined with continued strict cost discipline, leading to a strong positive jaw evolution. In details, revenues were up by 3% versus Q3 '24, excluding disposals, and even by 7.7% when excluding also the circa EUR 300 million exceptional income booked in Q3 '24 to close out our past presence in Russia. At the same time, costs continue to decrease in absolute terms and are down by 1.1%, excluding asset disposals, demonstrating our ongoing strict cost discipline. This consequently translates into further improvement in operational leverage with a cost-to-income ratio of 61% in Q3 '25 versus 63.3% in Q3 '24 and below our annual target of 65%. Regarding asset quality, the cost of risk remains contained at 26 basis points and within the lower range of our annual guidance. We've also made further progress in streamlining our business portfolio with the closing of the disposals in Guinea Conakry and in Mauritania. Let's now move to Slide 7 to go through the revenue bridge, which you may now be familiar with. Excluding asset disposals for comparison purposes, which generated around EUR 400 million of NBI in Q3 '24, group revenues increased by 3% in Q3 '25 compared with last year. And as I just mentioned, by 7.7% if we were also to restate the exceptional income recorded last year in the Corporate Center in connection with the closeout of our Romanian exposure in Russia. As illustrated in the chart, all businesses contributed positively to this solid increase. French Retail, Private Banking and Insurance, the revenues grew by 4.5% in Q3 '25 versus Q3 '24, excluding disposals. The rise is mostly driven by both NII and insurance revenues, which are up by 4.7% and 6.9%, respectively. On Global Banking and Investor Solutions, revenues increased by 1.6% compared to a very strong Q3 '24, thus consolidating a high revenue base around EUR 2.5 billion this quarter, thanks to solid performance in FICC and Financing and Advisory. The commercial performance of the businesses within Mobility, International Retail Banking and Financial Services are also strong with a 9.1% increase in revenues in Q3 '24, excluding asset disposals. Finally, if we include the exceptional -- exclude the exceptional income of EUR 287 million related to the exit of Russia, revenues at Corporate Center increased by EUR 175 million, mainly due to sound and improved liquidity management. On the cost front, on Slide 8, we can see that operating expenses fell further in Q3 compared with last year, not only at group level, but also across all pillars. It perfectly illustrates how the new cost policy launched since the CMD has spread throughout the bank. Overall, on a year-on-year basis, costs are down by 1.1% this quarter, excluding disposals and by 6.2% on a reported basis. Similarly, the cost-to-income ratio declined further in the third quarter compared with last year as did the ratios for all the pillars. The group cost-to-income ratio landed at 61% in Q3, a level well below the annual target. After the first nine months of '25, the group reports a cost-to-income ratio of 63%, which makes us very confident in our ability to achieve our 2025 adjusted target for a cost-to-income ratio below 65%. Let's now have a look at the asset quality evolution on Slide 9. The cost of risk stands at 26 basis points this quarter and 25 for the first nine months of 2025. In both cases, in the lower range of our annual guidance. This quarter's cost of risk mainly comprises Stage 3 provisions. which accounts for EUR 437 million, with notably a transfer of provisions from Stage 2 to Stage 3, which contribute to a net reversal of EUR 68 million in S1 and S2 provisions. On the later, total outstanding Stage 1 and Stage 2 provisions remain high at EUR 2.9 billion or 2x 2024's cost of risk. Asset quality remains robust as illustrated by the NPL ratio at 2.77%, stable from the last quarter. It is important to highlight that the group has not -- is not exposed to the recent U.S. defaulted companies, which made the headlines, and we have a negligible exposure to U.S. regional banks. Finally, the net coverage ratio remains high at 82% in Q3, up 1 percentage point from Q2 '25. Let's now turn on to capital on Slide 10. Thanks to very strong earnings, which contributed with 18 basis points in Q3 after accruing 50% payout, the CET1 ratio of the group increased further to reach 13.7% at the end of September '25 versus 13.5% at the end of June, which represents a level around 340 basis points above MDA. The other moving parts have a global minimal net impact of 3 basis points and are split between, on the one hand, a positive impact of 7 basis points related to the group employee share ownership as stated in a dedicated press release published on 24 July, and on the other, limited negative impacts related to the RWA variation for around 5 basis points and some regulatory impacts for 4 basis points, which come after a positive contribution of 8 basis points on that topic in Q2 '25, while other items have a limited 1 basis point net impact this quarter. Last, as you can see at the bottom right-hand side of the slide, all the other capital ratios remain comfortably above the regulatory requirements. On Slide 11, we can see that liquidity reserves remained high at EUR 328 billion, with a relatively balanced mix between cash and securities. Regarding the liquidity profile of the group, we maintained a strong liquidity ratios with an LCR at 147% this quarter and an NSFR ratio of 117%, which in both cases, represent a buffer around EUR 90 billion. We completed the 2025 long-term funding program in Q3 on very competitive terms and have even begun the prefunding of '26 program with a new senior nonpreferred debt in U.S. dollars successfully issued in September. Access to liquidity remains very good in our currencies and the deposit base remains strong, granular and highly diversified, having grown by EUR 10 billion in the quarter. Overall, the loan-to-depo ratio stands at 75% at group level. In Slide 12, we show a summary of the P&L for the group for Q3, which we will cover in more detail in the following slides. So let's move now to business performances on Slide 14, starting as usual with SocGen Network, Private Banking and Insurance. In Q3 '25, loans outstanding increased by 1% compared to last year, with both retail and corporate loans growing, excluding for the later state guaranteed loans, PGEs. Home loan production continues to increase strongly this quarter by 74% versus Q3 '24. Volumes of deposits are down by 5% versus last year or by 2% versus Q2 '25 in the context of continued strong growth of retail savings and investment products, which are off-balance sheet products and contribute to the continued strong momentum in asset gathering. As we can see on one side, AUMs in private banking increased by 7% versus Q3 '24 if we adjust for disposals and reached EUR 135 billion at the end of September, EUR 3 billion more than at the end of June '25. On the other side, life insurance outstandings reached EUR 153 billion, increasing by 6% versus Q3 '24 and representing EUR 3 more billion than in June '25, thanks to continued strong net inflows. Moving on to BoursoBank. As highlighted last quarter, thanks to a sustained growth pace of acquisition over the last two years, BoursoBank has reached its CMD target of 8 million clients, nearly 18 months ahead of its initial objective. In Q3, BoursoBank gained nearly 400,000 new clients. Since Q3 '24, it represents an increase of 1.5 million clients or 22% with a consistently low churn rate below 4%. Assets under administration continued to grow steadily. They reached EUR 76 billion at the end of September or circa EUR 10,000 per client, which represents an 18% increase versus Q3 '24, thanks in particular to the continued strong increase in deposits of 17% versus Q3 '24. Similarly, life insurance outstanding increased by 11% versus Q3 '24, with net inflows 4x higher than in Q3 '24, while market orders grew by 38% compared to last year. On the lending side, total loans outstanding are 8% up versus Q3 '24. Looking at the whole pillar on Slide 16. We can see that net income lands at EUR 439 million for this third quarter or 18% higher than in Q3 '24, with a RONE close to 10% under Basel IV requirements, which compares to an 8.2% last year under the previous Basel III standards. This is driven by, on the one hand, a solid increase in revenues by 4.5% versus Q3 '24, excluding disposals, largely linked to a 4.7% increase in NII despite the absence this quarter of positive base effect impact related to short-term hedges. And on the other hand, cost improvement. This is a decrease of minus 0.3% of operating expenses compared to Q3 '24, excluding disposals. Both movements lead to a cost-to-income ratio of 65.7% in Q3 versus 70.1% in Q3 '24. On the asset side, cost of risk lands at 33 basis points in Q3 '25. Let's move now to Global Markets and Investor Services on Slide 17. Starting with Global Markets. Market activities continue to generate a high level of revenues, above EUR 1.4 billion during this quarter. They are up by 0.5% in Q3 '25 versus an already very strong Q3 '24 despite unfavorable FX impact and one-day accounting base effects. Note that restated from this day one P&L impact, Global Markets revenues would have grown by double digit. The increase in reported revenues was mostly driven this quarter by our FICC platform, whose performance improved by 12% versus last year, thanks in particular to strong momentum in derivatives and financing with growing activity in FX and rates. With regards to equity activities, revenues remained high at EUR 824 million in Q3 '25. Year-on-year comparisons show a 7% decrease due to both a very strong basis for comparison, where Q3 '24 was the highest third quarter in 16 years in this activity and the aforementioned FX and day one accounting impacts. In Securities Services, revenues eased by minus 1% versus Q3 '24 as a result of a decrease in interest rate despite steady commercial momentum in the quarter in SGSS. Let's turn now to Slide 18 to comment on the evolution of our financing and advisory platform. which performed very well in Q3 '25 with a 4.2% increase in revenues versus the same period last year. This strong outcome is driven by a solid growth in Global Banking and Advisory by nearly 7% versus Q3 '24, thanks in particular to both solid performance of financing activities overall with continued strong momentum in terms of origination and distribution. In addition, our DCM and ECM platforms benefited from solid dynamics in the market. With regards to transaction banking services, revenues slightly declined by 2.5% in Q3 versus Q3 '24 due to lower rates, which masked the good overall commercial performance illustrated by the continued increase in deposits. So overall, GBIS delivers another solid performance as illustrated on Slide 19, with revenues reaching EUR 2.5 billion in Q3 '25, up 1.6% versus a very high Q3 '24, making this quarter the best Q3 for GBIS since 2009. We continue to drive costs down with expenses decreasing by 0.8% in the quarter, and the cost-to-income ratio declined 1.5 percentage points from 61.5% in Q3 '24 to 60% in Q3 '25, while the cost of risk remained moderate at 13 basis points this quarter. As a result, GBIS posted a net income of EUR 734 million in Q3 '25, translating into a high RONE of 17.4% under Basel IV. Moving on to the International Retail Banking on Slide 20. We can see that both Europe and Africa posted good performance this quarter, with revenues up by 4.6% compared to Q3 '24 at constant exchange rate and perimeter. In Europe, loans are up by 6% and deposits by 2% versus Q3 '24 at constant exchange rate and perimeter. While revenues increased by 4% versus the same quarter last year at constant exchange rate and perimeter, supported by higher net interest income in both KB and BRD. In Africa, loans are resilient with a slight decrease of 1% versus last year at constant exchange rate and perimeter, while deposits continue to increase by 4% in Q3 '25 versus Q3 '24. When we look at revenues, they increased strongly this quarter by 5% at constant exchange rate and perimeter, largely driven by a solid level of fees across most regions. Turning now to Mobility Financial Services. The combined business posted another strong increase in revenues this quarter by 12.4% at constant exchange rate and perimeter. Ayvens revenues contribution to SocGen is increasing by 13.2% versus Q3 '24, benefiting from positive base effect related to depreciation adjustments and nonrecurring items. When adjusted for those inspects, revenues are stable with two opposite trends largely anticipated. First, a continued increase in margin, which reaches 593 basis points in Q3 versus 521 in Q3 '24, which is basically driven by the strategy implemented that comprises this quarter some nonrecurrent elements. On the contrary, as expected and guided, an ongoing normalization of used car sales results per unit at EUR 1,100 this quarter versus EUR 1,420 in Q3 '24. Together with a tight monitoring of costs, the cost to income improved strongly this quarter to 53%, excluding UCS and nonrecurring items versus 63% in Q3 '24. Finally, regarding Consumer Finance, business delivered a good quarter with revenues up by 6.6% versus Q3 '24, still benefiting from margin expansion, mainly in France. So in terms of the overall financial performance of the pillar on Slide 22, we see very strong positive jaws again this quarter, thanks to a solid increase in revenues of 8.7% on one hand, while on the other, a decrease in cost by 3.9% in Q3 '25 versus Q3 '24, both at constant perimeter and exchange rate. And this is notably driven by mobility and Financial Services. The cost of risk is also down at 37 basis points in the quarter versus 48 in Q3 '24. Overall, the whole pillar posted a net income of EUR 393 million, up 19.2% versus Q3 '24, adjusting for the perimeter and exchange rates. Finally, the RONE improved by 1.7 percentage points versus last year and reached 14.9% under Basel IV in Q3 '25. To conclude with the quarterly results, let's move now to Slide 23 with Corporate Center. Year-on-year revenues are down by circa EUR 100 million due to the base effect linked to the circa EUR 300 million of exceptional income accounted in Q3 '24 related to the closing of the remaining exposure that we had in Russia. Excluding this one-off, revenues continued to improve this quarter, thanks to continued efficient liquidity management. In addition, the closing of the sale of our subsidiary in Guinea Conakry generated a positive impact accounted in net profit or losses from other assets. Let me now give back the floor to Slawomir. Slawomir Krupa: Thank you, Leo. As you can see, despite the shifting landscape, we continue to deliver on the commitments the group has made in regards to our sustainability road map. We are progressing well towards our targets in terms of financing the energy transition, and we continue to demonstrate our pioneering spirit with bold and innovative transactions. We are also driving sustainable finance through partnerships, deepening our collaboration with the IFC, for instance, and developing new collaborations with other multilateral organizations. In conclusion, our objectives are clear and our progress is measurable. We continuously assess both in order to keep our momentum going so we can achieve our goals. We remain firmly on track, and our determination is unwavering, and we are fully committed to ensuring success. Thank you very much. And let's now start the Q&A with our usual polite request to stick to two questions per person. The floor is yours. Operator: [Operator Instructions] The first question is from Tarik El Mejjad of Bank of America. Tarik El Mejjad: Two on capital, please. I mean, congrats first on this strong print again. But my question, and I think one missing part, I would say, in this print to me at least, was potentially managing more your excess capital through distribution and buybacks. So I think I have a very simple question here. Did you -- and can you share with us if you actually asked for it and didn't get the answer in time? Because you repeated many, many times that there's no point to build buffers on buffers and now it's literally you're talking 2.5 years of organic generation of buffer. So can you share with us more color. And then I'm sure you've seen the news and share price action that the [ Barnier ] has managed to pass an amendment in the parliament on this discussion on budget on the income side, taxing from 8% to 33%, and most importantly, increasing the scope to share price or acquisition price rather than the nominal value. So, in this context, I know it's early, so -- but just maybe you can share your thoughts. In this context, would you see better value in using excess capital for buyback minorities of Ayvens or maybe you can accelerate distribution before these things go through? Slawomir Krupa: Thank you, Tarik. So on the buyback, let's try and be very, very clear. So one, you know the framework. The framework is indeed, one, no intention to accumulate excess capital. Two, when considering excess capital, considering organic growth at high marginal rates of return, inorganic growth if and when it makes sense with a very conservative approach to execution risk and expected returns and return to shareholders preferably right now because of the math, still favorable to the buyback in the form of buybacks. So that's the framework. I'm repeating it so that it's very clear. Second statement, we have been having this conversation for a while, so to speak. And I think we have been strategically predictable from this perspective. And so you should expect us to remain predictable from this perspective. Now equally at the bank conference recently, I said that buybacks and these decisions because of various factors are not necessarily quarterly processes. And finally, I would point to the fact that this quarter, we are announcing a buyback at the Ayvens level, right? This is the -- these are the parameters of what I can say. Now in terms of the amendment that you're referring to, so for us, our understanding at this point is that it's not intended to be on the value, but indeed on the nominal. But more importantly, I would not want to comment on tax too much, especially on the race that we do observe these past few weeks and days even in the parliamentary debate. That's not my job, not my role. Obviously, if and when things are stabilized and become law, we will adjust our thinking, and you should expect us to be the most rational players out there in terms of dealing with whatever the framework is. But again, right, I would not be at this point, focusing too much on the race that you can see in terms of proposals that you can see like literally every night in France today. Let's take a step back. France has a history of being overall, overall the rational jurisdiction where, as you can see, even this year, companies are able to go through the instability, go through some of the news flow and continue to do their job, and I expect the jurisdiction to overall remain similar in the years to come. Operator: The next question is from Flora Bocahut of Barclays. Flora Benhakoun Bocahut: I wanted to ask you a first question on the cost of risk in French Retail Banking. It picked up slightly this quarter. So maybe if you could elaborate if it's a single file, it's coming from several. Is it the sign of the beginning of a slight deterioration there? And then the second question is on the equities revenues. You mentioned in the slide pack, the negative impact from the day one P&L year-on-year. Was that very concentrated on Q3 last year and therefore, unlikely to be a drag from here? Or is there potentially a bit more drag year-on-year coming from that in the coming quarters? Slawomir Krupa: Thank you. Hi, Flora. So, CNR, net cost of risk -- NCR, sorry, net cost of risk in French retail. So it fairly stable in the retail individual client part at a reasonably low level, nothing very material happening there. And indeed, you have an increase in the SME segment with basically no big files, no one-offs, but more something which is in line with what you may have seen as a market feature with the increase with the bankruptcy rate in France. So this is the explanation. It remains contained. As you can see, the cost of risk is still low. But indeed, this is the dynamic that we've seen in Q3. And we don't expect today any material deterioration at this point in time in the coming quarters, but there is a slight increase in bankruptcy rates in France. So, in terms of the equities and the specific day one question, which indeed is the most of the explanation for the performance of equities this quarter. It's very simple. It was concentrated -- the positive impact was concentrated last year on Q3. And this year, it's a drag, which -- the absence of which would have resulted in a growth of double digit of the market revenues. So you can see it's a substantial feature, which is a positive one because, as you know, a negative impact of day one is the sign of a very strong production, right, of a very strong origination in terms of commercial activity. But indeed, it is a drag. Now today, it's dependent on market conditions. But today, there is no reason to believe that it will remain the same constant in the coming quarters. At this point in time, it's more of a Q3 phenomenon. Operator: The next question is from Jason Napier of UBS. Jason Napier: The first one, BoursoBank has turned in another really strong quarter for customer acquisitions. There's some concern amongst investors that when a good thing is going so well that you might choose to extend the investment in customer acquisitions substantially further than might have been expected. Perhaps in simple terms, could you just talk about what we should be thinking in terms of fee income -- net fee income uplift next year and the year after as you presumably do start to invest less in customer acquisition offers? And then secondly, congrats on another quarter of very widespread beats on the cost line. I wonder whether you could talk a little bit about whether you have any sense as to what a more modern SocGen cost/income ratio might look like. We've just come off another company call talking about real hope that AI might substantially change the efficiency of modern banks. I just wonder whether you could talk about where you see the sort of medium-term cost income for the group. Slawomir Krupa: Thank you. Thank you very much. So, on BoursoBank first, we have committed to delivering EUR 300 million of bottom line in BoursoBank in 2026. And we will deliver a bottom line of EUR 300 million at least in BoursoBank in 2026. And it is one of the drivers, one of the main drivers of actually reaching another very important objective, which is the 60% cost-to-income ratio at French retail banking. So, from this perspective, again, you should expect us to be predictable and to stick to our commitments. And to your point, it will be achieved by a different balance, right, a different balance in terms of customer acquisition costs both in volume and in value because we also are working hard to deliver growth at a lower cost. And as you know, because we've spoken about this in the past, we had projected a GOI investment, a negative GOI throughout the plan to reach BoursoBank's Bank's objectives in terms of customer acquisition of minus EUR 150 million. The reality is that we have executed the plan and actually more than executed the plan with largely positive contribution from BoursoBank. So working on volumes, working on cost of the customer acquisition is what's going to help us achieve the objective, still generating growth, but again, with a different balance so that we can deliver on our commitments. In terms of the cost line, I mean, I'm not going to go beyond in terms of guidance here beyond what we have for 2026, which is, as you know, a 60% target -- below 60% target for the group and for French retail. But I can tell you two things, right, before moving to AI is that we are, and you see this quarter after quarter, working very diligently, and we are very focused on continuing to improve our efficiency, right? We recognize that there's substantial room to do better. I said in the past that I don't see any reason, any philosophical or otherwise reason for SocGen not to be delivering something which a comparable business model and jurisdiction, but something that would be much closer, if not within the best average performance of the European banks, again, adjusted for business mix and jurisdiction, but which clearly points to something in the next cycle that would be, well, significantly lower than 60%. I'm not saying anything that you wouldn't expect here, but that's how we're thinking. Then the AI piece, I think it's an absolutely critical topic for anyone really, but for banks indeed because of the nature of our business where you do have a lot of processes and technology, which resembles to some extent, a big factory where you would expect naturally significant improvements in efficiency and in the cost base linked to AI. I think what we need to recognize is that in our heavily regulated environment, the pace of final implementation at scale of these tools will be a process, right? You know how demanding the regulators and supervisors are in terms of model validation. You can imagine that for something processing sensitive data and processes in a highly regulated banking environment, you will have expectations in terms of the quality of the modeling underpinning the AI solutions. So it will happen. It will happen at scale, and it will continue to drive substantially the costs down and actually the client satisfaction and the quality of service and actually maybe quality of risk management up, but it's something which will be taking some time, in my view, to be really at scale and widely adopted within the banks. Operator: The next question is from Giulia Miotto of Morgan Stanley. Giulia Miotto: I have two. The first one is a follow-up on the capital distribution point. Some banks are doing buybacks twice a year, and some banks just do a large one in Q4, for example. So how should we think about the cadence of your buyback? Should we think that come Q4, you most likely distribute everything down to 13% or close to that? Or would you keep something for the second half of the year? And then secondly, HSBC took a provision on some tax -- withholding tax trading issues related to France. I'm wondering if there is any read across for SocGen or if you have any comments here? Slawomir Krupa: So, on the first point, it is true that as much as we had already in place the normal distribution, annual distribution buyback part of this policy. It's true that we executed our first additional share buyback this year. And so we're in the, let's say, the beginning of a process, which will eventually have some regularity depending on the performance, et cetera, and the excess capital position. But indeed, the way we think about it is that we do have the annual distribution as part of the Q4 -- and during the year, depending on the position, at this point, it's more position driven, right, and taking into account all the processes that are involved in potential additional distribution, we follow this pace, if you will, right? I hope that, that's clearer than the usual Fed chair explanation, but this is where we are. Giulia Miotto: But, sorry, so just to follow up to make sure I understand. Of course, you have a 50% payout half-half the buyback. So we all expect that in Q4. But I think it will be rational to expect an additional one given the excess capital starting point. Is that not a realistic expectation for Q4? Leopoldo Alvear: I mean I don't want to comment on the expectation, but I'm going to comment on something else you said, would it be rational? Yes, it would be rational. Question on the tax side for -- with the competitor that you mentioned. Of course, I don't know much about that rumor, and we don't comment specifically on the situations. All I can tell you is that we have not booked anything nor are planning in the short term to book anything on this topic at SocGen Ten. Operator: The next question is from Jeremy Sigee of BNP Paribas Exane. Jeremy Sigee: A couple of follow-ups on topics that have already been touched on. Firstly, I just wanted to check, you're not changing your full year '25 guidance, but you're obviously way ahead at the nine-month stage. I just wanted to check that you're not flagging deterioration or adjustment back down again in Q4. We shouldn't interpret anything from that. Is that a fair thing to say? And then second question, just you mentioned, obviously, we've seen the Ayvens share buyback. I just wondered how you position in relation to that. I can't see whether you've said that you're going to participate in the buyback or whether this is an opportunity to adjust your own shareholding in Ayvens. Slawomir Krupa: Hi. Thank you. So, on the first question, an important question. I'll be very clear is to be interpreted exactly the way you said it. So there's absolutely no message regarding the Q4. It's a process thing whereby we do not update our annual targets every quarter. And we do confirm, and we said it very clearly that we are above -- well above our full year 2025 target and that you should infer from this that in normal market conditions, which is our base case expectations at this point, we will, of course, outperform the target, right, just mathematically. One only nuance, which we have discussed in the past is -- you should, in normal business circumstances, expect the Q4 to have a run rate slightly different from the average of the year because of usually, right, the seasonality of costs with all kinds of true-ups that happen in Q4 and also with sometimes a slightly softer revenue generation, especially in the CIB. But apart from this totally business as usual phenomenon, yes, clearly, if you do simple math and assuming normal market conditions, we would outperform the targets. In terms of the stake in Ayvens, post share buyback, we're going to move from roughly 53% to 55% of ownership. And this is the only thing that's going to happen. We're very happy with this position. We have full control. We work hard on making this asset, and you can see the improvement, including this quarter, making this asset as profitable and as strong as possible, and we're happy with the current situation and with the increase to 55%. Operator: The next question is from Joseph Dickerson of Jefferies. Joseph Dickerson: I guess just coming back to the -- I guess, two things. Coming back to the capital distribution question. As I read this amendment, it does look like it's on the -- what they refer to as the valeur de chaque and not the valeur nominale. And I'm wondering if that sticks through the budget process, how would you then think about mediating your capital returns and managing the capital returns because that's clearly less effective. So I guess a thought process on that. And then I can't -- I didn't hear you answer Tarik's question necessarily as to whether or not you'd actually applied for a buyback this time. So I'm confused as to why Ayvens went for one and you didn't in the second quarter. So that's question on capital return. And then more of a fundamental question on the business. Can you just talk about some of your cross-selling potentials in France because you've got life insurance, private banking AUMs at a record high. You've got home loan production up 74% year-on-year. I guess, how can we expect this home loan production to translate through to cross-selling? And how are you benefiting from that today? Slawomir Krupa: Thank you. So, on the capital distribution, yes, first, you didn't hear my answer to Tarik's question because I didn't answer directly whether we have filed... Joseph Dickerson: I was being diplomatic. Slawomir Krupa: Yes. I know. Thank you for that. And simply because, I mean, if I start to comment on what I'm filing or not filing with the ECB, we're filing so many things every week that it would be a difficult process to follow. Listen, again, right, take comfort from some of my other answers. We have been extremely rational and consistent in looking at this. And while going through all the processes involved, and ultimately, by the way, the decision of the Board, but we do intend to remain rational, extremely rational as it pertains to managing the excess capital. And today, risk-adjusted, the SBB is obviously the best option. In terms of the tax thing, again, right, I mean, this just came out. I don't want to comment specifically. If it were to stick, so hypothetically, this was your question. If it were to stick and be really substantial and not on nominal value, therefore, not so substantial, we would simply adjust the maths, right? And again, choosing between organic, inorganic and any inorganic opportunity that we would have. And SBB, we would very rationally, like you would expect us to do, including, of course, like considering the cash distribution as well, we would make rational mathematically sound decisions in terms of how to deal with the excess capital. In terms of the cross-selling opportunity and home loans, you're spot on. I mean, in many jurisdictions, not all of them. But clearly, in France, the home loan is an anchor product, an anchor product because, one, its features, including its long-term fixed rate features usually at competitive rates because of the market dynamics is making the customer stick with you for usually a long time, right? I mean the number is actually in decades. And so it allows you to develop a relationship across the entire offering of the bank, and you pointed that out, our performance, both in terms of the private banking. I'll come back to private banking for a second -- in a second. But in terms of the private banking, but also in terms of all the investment products. And you see that our pace of fundraising in the life insurance investment envelope is extremely high. It's market-leading and is extremely high. Just to give you a sense, it's a pace which is well, well, well above almost double the size of our inventories in the space. So we're doing extremely well there. The Private Bank is doing extremely well. And the private bank is deeply connected with our retail operations. So it's not -- you have obviously an ultra-high net worth team and segment, if you will, but it is also very connected and by connected, some of the teams are actually embedded within the teams of the retail bank so that we can extract structurally on an industrial basis, if you will, the growth in value and the growth in assets that our individual customers experience throughout life. And usually, yes, it started with home loans. So this is exactly the strategy. The only thing I'll add is, nevertheless, you still need to make sure, right, that basically the investments you're making in terms of the home loans are worth it and that you have constantly an investment case that works mathematically. What I'm trying to say here is there have been times in the French market, take, for instance, '22 and '23, where the market was pricing this product because of all kinds of usually rate considerations, but not only eventually the competitive dynamics at a deeply, deeply negative level in terms of margins. So we had retrenched substantially at the time with production rates down 70% because while the logic of the anchor product and the investment in the long-term relationship is a prevailing one in the French market, on the other hand, there are a level of prices, which obviously don't make sense in terms of this investment. So we have been, I think, very nimble and conservative when considering this. But yes, the level of cross-selling is very important within this pillar. Operator: The next question is from Chris Hallam of Goldman Sachs. Chris Hallam: Two quick questions, both on equities. First, how far through the build-out of the cash equities platform would you say you are, I guess, for about 18 months or so on from the announcement on Bernstein? And how would you assess the market share opportunity on the one hand there versus the potential for, I guess, increased competitive pressure and capital release on the other? And then the second question, it's a bit of a follow-up to the earlier question on withholding tax. I guess thanks for the clarity there. What would the threshold be for either taking a provision or settling? I guess, how do you see this playing out from your side? And how should we think about the quantum of the outstanding risk? Slawomir Krupa: Thank you. So, on your first question, we're well advanced now. And we will be closing in '25 our first full year with the caveat, which we discussed in the past in this call, that the U.S. operations are not yet fully integrated. They will be next year. So -- but you're talking about the contribution from Bernstein basically of roughly EUR 200 million already, right? So it's a substantial enhancement to the franchise. And if you see some of our rankings, it has helped us break into the top 10. And if you look at some of what we have been able to achieve in the U.S. market in terms of primary equity, having, for the first time, run a significant bookrunner mandate and which delivered -- I'm not going to comment on with the number, but not insignificant contribution to our primary equity. So let me put it this way. All the assumptions are valid. So in terms of the trading revenues, we are firmly holding at the addition of our respective market shares. The team is happy. The retention level is extremely high, much higher than what we expected. In terms of the research, we are making the forays that we were expecting. And the only disappointment it's not about us. It's about the primary equity market in Europe, which, as you know, has been more than subdued in the last few years. So we're happy, and we will be continuing to investing and with the integration of the U.S. -- full integration of the U.S. platform next year, we'll be making another step in this direction. In terms of the withholding tax, I mean, again, right, I mean, you can't expect me to comment specifically on these kind of files. But my earlier answer was clear. And the way you should think about this is -- let me put it this way, right? If we have the stance, which obviously, as you can imagine, as a matter of process, it is not just a discretionary decision of management, but it goes through all the governance, including the auditors, is that it points to a position that we think we have in this matter. Operator: The next question comes from Andrew Coombs of Citi. Andrew Coombs: I think most of my questions have been answered, but perhaps I can do one on French retail and one on international retail. OpEx management, you previously answered about no reason why you can't be comparable to other European banks after adjusting for business mix and jurisdiction. And I think thus far, your cost saves have been pretty broad-based. But from here, the major levers you can pull in French retail? Or do you think it is much broader than that? And I'm thinking more about headcount considering the amount that your branch network has come down by? And then second question on international retail. Are you happy with the perimeter now? And can you just touch upon some of the volume growth you're seeing both in Czech and Romania? Slawomir Krupa: Thank you. So, on the very last piece, I'll leave the floor to Pierre on the volumes in Czech Republic and Romania, and I'll address all the others. In terms of the -- my comment about jurisdictions is simply -- or business mix is simply to recognize that if somebody has a very pure, for instance, retail banking mix, monoline mix in a jurisdiction that happens at that point in time to benefit from strong dynamics in terms of rates, for instance, while, obviously, you would not be able to compare just the cost to incomes one-for-one between us and that particular player. But on the other hand, I would like you to focus more, if I may, on the fact that this is not an excuse for us not to do our job and to continue to reduce our costs versus the per unit of revenue, of course. But also another way of looking at it per unit of RWA, right? This is another way we're looking at it. And we think that these metrics help level the playing field, so to speak. And we clearly are aiming at continuing to increase substantially our efficiency and to decrease substantially over time our cost to income at the group level, but also at the French retail level, right, we have been improving there substantially, but we're still at 57% in Q3 '25. So you have already a pretty healthy improvement to be expected next year. But even beyond that, we do believe that we can do better, and we are working on ways to operate this business with a lower, lower cost structure as simple as that. I mean, we have been late to the game of efficiency, but we are now fully, fully committed and working on this with a lot of focus. In terms of -- I feel like I'm missing your other question. Andrew Coombs: I think it was the perimeter of the international.... Slawomir Krupa: Yes, the perimeter of international retail, and then on to Pierre for the volume. On the perimeter, we're -- listen, we're happy in the sense that virtually all our assets, not all of them, but really, really most of them deliver stable performance at a high level of return and are also managed in a very sound manner in terms of risks. Now in the end, what we said about how we're going to manage our portfolio -- business portfolio remains true, right? So we need to make sure constantly that ROE headline is high, that ROE is above cost of equity in a sustainable manner. and some other parameters. I'm not going to list them each time, but I'll add the level of tail risk as well. And from this perspective, if and when we believe that we should be making adjustments, we will continue to make adjustments. But overall, today, the portfolio is delivering a sound average performance. Pierre, on the volumes of KB and BRD? Pierre Palmieri: Yes. So in terms of volumes at a constant perimeter and change, for KB, we see an increase in loans by 4% and a flat deposit level compared to last year. As far as Romania is concerned, it's a big increase by 13.5% in terms of customer loans and 10% in terms of customer deposits. So this translates into an increase in NBI in both globally in Europe by 6.6% in Romania, again, at constant perimeter and change, 9% in terms of NII and 2.4% in terms of fees. What is important is that BRD is gaining market share. The market share is up 35 bps. As far as KB is concerned, in terms of NBI, the NII is increasing by 1.7% and the fees by 2%. Operator: The next question is from Delphine Lee of JPMorgan. Delphine Lee: My first one, sorry to come back on this issue of the tax on buybacks and dividends. Sorry, it's just an important one. So on this topic, would you consider changing a little bit of the mix between buybacks and dividends because it looks like the tax on the dividends could be a bit lower. And how -- so from what you said earlier, I understand that you would reconsider the bit the usage of excess capital. in favor of inorganic, which would be the rational thing to do versus buybacks. So just on the inorganic, I mean, what areas would you kind of focus on? Then my second question is also on some of the proposals that seem to be, I think, discussed today in Parliament and in France around the banking fees, the proposals from the National Rally to kind of like cap fees. So just wondering how much of an impact could that represent for your French retail business? Slawomir Krupa: Thank you, Delphine. Listen, I mean, again, I need to start with the same introduction. I can't move into the business of commenting on the current -- and you know that, right? I mean country here, it is a political race for headlines, right? So I can't possibly be in the business of commenting a very intense and intensifying competition for headlines by various parties in a very divided parliament in France. Now going back to the substance, I think what matters, and maybe this is the most important message is that whatever happens, you should expect us to be rational, right, so that we would make the calculations that need to be made and then starting off a mathematical reality, compose something which is a convincing hole, if you will, right? So meaning organic growth, organic growth is a good opportunity. Today, on a marginal rate of return, we are able to generate high, high levels of marginal rate of return in various businesses, in particular, in GBIS, in Financing & Advisory, where the commitment of this additional capital comes also with a very high, high level of diversification from a sector perspective, from a client perspective, from a geography perspective. So in a sound way. The real limit there is to do it at a cost to income, which is not deteriorating. And second, it's in terms of risk management, of course, right, because we're not going to pour all the excess capital in organic growth regardless of the environment in which we're working. So it's a balance, right? But it's a rational balance, but organic growth is a substantial opportunity, and you should expect us over time to allocate part of the excess capital to organic growth. Inorganic growth is -- can be an opportunity. But there, you need to really expect us to have a conservative approach in terms of risk return considerations, right? Inorganic growth is an opportunity. We have delivered historically on some. We have failed at others. And clearly, we learned our lessons and execution risk would be always very carefully looked at. And from this perspective, share buybacks, and again, depending on what that hypothetical word might look like, might still be interesting because you need to adjust these returns for the risks taken, right? And obviously, a share buyback and/or a dividend distribution would both carry basically 0 risk to the investors versus the other opportunities. So you should expect us to be very rational, whatever the framework might be. And I am reasonably optimistic about where this whole thing lands. And the framework will be giving us inputs into a rational, mathematically sound reasoning about returns and risk-adjusted returns for our shareholders. Delphine Lee: And second question is on the banking fees. Slawomir Krupa: On the banking fees. Yes. So I mean, it's a little bit of the same thing. So I'm not going to say what I said again. Today, one thing I can tell you, for instance, is that the banking fees, if you compare them -- retail banking fees, if you compare the revenue, sorry, to the loan outstanding, it's roughly 2.3% in France versus something which is more 3.6% in EU. So one thing I can tell you is that it's quite easy to make the case that in terms of like the average return on risk, if you will, for a retail bank in France, we are already -- and it's to be expected given the level of competition in the market, we are already lower than the European Union. So, I think, again, my current stance on this is that I do believe that the reason in the country of Descartes will eventually prevail in these discussions. Because I think that eventually, no one, no matter the political color in France today, wants to make the business conditions impractical in France. Operator: The next question comes from Pierre Chedeville of CIC. Pierre Chedeville: I promise not to ask the question on tax issues. Maybe a follow-up on two strategic points. Regarding consumer credit, it seems that you are a little bit in the middle of the game in terms of size. Your R is below your cost of equity, your outstanding is a little bit decreasing. But yet, we see that margins are improving in this business. So I wanted to know where do you stand from a strategic point of view with that franchise? Do you want to invest in it and develop you stay still or maybe one day, it could be something to sell? And regarding asset management, we all know that you are concluding negotiation with Amundi. Probably you will not tell exactly where you stand there. But my question is more general. Do you think it would be interesting for you to try to develop a small part of your asset management internally for some specific areas and not depend the vast majority on Amundi. And do you think an evolution could be seen in asset management for you as this is a very profitable activity, which is lacking your global business model? Slawomir Krupa: Thank you. Thank you very much. On consumer credit, I mean, you almost said it all. The overall condition of this business within our mix is improving after years of challenge, obviously, because of either regulatory aspects, the usually rates and the compression of margins linked to the negative jaws, if you will, between the funding and the allowed authorized maximum rate. Plus, obviously, some of the post-COVID normalization in terms of cost of risk, et cetera, et cetera. So all these dynamics were broadly slowing down this business and lowering its performance to your point. So what are we doing? We're doing what we're doing everywhere, which is we'd like -- and you've seen it at Ayvens, you've seen it in International Banking. You've seen it very much at CIB. To some extent, it's a simple recipe is focus on the quality of the business and more, again, on structural profitability and margins rather than on volumes and focusing on the high-quality, high return on capital, sound risk management, in my view, is always preferable to uncontrolled growth. And that's what you're seeing happening in this business, and it is indeed improving. And for instance, like in terms of NBI, we're up 6.6% with a much, I would say, sounder generation of revenues than maybe in the past. From a strategic perspective, it's a very important business, obviously, in the continuum of value creation within the French retail, and we have a few assets in Europe, which are performing from very well to acceptable. And similar to everything I said about our international network or any business that we have, we will continue to assess them very rigorously and in a very demanding way. And if an asset is not delivering what we should expect in terms of return versus cost of equity or again, quality of its positioning. And if we're not the best shareholder, we will not keep this asset in the long run. It's a commitment on which we have delivered, and we will be continuing to deliver. In terms of the Amundi partnership, well, indeed, I'm not going to break any news here. But it's a strong partnership, a long-standing one, one that works reasonably well for both partners in terms of performance, in terms of revenues, et cetera. So we learn, right, as we mature. And so we are discussing all kinds of things with our partner. But we will clearly make sure that any partnership with anyone is always as balanced as possible between the product quality, the product support, the product performance and of course, the fundamental asset of the client relationship that we bring to the table. Are we going to develop something in terms of proprietary asset management? We are. We are already in terms of some of the high end of our client base is actually serviced by an in-house asset manager. And we do intend to very selectively, exactly the way you implicitly -- you implied in your question, very selectively where it makes most sense with, again, high focus on the returns and the costs, we will be developing this further over time. And the other way of looking at it is in alternative asset management, we are through the Brookfield partnership and through our investments in the transition fund that we have created and funded with our own equity. We do intend, for instance, through these two vehicles to increase our reach in terms of alternative asset management, where we can bring something, again, proprietary to the table and build this on an organic basis. Operator: The next question is from Alberto Artoni of Intesa Sanpaolo. Alberto Artoni: Just two questions from my side. The first one is more strategic on the direction of return on tangible equity. I know you have a target for 2026. And -- but some competitors started to look beyond the target that they had given in the past. So I was wondering if you intend to perhaps provide in the future guidance for intermediate targets going forward? And secondly, a more technical thing on FRTB. I think you mentioned in the past that you expect a negative impact of 40 basis points. I was wondering if that is still all true today? And what do you expect with the legislation? I know there are discussion of postponing it, potentially changing it? What is your take on that? Slawomir Krupa: Thank you. So the direction of travel on ROTE is up. There's no other direction of travel. It's true for what we have been doing and long term, it's true. And it's intrinsically, by the way, linked to all the discussion we've had today about cost and efficiency and cost to income. Of course, we intend to drive the cost down while continuing to grow, right? And you've seen our growth rates, excluding disposals, which are very substantial and very balanced across the businesses. That's exactly what we want to keep on doing, which is delivering as regularly as possible as big positive jaws as we can. And it's not always going to be perfect, but we will focus all our efforts on this. And so indeed, this is how you should look at the direction of travel. Now in terms of actual guidelines and guidances, we will -- we believe that being very transparent with our investor community, with you guys is obviously critical and expected. And so we will be at some point next year, sharing with you our detailed views about the next few years and be able to not only throw a number, right, because throwing a number is one thing, but also explain to you how we think about how we're going to get there and improve our performance and deliver value to all the stakeholders, but to investors in particular. In terms of the FRTB, it's still unchanged estimate that we have, 40 basis points, 2027, if it happens. And for the rest, the impact from the output floors or other, let's say, tail end impact, they are all either 0 for the output floors. That's our assumption today or very, very small and long term. So this is where we are in terms of what's going to happen to FRTB. Again, I'm not in a position to give you a firm answer. But again, I think that in the end, a little bit like the tax discussion in France, I think that in the end, people understand what is a right balance between safety and soundness concerns, which are obviously not only legitimate but important for everybody, for society and competitiveness. And I think there is a balance to be struck. And in that balance, in my view, FRTB, given the nature of regulations here and given what's happening worldwide is likely to be adjusted in my view. But of course, I can't speak for the commission and the other participants in that discussion at this point. Operator: The next question comes from Sharath Kumar of Deutsche Bank. Sharath Ramanathan: I have two, please. First, on BoursoBank, very encouraging to see the evolution there. But I wanted to ask you about the risk you see from Revolut and the aggressive pace of client acquisition. Would this entail a continuing pace of higher client acquisition even in 2026? Second one is on equities. Can you quantify the year-on-year growth, excluding the day one accounting adjustments that you had in the prior year period? The lower growth versus peers, is it a mix effect or you not being on the front foot still on organic capital deployment? Slawomir Krupa: I'm not 100% sure I got the end of your second question. You asked for day one from -- for growth in equities adjusted for day one. Is that what you -- is that your question? Sharath Ramanathan: Yes, yes. The year-on-year revenue growth if we don't have the accounting adjustments. and how it compares with peers. Slawomir Krupa: Okay. What was the point about organic growth or organic capital? Sharath Ramanathan: So, basically, the lower growth in equities franchise, is it to do with the mix effect? Or you not still being on the front foot for organic deployment? Slawomir Krupa: I understand. All right. So in terms of the BoursoBank and Revolut question, I would say the following, right? First of all, as I said also at the conference recently, when you have a strong, highly competitive new entrants in the market, you have to pay attention. You have to make sure you understand what they're doing, you have to recognize their strength, study them and adjust if needed, right? And so this is how we are treating this market evolution, meaning very seriously. Second comment, we are not exactly in the same business, right? If I oversimplify, they are wide geographically and reasonably shallow in terms of products. We are very focused geographically, it's restreint, but very, very deep in terms of product and in terms of client relationship. Again, as I mentioned in the past, we're talking about EUR 60 billion of assets, EUR 50 billion of deposits. You're talking about a churn with a high level of cross-selling, a churn which is well below 4%. You're talking about basically the best of both worlds, which is like a real universal bank for individuals with a very wide product range across virtually any banking product from the simplest to the most sophisticated one. But you're talking also, again, about the #1 bank in terms of client satisfaction. So, from this perspective, we're talking about different players. But again, we are trying to make sure that we give enough attention to this new entrant. Is that going to affect directly our acquisition policies or whatever? It certainly affects our thinking about this, and we clearly want to make sure that the way we acquire clients, the cost at which we acquire client is optimized and it's my earlier answer. And with the proof point of having actually delivered a higher growth than expected with a much lower cost than expected, it shows you that we are very focused and have been for a while now on making sure that this equation works from a bottom line perspective. But is that going to make us change radically our approach in 2026, in particular? The answer is no. In terms of the day one adjusted performance for equities, I mean, we're not disclosing it like that, but it is -- you have to think about this as high single digit for equities instead of the minus 7%. And for the markets, it's double digit -- I mean, well into the double digit if you took both businesses. In terms of the mix, there is a bit of a mix, yes, you're absolutely right. I mean -- and even the whole day one thing, which is linked to the strength in terms of origination on our structured products platform. So you see that there, we're doing extremely well. And likely gaining significant market share currently. On the flip side, historically, smaller activities on the flow side. We do have a slight mix effect. Remember, there's also a slight FX effect. U.S. banks obviously publish in dollars. We publish in euro. Do the math. We're talking about a 7% or 8% differential quarter-on-quarter and year-on-year versus Q3 '24 and '25. So all these things play a little bit. But the most important one is the day one, which happened to be a very high release last year and this year, the opposite trend. Thank you. Operator: The final question is from Anke Reingen of RBC. Anke Reingen: Just two, please. One is on the 13% core Tier 1 ratio. So assuming the tax wouldn't change, how quickly do you think you would want to be at that level? And then just sorry for following up on litigation risk, but hopefully, that's an opportunity for you to comment. I mean, with respect to the recent Sudan litigation for BNP, if you can maybe just talk about your own legal situation, if any claims have been filed or potentially, is it already too late for any claims to be filed? Slawomir Krupa: Thank you. So, on the first point, the only thing I can say is, again, right, above 13% is excess capital. And then we're not running the ship, if you will, down to 13%. Obviously, there will be always some small technical buffer. You also have temporality, right? If you think about, for instance, hypothetically, asking for SBB authorizations to the supervisor, you have a four months lead time, you build up capital during the quarter, et cetera. So, basically, you will always be a few tens -- tens of basis points above 13%, even if you were to do systematic buybacks on the back of your capital generation. So this is how you should think about this. And then back to everything I said earlier, rational allocation between the various opportunities that we have in terms of using the excess capital. In terms of the litigation, I mean, first of all, of course, I can't comment on something that is not mine. But we -- what I can say is since you're asking, right, we don't have any exposure to Sudan or to the of this type of things. All right. Thank you very much. So thank you very much for your time. I know it's a busy day for you. Good luck with all the work. And I look forward to speaking with you next quarter. Thank you very much. Take care. Bye, bye. Operator: Ladies and gentlemen, thank you for your participation. You may now disconnect.
Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Corporation Third Quarter 2025 Earnings Conference Call. [Operator Instructions] And as a reminder, ladies and gentlemen, this conference is being recorded today, October 30, 2025. I would now like to turn the call over to today's host, Jeff Holy, Westlake's Vice President and Chief Accounting Officer. Sir, you may begin. Jeff Holy: Thank you, Stefan. Good morning, everyone, and welcome to the Westlake Corporation conference call to discuss our third quarter 2025 results. I'm joined today by Albert Chao, our Executive Chairman; Jean-Marc Gilson, our President and CEO; Steve Bender, our Executive Vice President and Chief Financial Officer; and other members of our management team. During the call, we will refer to our 2 reporting segments: Performance and Essential Materials, which we refer to as PEM or Materials; and Housing and Infrastructure Products, which we refer to as HIP or Products. Today's conference call will begin with Jean-Marc, who will open with a few comments regarding Westlake's performance. Steve will then discuss our financial and operating results, after which Jean-Marc will add a few concluding comments, and we'll open the call up to questions. During the third quarter of 2025, we recorded a noncash impairment charge of $727 million, representing all of the goodwill associated with our North American Chlorovinyls business unit. We also accrued expenses of $17 million related to previously announced facilities closures. We refer to these expense items, which in aggregate were $744 million as the identified items in our earnings release and on this conference call. References to income from operations, EBITDA, net income and earnings per share on this call exclude the financial impact of the identified items. As such, comments made on this call will be in regard to our underlying business results using non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to GAAP financial measures is provided in our earnings release, which is available in the Investor Relations section of our website. Today, management is going to discuss certain topics that will contain forward-looking information based on management's beliefs as well as assumptions made by and information currently available to management. These forward-looking statements suggest predictions or expectations and thus are subject to risks or uncertainties. These risks and uncertainties are discussed in Westlake's Form 10-K for the year ended December 31, 2024, and other SEC filings. We encourage you to learn more about these factors that could lead our actual results to differ by reviewing these SEC filings, which are also available on our Investor Relations website. This morning, Westlake issued a press release with details of our third quarter results. This document is available in the Press Release section of our website at westlake.com. We have also included an earnings presentation, which can be found in the Investor Relations section on our website. A replay of today's call will be available beginning today, 2 hours following the conclusion of this call. This replay may be accessed via Westlake's website. Please note that information reported on this call speaks only as of today, October 30, 2025, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay. Finally, I would advise you that this conference call is being broadcast live through an Internet webcast system that can be accessed on our web page at westlake.com. Now I would like to turn the call over to Jean-Marc Gilson. Jean-Marc? Jean-Marc Gilson: Thank you, Jeff, and good morning, everyone. We appreciate you joining us to discuss our third quarter 2025 results. For the third quarter of 2025, we reported EBITDA of $313 million on net sales of $2.8 billion. Compared to the second quarter of 2025, sales and EBITDA decreased as improved production and sales volume in our PEM segment was more than offset by lower sales volume in our HIP segment and PEM's lower average selling price. While North American residential construction demand has softened in 2025, HIP sales volume and total sales were comparable to those in 2024. This sales resiliency illustrates the strength of our relationships with key customers and our broad and deep portfolio as we continue to grow in this important market. As compared to the third quarter of 2024, HIP's margin and EBITDA were negatively impacted by a sales mix shift to lower price and lower-margin products as our key customers work to address the home price affordability impact felt by home buyers. In addition, HIP's EBITDA includes some period-related administrative restructuring and integration expenses in the third quarter of 2025 that are expected to be of a nonrecurring nature. Overall, our HIP business is performing well in light of the affordability headwinds facing the new home construction market. We remain very positive on HIP's long-term growth outlook, supported by the need to rebuild the North American housing stock following over a decade of underbuilding of homes, and we have continued to invest in the HIP business to accelerate our growth. The construction of a new PVCO pipe facility in North Texas to be completed in 2026, and the recently announced acquisition of ACI are some visible examples of our commitment to HIP through these exciting growth-oriented investments. The ACI acquisition significantly expands our global compound business by introducing silicone and crosslinked polyethylene compounds into our portfolio. And it is also -- and it also importantly widens our access to new automotive, electrical and power markets. We expect to close the ACI acquisition in the first quarter of 2026. Turning to PEM. Compared to both the prior quarter and prior year periods, our third quarter earnings and margins reflect the soft global demand for many of our PEM products, particularly PVC resins. Our improved operational performance and resulting increase in sales volume in the third quarter helped offset some of the reduction in prices resulting from the global supply-demand imbalance. This global imbalance in supply/demand in the chlorovinyl chain coupled with the challenging macroeconomic environment has resulted in an extended trough. As a result, during the third quarter of 2025, we took a noncash impairment charge of $727 million for all of the goodwill associated with PEM's North American chlorovinyl business. While significant, the charge represents only a small portion of our net investment in the business, and we remain positive in the outlook for chlorovinyls. We remain committed to this business as the global need for its products, which are critical to industries ranging from building materials to water to manufacturing remains intact. While the current trough continues to persist, we advanced several strategic actions to improve PEM's performance centered around 3 key pillars: #1, improve plant reliability to lower production cost -- unit production cost. This pillar is beginning to show results in the third quarter. Two, reduce cost. We are on track to achieve our $150 million to $175 million of company-wide structural cost reduction in 2025. And we are taking further actions to achieve another $200 million of structural cost reduction in 2026. Approximately 75% of these cost reductions are attributable to the PEM segment, and these cost reductions will lower PEM's cost and improve our global competitiveness. Three, optimize our manufacturing footprint. We have taken strategic actions to close facilities such as Pernis in the Netherlands and our Huasu PVC resin facility in China. We will take other appropriate asset optimization actions to improve our financial performance as needed. Our relentless focus on these 3 pillars demonstrates Westlake's continued efforts to adjust our cost structure in response to changing global macroeconomic conditions. Advancing these strategic actions in the coming months is a critical driver to improve our cost and return our PEM segment to levels of profitability that provide an appropriate return on investment. So to summarize the third quarter, our HIP businesses continue to perform well and provide a very valuable platform of earnings stability while profitability in our PEM segment is challenged by the ongoing trough. We believe our determined drive to deliver on the elements of this 3-pillar strategy will return PEM to profitability, improve the competitiveness of our assets and deliver the financial performance we expect. I would now like to turn our call over to Steve to provide more detail on our financial results for the third quarter of 2025. Steve? M. Bender: Thank you, Jean-Marc, and good morning, everyone. As a reminder, my comments regarding the income from operations, EBITDA, net income and earnings per share all exclude the financial impact of the identified items. Westlake reported a loss of $38 million or $0.29 per share in the third quarter on sales of $2.8 billion. The loss in the third quarter of 2025 was $26 million higher than the second quarter of 2025, primarily due to lower average sales price, primarily in PVC resin in our PEM segment. The challenging global macroeconomic environment and imbalance in supply/demand for many of PEM's products has resulted in an extended trough. As a result, during the third quarter of 2025, we took a noncash impairment charge of $727 million for all of the goodwill associated with PEM's North American chlorovinyls business. While this impairment reflects the near-term challenges in the North American chlorovinyl business faces, we believe the cost reduction actions we are taking, combined with the improved plant reliability will turn this business to levels of profitability that it is capable of generating. For the third quarter of 2025, our utilization of the FIFO method of accounting resulted in an unfavorable pretax impact of $37 million compared to what earnings would have been if we had reported on the LIFO method. This is only an estimate and has not been audited. At a segment level, approximately $32 million of the unfavorable impact was at PEM and the remaining $5 million unfavorable FIFO impact was at HIP. Before I discuss the details of our segment results, I want to provide some high-level thoughts on the quarter. Our HIP segment performed well, holding sales in line year-over-year despite the slowdown in North American residential construction activity, which highlights our important market position with our key customers, supported by our coast-to-coast market coverage and a wide range of product offerings. While sales were in line with prior year levels, HIP's margins and earnings during the quarter were impacted by unfavorable changes in sales mix and several period-related expenses. Meanwhile, our PEM segment sales volumes benefited from improved plant reliability compared to the second quarter of 2025. However, average sales prices decreased 4% quarter-over-quarter, which more than offset the impact of the improved sales volumes on segment's earnings. Moving to the specifics of our segment performance. Our HIP segment delivered EBITDA of $215 million on $1.1 billion of sales. When compared to the second quarter of 2025, HIP segment sales volumes were 6% lower, particularly for pipe and fittings, which had exceptionally strong sales volumes in the second quarter of 2025 that may have reflected some pull forward of demand. Sales volumes for global compounds also declined sequentially, driven by slower industrial and manufacturing activity. Meanwhile, demand for siding and trim and roof remained firm. Average sales price for HIP was unchanged sequentially. Lower sales volume, combined with the $20 million period-related expense items and the $5 million FIFO impact that I previously mentioned drove a decline in HIP's EBITDA margin to 20%. Adjusting for the period-related expenses and the FIFO impact, HIP's EBITDA margin in the third quarter of 2025 would have been 22% compared to the 24% in each of the second quarter of 2025 and the third quarter of 2024. Looking at HIP's results on a year-over-year basis, when compared to the third quarter of 2024, HIP sales fell less than 1% as a 0.5% increase in sales volumes was offset by a 1% decline in average sales price. The year-over-year increase in sales volume despite the challenging backdrop for North American residential construction was driven by a solid double-digit sales volume growth in pipe and fittings. And on a year-to-date basis, through the end of the third quarter, pipe and fittings sales volumes have grown nearly 10% as compared to the first 3 quarters of 2024. Thus, our pipe and fittings business continue to perform very well with a solid outlook for growth supported by municipal water infrastructure investments and U.S. government funding coming from the infrastructure bill. To summarize HIP's results, the business continued to perform well in the face of the affordability issues surrounding residential construction, and we continue to be pleased with the stability and profitability of this business delivers. We continue to view HIP as a vehicle for inorganic growth as demonstrated by the recent announcement to acquire ACI's global compound solutions business. ACI brings important technologies and market access, particularly with global automotive manufacturers. We believe that this acquisition will greatly expand the breadth of our product offering and the market reach of our global compounds business, expanding our sales and earnings growth. Turning to our PEM segment. Third quarter sales of $1.7 billion fell by $46 million in the second quarter of 2025, driven by a 4% decline in average sales price that more than offset a 1% increase in sales volume. The decline in average sales price was the result of broadly lower chlorovinyl prices primarily for PVC resin and the shift in our sales mix toward export markets where selling prices tend to be lower. Improved reliability and our global competitive feedstock and energy position in North America drove a 1% sequential increase in sales volume, resulting in a $38 million increase in EBITDA compared to the second quarter of 2025. On a year-over-year basis, PEM's third quarter sales of $1.7 billion were 13% lower, driven by a 7% decline in average sales price and a 6% decline in sales volumes. As Jean-Marc discussed, the continued softness in global manufacturing and industrial demand, combined with low-priced Asian sales in the global marketplace have pressured pricing for many of PEM's products, particularly PVC resin. The lower year-over-year average sales price, combined with lower sales volume drove a decline in PEM's EBITDA to $90 million in the third quarter of 2025 compared to $297 million in the third quarter of 2024. As Jean-Marc mentioned, we remain confident in our ability to improve PEM results and deliver meaningful profitability improvement in our PEM segment. Shifting to our balance sheet. As of September 30, 2025, cash and investments were $2.1 billion and total debt, $4.7 billion with a staggered fixed rate maturity schedule. For the third quarter of 2025, net income provided by operating activities was $182 million, while capital expenditures were $239 million. We continue to look for opportunities to strategically deploy our balance sheet in order to create long-term value. Now let me provide some guidance for your models. We continue to expect Housing and Infrastructure Products revenue to be in the range of $4.2 billion to $4.4 billion, with an EBITDA margin between 20% and 22% for 2025. However, given lower North American residential construction activity and the $20 million of period-related costs incurred in the third quarter, we now expect to be towards the lower end of each of these ranges. We continue to expect total capital expenditures for Westlake in 2025 to be approximately $900 million. Through the end of the third quarter, we achieved approximately $115 million toward our 2025 company-wide structural cost savings target of $150 million to $175 million. And we are driving actions now to take an additional $200 million of structural cost reductions by 2026 as part of our PEM profitability improvement strategy. For the full year of 2025, we expect cash interest expense to be approximately $160 million. Now I'd like to turn the call back over to Jean-Marc to provide some thoughts on actions the business is now taking to grow earnings in 2026 and beyond. Jean-Marc? Jean-Marc Gilson: Thank you, Steve. Looking forward, we are taking proactive steps to improve our financial performance. Our HIP segment will continue to execute its successful strategy utilizing 3 key levers: First, winning with the winners. As we demonstrated this year, even in a slower market, the value of our brands and our broad national footprint delivers significant value for HIPs customers. As a supplier of choice to building product distributors and large national homebuilders, we expect to generate long-term organic sales growth of 5% to 7% per annum. Second, new product innovation. Our HIP business continues to commercialize breakthrough new technologies that create value for our customers such as our PVCO pipe products. This advanced molecular-oriented PVC pipe was introduced in 2021 and has experienced solid customer adoption by delivering water solutions with 40% less PVC. Construction on our new PVCO plant in North Texas continues with an expected start-up in the latter part of 2026 to meet growing customer demand. Third, acquisitions. HIP has demonstrated a proven track record of accretive acquisitions. Our HIP businesses compete in relatively fragmented industries with significant opportunities for both bolt-on and strategic acquisitions. We see significant opportunities to leverage our sales and distribution platforms that are currently in place to create synergies and drive earnings growth. Shifting to PEM. Our drive to return this segment to profitability revolves around our 3-pillar profitability improvement strategy, which I have already detailed, and which is well underway. While we are optimistic that global demand growth for PEMs product will improve, we are squarely focused on actions within our control while the global supply and demand picture improves. This includes improving the reliability of our plants so that we can predictably serve our customers. As a reminder, in 2025, PEM's EBITDA was negatively impacted by approximately $200 million from operating issues. We also have identified significant operational cost savings as part of our company-wide $200 million cost savings target for 2026. Finally, strategic asset optimization actions that we have already taken, such as the Pernis shutdown are expected to generate over $100 million a year in additional savings starting next year. As we progress into 2026, we will continue to optimize our network and take action when and where necessary to drive improved profitability at our PEM segment. Before I open the call to your questions, I want to close by highlighting Westlake's foundational strength, which continue to serve us well. These strengths include a diversified and complementary portfolio of businesses, our vertically integrated business model, our globally advantaged feedstock and energy position in the U.S. and our investment-grade rated balance sheet with $2.1 billion of cash and securities. As we end 2025 and transition into 2026, we will continue to capitalize on these strengths to create value for our shareholders. Thank you very much for listening to our third quarter earnings call. I will now turn the call back over to Jeff. Jeff? Jeff Holy: Thank you, Jean-Marc. Before we begin taking questions, I would like to remind listeners that our earnings presentation, which provides additional clarity into our results, is available on our website, and a replay of this teleconference will be available 2 hours after the call has ended. Stefan, we will now take questions. Operator: [Operator Instructions] Our first question comes from the line of David Begleiter of Deutsche Bank. David Begleiter: Jean-Marc, we've seen polyethylene an increasingly weakening spot market. How will that affect your earnings in the fourth quarter? And what does that mean for -- if anything, for the October price increase you have out there for polyethylene? Jean-Marc Gilson: Yes. Thank you for the question. No, you're right. We are seeing a, I would say, a little bit of a weakening in polyethylene prices. At the same time, ethane is still seeing in the mid-20s in terms of price, and this is certainly putting pressure on our ethylene margins. There is plenty of supply in the polyethylene segment. We have a very good position, very good operating efficiency in the quarter. We're expecting the same over the next quarter and we will do our best to gather and create as much value as we can in that segment. So overall, it's been tough, but I would say relatively stable in the ethylene segment. We are -- as you expect, the last quarter is always subject also to some seasonality, and that's probably what we're going to see in conjunction with a stable to a little bit lower prices in the last quarter. So that's what we expect getting into the last quarter. David Begleiter: And just for Albert, given the pressures you're seeing in the commodity chemical space, are you and the Board still committed to this current portfolio construct with a building products business with a petrochemical business? Or is there a thinking that perhaps these businesses at somewhere down the road are being separated? Albert Chao: Yes. Certainly, we are looking at various combination of business. We believe in the strength of the 2 business being together, as you know that our PVC business is a major supplier to our HIP business in North America. And we believe that with the balance of supply-demand globally improving over the next few years that with our cost restructuring in our PVC vinyl business in the U.S., we will be much better positioned to serve our customer, both domestically and overseas. And as we see interest rate coming down, it will certainly help the housing construction business in the U.S. that will also improve our HIP business as well as our PVC business. So we believe there are synergies being together, but we understand from the valuation of the chemical and construction building material business, they are different. So we are hoping that the market can see the sum of the parts, but we'll evaluate options as we go. Operator: Our next question comes from the line of Frank Mitsch of Fermium Research. Frank Mitsch: You discussed some of the weakness in the polyethylene markets. PVC hasn't exactly been covering itself in glory. What is your near and midterm outlook on the PVC side of things? And what will it take to get it back on track? Jean-Marc Gilson: Yes. So -- yes, thank you for the question. I will -- I'll start and then will hand it over to Steve. The forecast for -- you're right. I mean, the chlorovinyl chain has been challenged this year with prices going down. And hence, we are taking, I mean, efforts on the cost side to bring -- to make sure that we are in a position to compete even at these low prices. So that's why we have started the additional cost savings on top of previous ones. And we are hopeful that we will get back into a position where we will deliver acceptable financial returns in that segment in a not-too-distant future. M. Bender: And just to add on, Frank, as Jean-Marc was noting, big focus and actions being taken now for cost reductions, improving reliability. We're already seeing those results in the third quarter. And here we are well into the fourth quarter, already seeing improved operating reliability, which allows us to reduce that unit cost. So big efforts on that front. But admittedly, it may take some further supply reductions in the marketplace. And frankly, as you think about what is happening already and been announced in the European market, you've already seen reductions in chlor-alkali announcements, both in chlor-alkali as well as in PVC. So I think some of those higher cost players have already begun to take actions to address the oversupply and high-cost positions. Frank Mitsch: And Steve, if I could follow up on the ACI acquisition. You noted in the release what the sales were in 2024. I was wondering if you might be able to give us an idea of what transpired in 2025. And are we looking at HIP margin type of business? Anything on D&A as we look to model 2026 with the ACI acquisition built into the company? M. Bender: Yes. So Frank, good question. And the ACI business is a very strong and it's a global compounding business in that crosslinked polyethylene and silicone business. And it does have good margins in that business. Of course, compounding businesses don't tend to very -- have very high-end ranges of margins. But I would say the range that you're seeing in our HIP segment are reflective of what I would expect to be delivered as we integrate ACI into our business. We think we have compelling synergies with our existing compounds business that is already a global business. And so I do expect the margins that you see in our HIP segment should be reflective of what we achieve once we get these synergies achieved in the ACI acquisition. Operator: Our next question comes from the line of Aleksey Yefremov of KeyBanc Capital Markets. Aleksey Yefremov: I was hoping you could just discuss further in detail the sources of this revision to your HIP guidance and how it affects your maybe initial views of 2026 for the HIP segment? M. Bender: I'm sorry, Aleksey, could I get you to say that again? You were a little faint as you were asking that question. Aleksey Yefremov: Apologies. I was just asking why the new HIP guidance is lower? What product lines or -- what was the reason behind it? And then any initial thoughts on HIP in '26? M. Bender: Yes. Thank you. I'm sorry. It was -- your question initially was a little faint. Thank you for that question. So again, I'd say that with the shifting in product mix that we saw occurred in the third quarter addressing affordability by many of our customers, we saw a shift from the mix of products in that space. And as we think about the period-related costs we had in the third quarter, it also had an impact in the overall 2025 guidance that we have provided. I think a lot of those costs that we had that were period related are largely nonrecurring in nature. And so as we think about the outlook for 2026, our guidance for construction activities is similar to what we've seen in 2025. If you listen to some of the conversations that are occurring publicly with some of our larger homebuilders nationwide, they're guiding to similar levels of construction activity, and we are believing to work very closely with those homebuilding construction companies. So I think our expectation is while we see rates likely to continue to drift further down on the short end of the curve, I do expect that the longer end of the curve will drift lower. And we do expect there will be more activity in the construction level in '26. But I would still say we expect the range of construction activity to be 1.3 million to 1.4 million housing starts, frankly, very similar to 2025. But remember, only half of our HIP business is new construction. I want to remind you that the other half is repair and remodeling, and the repair and remodeling business has continued to perform very well. So this is why we think that we'll continue to see good continuing performance in 2026. Aleksey Yefremov: And I was hoping to get some color on caustic soda market, domestic and export. What is your view for the rest of the year? M. Bender: So I'd say the market in caustic is well supplied. We expect that as we look forward into the market, while the consultants have some indication of price momentum, I would expect that pricing in the market remain relatively stable at this stage. But I think the market is well supplied. I would say the same is true on the chlorine side as well. Operator: Our next question comes from the line of Patrick Cunningham with Citi. Patrick Cunningham: Maybe just a follow-up on ACI, more of a general question. Are you seeing more opportunities on the PVC compounding or other sort of materials side relative to the building products space, just given where the difference in valuations is? And then maybe if you could just comment on what the pipeline in general looks like. M. Bender: Yes. I'd say, Patrick, that there are opportunities that we see in expanding the footprint of HIP, both in product offering and ranges, whether they're in the compounding sector or our pipe and fittings businesses or our exterior building products business, the Royal business. I'd say there's ongoing good dialogue that we have with parties who may choose to monetize some of those assets. And it's always a function of how does that fit into our business and the associated synergies. So I'd say there's really good opportunity as we look forward, but we're always looking for those synergistic fits into our overall portfolio. Patrick Cunningham: Understood. And then maybe just on the quarter-on-quarter sequential weakness on PVC. You mentioned a shift to export markets. Is this sort of a reversion back to your normal level of exports given the better operating rates? Or is there something abnormal here in terms of higher split towards the export markets? M. Bender: No, I think the industry has historically exported PVC resin in the 40s percent of production. And our shift back to some exports was simply improving reliability over the course of the third quarter. And I think going back, as you may recall, our historic levels of exports are below that industry average of 40 or so percent. We're in the mid-30s to low 30s on an average basis. So it's simply just improving reliability, improving production and putting some of that extra production back into historic market levels as we have in the past. Operator: Our next question comes from the line of John Roberts of Mizuho. John Ezekiel Roberts: Did you get an opportunity to bid for the OxyChem business? Or was the antitrust there just even too far for this administration and something Oxy maybe didn't want to deal with? M. Bender: Well, I cannot obviously speak to transactions that we consider, it's a large transaction, and we are a very large player in this space. So we do have to be mindful that there could be regulatory issues around such a transaction. But I would say that we're constantly looking for good opportunities and certainly, whether it be in the HIP side of our business or on the PEM side of the business. But there's always opportunities that we look to, to see if there's real synergy value and real opportunities to grow the business in a value-added way. Operator: Our next question comes from the line of Hassan Ahmed of Alembic Global Advisors. Hassan Ahmed: Just trying to -- I know in your prepared remarks; you talked a fair bit about sort of cost savings and asset optimization and the like. But just trying to get a better sense of a bridge to 2026 EBITDA-wise. It seems you guys will get $200 million in cost savings in '26, an incremental $100 million from the footprint optimization. And if I heard correctly, you had operational issues in PEM, accounting for around $200 million in 2025, which won't be there in '26. So -- and then obviously, some accretion from the acquisition. So I mean, is it fair to assume that via self-help and these things that I just laid out, I mean, on a year-over-year basis, all else equal, EBITDA next year would be $500 million higher than this year? M. Bender: Yes. No, I think as you think about the pillars that Jean-Marc spoke to and the efforts that we have underway for cost reduction, improved reliability and asset optimization, I think you've outlined well the guidance that we're trying to speak to in terms of the actions in Pernis, the cost reduction initiatives and the opportunity to improve reliability. And when you think of the reliability challenges, the unplanned outage we had this year, a higher level of planned turnarounds in 2025, but also a number of unplanned outages as well. As we think about 2026, of course, there are going to be some planned turnarounds. And of course, there could be some unplanned outages. But I think you've outlined the direction that we're moving to improve reliability, reduce our cost and really act on opportunities to rationalize assets that are not performing well to really improve the bottom line. So I think you kind of framed the thinking that we have well. Hassan Ahmed: Fair enough. And as a follow-up, kind of linking a couple of the past questions together, I mean, this $727 million impairment associated with the PEM segment, how should we think about that in light of some of the valuation data points provided by the OxyChem deal? I mean, obviously, that says something about the fundamentals there, Berkshire coming in and maybe scooping these assets up at the bottom of the cycle. How does that fit into this impairment you guys took? And again, going back to one of the earlier questions, just potentially thinking about the overall portfolio, is there some sort of valuation leakage with the way the business is set up today? M. Bender: So the impairment is a mechanical process that one has to undertake on an ongoing basis. And when you think about the extended trough that we've seen in the chlorovinyls business, it was clear to us that, that impairment was necessary to be taken. But I think you saw from our prepared remarks that we see the business really in a condition to continue to see good demand over the medium to long term. So we think it really positions the business to continue to return a very solid return on assets as we go forward. And the positioning that we have, we think, is well positioned to capture that value medium to long term. But clearly, we're in this trough conditions today. And those trough conditions really are the drivers behind that impairment that is really just a mechanical process that one has to undertake on a regular basis. But nevertheless, we think the investment that we've made is well positioned, and we'll continue to really reap the benefits of this investment over time. But that's not to say that we won't make sure all assets are performing well as they should. And if they don't, we'll assess where the right value proposition sits. Operator: Our next question comes from the line of Josh Spector of UBS. Joshua Spector: I just wanted to ask around the $20 million of period-related expenses and HIP. Can you tell us what exactly that was? And is that really a 1 quarter cost? Or is that something that maybe lingers for a few more quarters? M. Bender: No, I called these out as period related because they really are administrative, and transition and integration related. And so they really are nonrecurring in the nature of those items, which is why I call them out as period related. Joshua Spector: But would you expect more integration costs in fourth quarter? And are these numbers included in that $200 million reliability bucket you've called out? Or is this entirely separate? M. Bender: I see those -- I do not see those at this stage in the fourth quarter, and I don't see those as likely to be near-term repeating. Operator: Our next question comes from the line of Matthew DeYoe of Bank of America. Matthew DeYoe: How are you thinking about operating rates in polyethylene? Because it feels like the industry is running a bit -- I guess, how you say, if the industry does run hot, it feels like product starts to back up domestically. And I think we saw that in July and August. But I don't know if I'm extrapolating too much off of shorter duration or shorter -- fewer data points. What's your perception there? And how do you think about your own utilization rates? M. Bender: As you think about operating rates, we recognize that operating these plants to service our customers is important. But at the same time, we're going to be operating these facilities in a manner that creates real value. And so if those operating rates are hovering today for the industry in the mid-80s to low 80s, we certainly had some planned plant maintenance that we undertook in the third quarter. And so I would expect that our operating rates for the year will be slightly lower than industry average. But as we think about our polyethylene assets, we'll continue to make sure the operating rates reflect the value add that we see in the marketplace. And if we need to adjust those operating rates accordingly, we will. Operator: Our next question comes from the line of Duffy Fischer of Goldman Sachs. Patrick Fischer: If you back into the number for HIP, just with what you've given us because we've got the year at the low end at the 4.2% and the 20%, you get a little under $150 million, which is down 20% year-on-year, roughly equal to Q3, which was down about 20%, but you don't have the period cost you just said. So how should we think about that back half number basically being a base to grow into 2026? It seems like HIP numbers should be down next year just given how low we are in the back half relative to the year. But any guidance on that would be helpful. M. Bender: Yes. So Duffy, we see the seasonal construction period begin to slow in Q4. And so if you think about the new construction activity that typically occurs in the fourth quarter, it tends to be slower. But as we look forward, and again, I just want to remind you that half of our HIP business is repair and remodeling. So it's not entirely tied to the new construction markets that we see the nationwide builders dealing with at this stage. And so we still remain very constructive in our outlook for 2026 in terms of how we see the HIP business continuing to perform. There, of course, is seasonality in the first quarter and in the fourth quarter. So as we look at the fourth quarter that we're in today going into the early stages of first quarter, there is naturally seasonality and this is why we're guiding not only to the lower end of this range for the period-related expenses we had in the third quarter, but also some of the slowing that we typically see in the fourth quarter. But as we look forward into 2026, recognizing that half our business is new construction, the other half is repair and remodeling, we still remain relatively constructive in our outlook. Those -- that constructive outlook is really tied to the dialogue that we're having really with these nationwide builders who, while they are working down their completed and unsold inventory, still seem to be moving forward with their construction plans. Patrick Fischer: Fair enough. And then if I could just go back to the write-down in the PEM section, chlorovinyl, obviously everything has to be forward-looking, right? The fact we've been in a long trough, it's not a backward-looking write-down, it's your expectations going forward. So what's changed, I guess, kind of in your 10-year outlook for chlorovinyls? And how much of the hit is downstream and how much of the hit would be kind of at the chlor-alkali level? M. Bender: Yes. This was, of course, just really on a chlor-alkali base. And so as we think about the discounted cash flows that one has to run for the assessment of goodwill impairment, you can recognize that the extended trough we have triggered that impairment. But when we think about the fact there was no impairment of the assets themselves, it signals really the fact that we believe that this business continues to perform and will perform well in the medium to long term. It's just the extended nature of this trough really in the chlorovinyls business. Operator: Our next question comes from the line of Vincent Andrews of Morgan Stanley. Turner Hinrichs: This is Turner Hinrichs on for Vincent. So I wanted to level set a little bit for your comments on outages. You all mentioned earlier, of course, the issues constituting around a $200 million impact this year. And you also had the Petro 1 turnaround, I believe, in addition to that, $80 million. So in the absence of unplanned outages, how are you all thinking about maintenance costs next year relative to this year? And is that the right way of framing it? M. Bender: Yes. And so as I say, 2025 was a much heavier year for planned outages, planned turnarounds. And so as I think about 2026, we don't have an ethylene cracker planned outage for turnaround. We only have some of the smaller units, and those occur on a pretty regular basis every 2 to 3 years, whether they are PVC or chlor-alkali or polyethylene assets, which typically turn every 2 to 3 years. And so the relative maintenance expense for turnarounds in 2026 should be much lower than they were in 2025. Turner Hinrichs: Okay. I think that answers the question. How are you thinking about, if you can provide any color on this, go-forward CapEx, specifically, if the market environment remains relatively similar next year to this year, is it safe to assume that CapEx might still be in the $900 million range or perhaps $1 billion range? M. Bender: Yes. We're continuing to finalize our budget plans for 2026, but I would say that I would expect it to be similar in relative size. Operator: Our next question comes from the line of Pete Osterland of Truist Securities. Peter Osterland: Within PEM, you had a $36 million tailwind from improved plant reliability in the third quarter. Do you expect this to be a sequential tailwind in fourth quarter as well? And what is a reasonable amount to expect there? Could it be another $35 million or so? M. Bender: And so while we have seen some improved reliability, I would expect that we'll continue to see improved reliability in the fourth quarter. The amount of that reliability dollar-wise is really attributable to the assumptions that you might have on pricing. And so I have to refer back to you in terms of what your assumptions are for pricing in the model, but we are seeing improved reliability in Q3 and in Q4. So I do expect a tailwind, but the quantification of that is really a function of what pricing assumption you might have in your models. Peter Osterland: Got it. And then I also just wanted to follow up on your plans for the $200 million of cost saves in '26. Could you share the cadence you expect throughout the year for actioning those cost savings? And I guess how much of that $200 million do you expect will actually be realized in '26 EBITDA relative to 2025? M. Bender: Yes. And so I do expect actions -- I do expect those all to be pocketed in 2026. Actions actually are underway now. And so whether these are actions that relate to supply chain, to feedstock to a wide range of what I would say, structural costs that are coming out of the business. So we'll begin to provide a little bit more color in '26 as we get into the actions in terms of the cadence. But I do fully expect to pocket that $200 million in 2026 because actions clearly are underway, well defined and well actioned at this stage and beginning to materialize in '26. Of course, we have actions underway for 2025 as well. And as I mentioned, we've had $115 million achieved toward our $150 million to $175 million target in '25. So we expect that we are moving forward. And many of these leverages the actions in '25 that will continue to be additive in 2026. Operator: Our next question comes from the line of Matthew Blair of TPH. Matthew Blair: You mentioned a few times the affordability issues in the U.S. housing market. How are you responding here? Are you introducing more low-cost products? Are you changing the raw materials on any of your existing products? Or maybe this doesn't warrant a change in strategy from you, but could you discuss that? M. Bender: Yes. And so when you think about our HIP businesses, we do have the range of good, better, best range of products. And that allows us to be able to address the affordability issues that some of the builders may have as they think about trying to address the affordability issues of homes. And so I spoke earlier about some of the product mix shift that we saw in Q3, and that's part of the reasoning behind some of that product mix shift is moving products from maybe good, better, best to be able to address the affordability issues that we see builders approaching us and discussing. Matthew Blair: Sounds good. And then could you also discuss why you re-upped the ethylene supply agreement with the MLP? Does this raise costs at a time when margin -- when the industry is in a tough spot? And -- or is it the general idea that just preserve your optionality in case the MLP equity markets ever come back? M. Bender: Yes. Good question. But we continue to see, I think, good value in the partnership in its position today. And the extension of this agreement is actually very much as was originally envisioned back in 2014 when we constructed the partnership and launched that into the marketplace. It was designed to have an ability to extend that contract yearly year after year as the end of that 12-year contract expires, which is the end of '26. So renewing that contract or moving forward with that is reflective of the original construct of that ethylene sales agreement that was originally put to place in 2014. If you look at the way the contract for the ethylene sales agreement is constructed today, actually, we're very close to that $0.10 margin already. So there's really no give up on either side of the equation. The C-corp as well as the partnership are getting in effect market pricing in today's market. And so if you look at cash margin, that's really not how the agreement is structured. It's really on a fully loaded basis. And so that's really where the market is today, and that's why both the C-corp and the partnership have agreed to extend this contract. Operator: Our next question comes from the line of Arun Viswanathan of RBC Capital Markets. Arun Viswanathan: So I guess just going back to caustic, you noted that caustic is well supplied, and you don't expect a price increase, or I don't know if that's what you said. But I guess I was under the impression that maybe there was a $50 increase announced, and you could get maybe $20 of that in the coming months. Maybe you can just elaborate on what you're seeing there in caustic soda. M. Bender: Yes. And so Arun, there -- as I said, the market is well supplied. If you look at where the consultants are with their forecast for prices, they do have nominated in their forecast price increases. And this is the time of year where you see a curtailment of chlorine production as we reach a slowing season in construction, which impacts PVC slowing just because of the seasonality. So there is normally a slowdown in the production of chlorine and therefore, caustic soda production, which is the basis behind their driver for the price increase. And whether it be one consultant or another, they have roughly $25 a ton in their forecast. And so my comment really was that the market simply is well supplied. And to the extent there are opportunities to improve pricing, we'll certainly act on those. Operator: Our next question comes from the line of Kevin McCarthy of Vertical Research Partners. Kevin McCarthy: With epoxy resins having been removed from Annex II, would you provide an update on how you see that market unfolding over the next several quarters? M. Bender: Yes, Kevin, it's -- with our shuttering of the Pernis facility in Europe and our ability to source feedstocks, both LER and BPA in a very cost-effective manner, our downstream businesses are beginning to perform much better with that lower cost input feedstock. And so our European and North American and Asian businesses in epoxy are expected to continue to perform well. The challenge we had in our epoxy business simply was the fact that we had higher cost of production in Europe. So as we see the market today, I see some improvement in overall epoxy pricing. But I'd say our focus these days is very much in the downstream formulated aspects of the epoxy business that we have in Europe, in the Americas as well as in Asia. Kevin McCarthy: And then as a follow-up or clarification, when exactly will the $100 million of goodness related to the Pernis closure begin to flow through? Does that happen in the first quarter? Or how would you characterize that? M. Bender: Yes. So the losses that we were incurring there, the plant has been shuttered and we're in the process of bringing the unit down or brought the unit down safely in the third quarter. So the benefits that we're beginning to see are beginning to accrue in Q4 and forward into 2026. So of course, there'll be some severance costs and such that you'll see flow through, but the benefit that we're seeing to the bottom line will begin to come through in Q4 and into '26. Operator: Our next question comes from the line of Michael Sison of Wells Fargo. Michael Sison: Just curious, I think I understand some of the pluses for 2026. But if demand stays in the trough, which a lot of companies have said they haven't seen evidence that we're going to pick back up anytime soon. You noted polyethylene, PVC, caustic, chlorine are both oversupplied, and it feels like feedstock costs could go higher. So do you think margins -- industry margins for PEM could go lower in '26 given that scenario? M. Bender: It's really hard to make that call, Mike. When you think about the market that we see today, the outlook we see, and I'm looking at outlooks for -- from the consultants on pricing, pricing remains fairly stable. If you look at the average prices, one of the better-known consultants for '25 and compare that to their forecast for 2026, it's basically flat for the course of '26 versus the year 2025. Certainly, we have -- and Jean-Marc made comment about this, our feedstock costs have certainly risen. And so you're seeing some higher costs for ethane. And so there could be some further compression. But of course, that ethane is going into derivatives downstream. So if those derivatives downstream can't support that higher feedstock, then higher prices may not fully materialize in ethane. But I would say, as we look forward, we're certainly looking at our customer demand picture and also looking at what our customers are saying and how we operate the business. But I would say the consultants suggest that prices should be relatively flat from '25 to '26 in the chlorovinyls business. Operator: At this time, the Q&A session has now ended. Are there any closing remarks? Jeff Holy: Yes. Thank you again for participating in today's call. We hope you'll join us again for our next conference call to discuss our fourth quarter 2025 results. Operator: Thank you for participating in today's Westlake Corporation Third Quarter Earnings Conference Call. As a reminder, this call will be available for replay beginning 2 hours after the call has ended. The replay can be accessed via Westlake's website. Goodbye.
Operator: Good day, everyone, and welcome to the Third Quarter 2025 Transocean Earnings Call. [Operator Instructions] Please keep in mind, today's call will be recorded and we will be standing by if you should need any assistance. It is now my pleasure to turn today's conference over to Director of Investor Relations, Alison Johnson. Alison Johnson: Thank you, David. Good morning, and welcome to Transocean's Third Quarter 2025 Earnings Conference Call. A copy of our press release covering financial results, along with supporting statements and schedules, including reconciliations and disclosures regarding non-GAAP financial measures are posted on our website at deepwater.com. Joining me on this morning's call are Keelan Adamson, President and Chief Executive Officer; Thad Vayda, Executive Vice President and Chief Financial Officer; and Roddie Mackenzie, Executive Vice President and Chief Commercial Officer. During the course of this call, Transocean management may make certain forward-looking statements regarding various matters related to our business and company that are not historical facts. Such statements are based upon current expectations and certain assumptions and therefore, are subject to certain risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our SEC filings for our forward-looking statements and for more information regarding certain risks and uncertainties that could impact our future results. Also, please note that the company undertakes no duty to update or revise forward-looking statements. Following Keelan and Thad's prepared comments, we will conduct a question-and-answer session with our team. During this time to get more participants and opportunities to speak, please limit yourself to one initial question and one follow-up. Thank you very much. I'll now turn the call over to Keelan. Keelan Adamson: Thanks, Alison, and welcome, everyone, to our third quarter conference call. We posted a strong third quarter, demonstrating our collective focus on delivering superior operational performance to our customers. And I extend my sincere thanks to all of our crews offshore and our operation teams onshore without whom these excellent results would not be possible. Additionally, we have made notable progress in recent months, reducing our operating costs as evidenced by our strong free cash flow generation in the period and our simplified and improved capital structure. We completed several important capital markets transactions that advanced our deleveraging efforts and further reduced interest expense to better position the company for the long-term benefit of our shareholders. Thad will provide more detail, but as the result of our ongoing cost control initiatives and these transactions, we have achieved several important results. First, by the end of 2025, we will have reduced our debt by approximately $1.2 billion versus our scheduled maturities of $714 million. We believe that a stronger and more flexible balance sheet is essential to improving total shareholder return, making accelerating -- accelerated deleveraging one of our key objectives. Second, these transactions allowed us to convert one tranche of secured debt to unsecured debt, reducing restricted cash balances that are now being used more efficiently and releasing the Deepwater Poseidon, which is among our highest specification and most capable rigs from the collateral pool. Third, our annualized interest expense will now be reduced by approximately $87 million versus 2025 with these savings expected to be used for further opportunistic debt reduction. And lastly, we have significantly improved our debt maturity profile and materially reduced our 2027 obligations. Today, we currently expect to meet our remaining scheduled maturities with cash flow from operations. We will include a slide in our corporate presentation that illustrates this improvement. We are pleased with the significant progress we have made on our balance sheet so far this year and there is more work to be done. I will remind our listeners that in addition to the providing industry-leading offshore drilling services to our customers, these actions and outcomes are consistent with our previously articulated objectives of reducing debt, reducing interest expense and simplifying our capital structure. Turning to asset strategy. We continue to refine the composition of our fleet. After a fulsome analysis of the option value of our cold stacked assets, we announced our intention to dispose of 4 drillships and 1 harsh environment semisubmersible from our stacked fleet. Overall, we will retire 9 rigs, including the 4 announced last quarter, a process that should be complete by mid-2026. Our fleet now consists of 24 contracted ultra-deepwater drillships and high-specification harsh environment semisubmersibles as well as 3 higher specification, seventh gen ultra-deepwater drillships currently cold stacked in Greece. We have been deliberate in the rationalization of our fleet to maintain a portfolio of the highest specification, most marketable and competitive assets in the industry. The decision to retire these older assets better aligns the company with evolving customer needs while supporting a more balanced industry supply-demand dynamic. With respect to rig contracting and as we expected, our customers exercised some priced options. In the U.S. Gulf, following the announcement of its final investment decision on the Tiber-Guadalupe development, BP exercised its 1-year $635,000 per day priced option for the Deepwater Atlas. The program is expected to contribute approximately $232 million in backlog and will keep the rig operating with BP through the second quarter of 2030. We are grateful for the continued confidence BP places in us to execute its payload [ gene ] programs. In Brazil, Petrobras exercised the first of its 2 options for the Deepwater Mykonos. The program extends the rig's firm term into early 2026. Moving now to the broader market environment. Given global macro uncertainties and its impact on commodity prices, our customers continue to exhibit capital discipline, prioritizing free cash flow for debt reduction, returning capital to shareholders and taking a measured approach to the amount of capital that they commit to exploration and development activities. They have also been reducing costs by restructuring their organizations and have largely been sustaining reserves and production levels through acquisitions and consolidation. This has resulted in deferred near-term demand for drilling services and as expected, a slower pace of contracting. However, industry projections continue to suggest that upstream investment in offshore will increase, particularly in the deepwater segment. Indeed, a number of independent organizations recently observed that the significant decline in operators' reserve to production ratios resulting from their capital discipline is not sustainable, a view with which we agree. We believe that their efforts to improve this metric will lead to meaningful increases in offshore drilling activity. Notably, and perhaps to the greatest extent we have heard over the past decade, many customers are now indicating a necessity to increase their exploration activity to address this emerging supply imbalance. Multiple third parties project that demand for deepwater rigs will significantly increase in the coming years and we are encouraged by recent conversations with customers and anticipate contract awards for more programs later this quarter and into 2026. Based upon known tenders, programs and contract options, we expect the number of contracted floaters to grow by approximately 10% in the next 18 months. Looking regionally, in the U.S. Gulf, activity is stable as operators continue to extend utilization of rigs they already have on contract. Additionally, 3 short-term programs with independent operators are expected to be awarded in the fourth quarter with one more tender to be released before year-end. In Brazil, we anticipate the Petrobras Buzios and Mero tenders and Shell's Gato do Mato tender will be publicly awarded in the coming weeks for a total of 23 years of firm work requiring 6 rigs. We believe that these programs will mostly be satisfied with rigs currently in country. In Africa, we still anticipate demand could increase the working rig count by at least 3 rigs through 2027. In Nigeria, the Exxon and Chevron tenders for multiyear development are well underway and Total's new tender is expected to be released in the coming months. In the Ivory Coast, we believe Eni's release of its tender for the multiyear Baleine Phase 3 development commencing early 2027 is imminent. In Angola, the rig count is expected to remain relatively stable. Azule Energy recently released an expression of interest for 2 rigs commencing late 2026 and Shell will go back to the country after many years out by starting a new exploration campaign in 2027. We now expect there will be 5 drillships and 1 semisubmersible working in country by 2027. In Namibia, most of the operators that are currently active will continue to drill exploration and appraisal wells in 2026 through 2027. We expect the first major development program will be tendered for 2 rigs to begin in 2028. And finally, in Mozambique, Eni's tender is progressing with Exxon and Total's tenders anticipated to be released soon. I also note that Total recently lifted force majeure from their $20 billion LNG project there, a decidedly positive development for Mozambique's economic development and for investor confidence as the country continues to develop its energy resources. In the Mediterranean, current opportunities could require up to 2 incremental rigs in the next 2 years with programs from a number of the major operators as well as local independent energy. Moving further east to India. The ONGC tender for 1 drillship with a mid-2026 commencement is in progress. And elsewhere in Asia, there are a number of market inquiries, including 2 in Indonesia for multiyear programs starting in 2027. In Australia, Chevron's Gorgon Phase 3 tender is progressing toward award, which we currently expect in the first quarter of next year. We anticipate there will be 1 drillship and 2 semisubmersibles working in country in 2027. In Norway, utilization of the high-specification harsh environment semisubmersible fleet is expected to remain robust through 2027 as the award for Equinor's rig tender is expected imminently. This and other projects have commencements in 2027, many of which will utilize contract extensions of the current fleet. Based upon current planned programs in 2027, the drillship and harsh environment semisubmersible markets are projected to reach active utilization of above 95% and close to 100% respectively. Operationally, we continue to deliver strong safety and reliability performance for our customers. Indeed, in September, we posted revenue efficiency of 100% and delivered 97.5% for the entire third quarter. Responsible for these achievements is a uniquely qualified and high-performing team that is focused on delivering the professional and disciplined experience to which our customers have grown accustomed. Through rigorous procedural discipline, we've built an operational framework that enables us to deliver the same standard of performance on every Transocean rig regardless of where it is operating. I am also very proud that we continue to set industry firsts. We recently ran the heaviest casing string on record at a hook load of approximately 2.85 million pounds using our eighth generation drillship, the Deepwater Titan. This achievement showcases what can be delivered with this highly capable generation of asset, unlocking significant well construction and production efficiencies for our customer. In conclusion, we remain focused on optimizing the value of our assets and services while maintaining a disciplined approach to deploying our high-specification fleet. Our priority is to best serve our customers and continue to generate strong cash flow, supporting our ongoing efforts to strengthen the balance sheet and increase the value of our equity. We will continue to take steps to optimize our capital structure and financial flexibility. I'll now turn it over to Thad for further discussion on our transactions, our results and guidance. Thad? R. Vayda: Thank you, Keelan, and good day to everyone. During today's call, I will briefly recap our third quarter results, provide guidance for the fourth quarter and conclude with our preliminary expectations for full year 2026. As is our practice, we'll provide updated guidance for 2026 when we report our full year 2025 results in February. During the third quarter, we delivered contract drilling revenues of $1.03 billion with an average daily revenue of approximately $462,000. Contract drilling revenues are slightly above our guidance range due primarily to the Deepwater Skyros, which continued to operate throughout the quarter. Operating and maintenance expense in the third quarter was $584 million. This is below our guidance range, primarily due to deferred maintenance costs across the fleet and the release of a $10 million provision resulting from the anticipated favorable outcome of a legal dispute, partially offset by severance costs associated with the company's shore-based support reorganization undertaken in August. Capital expenditures for the quarter were $11 million, also below our guidance range of $25 million to $30 million, primarily due to the timing of payments. G&A expense was $46 million, below expectations due also to timing, but with respect to professional and legal services. We ended the third quarter with total liquidity of approximately $1.8 billion. This includes unrestricted cash and cash equivalents of $833 million, about $417 million of restricted cash, the majority of which is reserved for debt service and $510 million of capacity from our undrawn revolving credit facility. All of the proceeds from the recent equity and debt capital markets transactions have since been deployed to reduce and refinance certain debt obligations. Adjusting for these proceeds, our quarter end liquidity would have been approximately $1.2 billion. I will now provide guidance for the fourth quarter of 2025 and preliminary guidance for the full year of 2026. For the fourth quarter, we expect contract drilling revenues to be between $1.03 billion and $1.05 billion based upon an average fleet-wide midpoint revenue efficiency of 96.5%, which, as you know, can vary based upon uptime performance, weather and other factors. This guidance includes between $60 million and $70 million of additional services and reimbursable expenses. The slight sequential increase in revenue is mainly due to higher activity on the Deepwater Conqueror, which started its new contract on the 1st of October, partially offset by lower activity on the Deepwater Skyros as it has concluded its work in Angola and is mobilizing to Ivory Coast for its next contract, which starts in December. We expect fourth quarter O&M expense to be within a range of approximately $595 million to $615 million. This quarter-over-quarter increase is primarily due to the release of the previously mentioned anticipated favorable resolution of a legal dispute, which is not repeated in the fourth quarter and higher in-service and out-of-service maintenance across the fleet, partially offset from the shore-based reorganization implemented in August. We expect G&A expense for the fourth quarter to fall within a range of approximately $45 million to $50 million. Net cash interest expense is projected to be approximately $122 million for the fourth quarter, comprising interest expense and interest income of about $131 million and $9 million, respectively. Capital expenditures and cash taxes are expected to be approximately $25 million to $30 million and $18 million, respectively. Finally, we currently estimate that we should end the year with total liquidity of slightly more than $1.4 billion, including the $510 million capacity of our undrawn credit facility. Versus our prior guidance of $1.45 billion to $1.55 billion, our year-end liquidity reflects the use of approximately $106 million of cash in excess of that provided by the recent transaction to reduce our debt balances. We expect that at year-end, the remaining debt and capital lease balance will be approximately $5.9 billion, which is net of $80 million of remaining scheduled payments and maturities to be settled with cash. For 2026, we currently forecast contract drilling revenue to be between $3.8 billion and $3.95 billion. Approximately 89% of our forecasted revenue is associated with firm contracts and the range assumes revenue efficiency of approximately 96.5% at the midpoint. Our guidance includes between $230 million and $270 million of additional services and reimbursable expenses. We expect our full year O&M expense to be between $2.275 billion and $2.4 billion and we currently anticipate G&A costs to be between $170 million and $180 million. We forecast 2026 cash interest expense to be about $480 million. Our preliminary projected liquidity at year-end 2026 is between $1.6 billion and $1.7 billion, reflecting our revenue and cost guidance, which incorporates the net effect of our ongoing cost savings initiative and includes our $510 million revolving credit facility, which we expect to remain undrawn and anticipated restricted cash of approximately $380 million. This liquidity forecast also includes CapEx expectations of approximately $125 million to $135 million. I reemphasize our continued focus on strengthening the company's financial position through disciplined management of our capital structure. In utilizing a combination of equity and debt in our recent capital markets transactions, we were able to reduce our gross debt by approximately $1.2 billion versus scheduled maturities of $714 million, an incremental debt retirement of over $0.5 billion. This is accompanied by a substantial reduction in annualized interest expense of about $87 million. The sequence of the capital market transactions also allowed us to achieve the best possible rate, 7.875% on the new 5-year $500 million senior priority guaranteed notes due 2029, below that of the now retired 8% notes that matured in 2027. Additionally, with the retirement of the 2027 notes secured by the Deepwater Poseidon, we were able to utilize cash that would otherwise have been held in our restricted cash accounts in a more productive manner. Finally, the tender offer for our discounted 2041 and certain 2028 maturities contributed about $105 million of debt reduction to the total $1.2 billion with associated annual interest expense savings of about $9 million. In conclusion, we remain committed to a thoughtful, measured approach to liability management. With strong backlog conversion generating incremental free cash flow, we anticipate being able to continue accelerating debt reduction in excess of scheduled maturities. I'll now turn the call back to Alison to launch the Q&A session. Alison Johnson: Thanks, Thad. David, we're now ready to take questions. [Operator Instructions] Operator: [Operator Instructions] We'll take our first question from Eddie Kim with Barclays. Edward Kim: Just a bigger picture question on your confidence level in the increase in deepwater utilization. I think you mentioned 95% or even 100%. I believe that's exiting '26 and into 2027, if you could clarify the timing there. We've seen a few day rates now below $400,000 a day and there's some investor concern around some more negative day rate prints here in the next couple of months. First, do you think those are coming? And second, how does that impact your view on this activity inflection higher in the back part of next year? Keelan Adamson: Yes. Good question. And I think the way I would probably approach I think the 2-part question was one on utilization and the second part was more on rates and how that pressure will exert itself. I would say our view remains the same, Eddie. We believe that as we turn from the end of '26 into '27, the utilization of the ultra-deepwater fleet will bridge over 90%. And based on the conversations we're having with our customers, the programs, the tenders that we know are out there, with the long-term fundamentals with respect to the upstream CapEx, we expect to start moving towards offshore. The 2025 was a low FID year and so we expect the number of FIDs to increase as we go forward here into next year. And the need for oil companies to start exploring to a greater extent. And from my conversations with the heads of wells and indeed some CEOs in the last quarter, that sort of period looks like '27, '28, they're going to start releasing some capital to address those supply concerns. So we're very constructive on the longer term, certainly from 2027 out. Yes, there is some utilization available in 2026. But those rigs that are on the water, there's quite a few opportunities for those to capture some work. The question on rate, obviously, as the utilization builds from where we are at the moment, which we would consider to be at the bottom of the trough and I'm sure Roddie will add a few more thoughts on this after I'm finished, we certainly believe that as that capacity is absorbed into the awards that are coming, the rates will be competitive. It's a competitive environment right now as the drilling sector starts trying to build their utilization. But for the timing of our assets rolling towards the second half of next year, we expect a lot of that activity to be absorbed. And so we consider it a really good opportunity for us to roll some of our rigs that are coming available at the end of the second half of next year and going into '27 and '28 prospects. And so as you know, utilization when it bridges 90%, that's when the upward pressure starts exerting on rate. So we're very constructive on both utilization and our ability to create value from our assets as we move from '27 out. And with that, perhaps Roddie has a few more comments to make. Roddie Mackenzie: Yes, sure. Sure. Eddie, let me add just a couple of notes to that. So as we think about where we are in the cycle, essentially we were kind of at a low point of contract awards in the first quarter of this year with only about 12 rig years awarded. The second quarter was a bit better at 14 rig years. The third quarter was 18 rig years. So we see the steady increase. And as Keelan has alluded to, in the fourth quarter, like in Brazil alone, we expect to get 23 rig years awarded. If we think about the other regions, we think Q4 is going to be a very strong contracting quarter and that continues into '26. So if you think about that in terms of actual utilization, we've already gone through the dip in contracting. Therefore, the increase in utilization is already booked. So this utilization is going to happen. It's kind of in the books at the moment and we think it basically accelerates from there. There was one other thing I was just going to mention real quickly on utilization. So as we entered the year 2025, we did have some white space on certain assets. And it's just a phenomenon of our business that on the active rigs, typically, the programs will run longer rather than run shorter and that's for a variety of reasons, whether they're well-related or more often, once an operator has an active rig working, it's very cost-effective to add additional wells to that program. So we saw that kind of several times for us and it's one of the reasons why our results in the third quarter are so good that we contracted beyond the time line that we had stated in the fleet status report. So I think on that side, utilization is looking only on the way up from this point forward, which is great. And to Keelan's point again about the rates, certainly, for near-term stuff, we're seeing more competitive numbers. But I think what's interesting is the time frame in which we are rolling over the rigs is going to allow us to continue our very disciplined approach and making sure that we get value for those rigs. And to be honest, having the highest specification rigs available at a moment when we're transitioning into the busiest time, I think, is a really good position to be in. If I look at the [ Farley ] charts and other charts, '27 looks -- if all of the probable items come through, then we're pretty close to 100% utilization and potentially above it if there's a big release of budget capital, but we have to wait and see how that pans out. But certainly, utilization and day rates are looking pretty solid from this point forward. Keelan Adamson: Yes. Maybe one more comment, Eddie. I think when we talk about rates and we look at what's been fixed and what's been announced, I think the seventh gen units, there's been a lot of resilience at around $400,000 a day. And the competitive environment that's available that's present right now is going to also attract some of the lower spec sixth gen units, which is where you will see some more competitive pricing as the drillers start building more utilization on those assets. But we've been pleased with the resilience of the seventh generation assets have shown when it comes to day rate. And maybe another follow-up on '26. We're still looking to see what our customers are going to release from a budget point of view for next year. I'll be interested to see what that looks like and how that can be transferred over to the drilling market in '26. Edward Kim: Great. Great. That's great to hear and all very helpful color. Just my follow-up is on your rigs coming off contract soon. You have 4 drillships set to come off contract around kind of early to mid next year, the Skyros, Mikonos, KG2 and the Proteus. Just based on conversations you're having now for these rigs, would it be prudent at this point to assume maybe 1 quarter of idle time after coming off contract? How should we think about the follow-on opportunity for these rigs and the timing around when that next contract is likely to commence? R. Vayda: Yes, I'll take that one. So we are in discussions on all those rigs in various different manners at the moment. So we don't want to tip our hat to that. But yes, we think -- certainly, there's not going to be idle time in all of those rigs. There's possibility that there could be on 1 or 2. But as I said before, a lot of these programs, especially around finishing up wells going a little bit longer, but we do have active prospects on every one of them. So that's pretty promising. And I think something that is obviously not readily apparent to everybody in the industry, except for those that are actually bidding for the work is the number of conversations for work is kind of -- it hasn't been this active and busy for our marketing team for a couple of years. So yes, we're pretty confident we'll be putting on some backlog on a number of those rigs. Keelan Adamson: Yes. Maybe a little bit more color from my side, Eddie. You mentioned a few rig names. Rigs have reputations and the rigs that we have rolling have very strong reputation. So the Skyros, for example, Transocean and Total's multiple year winner of Rig of the Year. I mean the rig has performed outstanding on that Total contract for 10 years, even performed 10 years without an LTI in its safety performance. The reputation of that rig is outstanding and there are several inbounds that we get concerning its availability. If you think about the Proteus you mentioned in the Gulf of America, the Proteus is one of the highest spec units in the world, has performed outstanding as well for its Shell campaign. So we have a variety of rigs that are rolling. Some are more sixth gen nature and some are much more higher spec. So what you'll see from us is certainly looking to build utilization on our lower spec units. And when it comes to the higher spec units like Proteus, that's an opportunity for us to remain disciplined. I think we've demonstrated that in the past as the market ran up before this particular mid-cycle lull. And I would say we will be very disciplined in how we approach the Proteus and the sort of work and the term that we put on her, obviously, we want to keep her busy. But if we don't like particularly the economics that are associated at that time, we'll take shorter stint work. And then, of course, that provides opportunity for small amounts of white space. But that is the consequence of a commercially strategic bidding discipline that we employ, especially with our harsh environment -- with our high-spec units. Operator: We'll take our next question from Doug Becker with Capital One. Doug Becker: Some industry reports suggest Petrobras recently had one-on-one meetings with drilling contractors just to discuss ways to reduce costs. Just wanted to get confirmation, did Transocean have such a meeting? And if so what was the outcome? Keelan Adamson: I'll offer some commentary, and I'm sure Roddie will add his -- some color as well. Yes, we've been engaged with Petrobras on this topic for a while. I would reiterate our belief that we do not believe that this cost reduction exercise on Petrobras' part is going to materially change the activity that they have in country. We have a lot of experience across our operations of driving cost efficiencies into the operation on behalf of our customers. And with respect to Petrobras, we are engaged with the lessons we've learned across our fleet and with various different customers on how to reduce that cost structure. And typically, it's built around things like the number of people on board the rig and simple things like that. So Petrobras are keen to engage with the drillers on this matter. There are efficiencies to be gained and it's very encouraging to see Petrobras open to having these discussions, looking for more efficiencies and allowing drilling contractors to bring their experience to bear in this environment. So Roddie, do you want to add anything? Roddie Mackenzie: Yes. I'd just add, that's exactly the point. This is actually a welcome effort. So yes, to recap on that, basically, they're looking to take about 7% or 8% out of their cost basis. And they're doing that in a manner, as Keelan said, there are certain things in the Petrobras contracts that have expense to the contractors that are perhaps nice to have, maybe not essential to the contract. So if we're able to take some of those out and pass on those savings to Petrobras, that makes their wells more competitive, that stimulates more work. So we think that's a positive effort. And of course, we're very interested in that. And I think it's off the back of news like Ibama give the approval for the drilling exploration campaign in Foz do Amazonas, which is the North Coast of Brazil. So that's very encouraging for future activity. But yes, I think their statement is they very much are looking to keep all the rigs they have on contract and just seeing where they can be more cost-effective on certain demands that they have. And of course, we're all over that. I think that's quite positive. Doug Becker: Is it fair to say that discussions were much more about those cost reduction efforts outside of rate? Or is there a desire for some type of concession on price or blend and extend? Roddie Mackenzie: Yes. I mean, obviously, we can't talk about specific negotiations that we have with them. But the first focus is on the existing contracted rigs and what they can do to reduce the cost basis. If there is opportunity to add term to some of those, then that's an avenue that I'm sure many will be happy to explore. Doug Becker: That makes sense. And then, Thad, maybe one for you. A lot of steps to reduce debt during the third quarter. What would you highlight as the next few steps going forward and maybe in particular, just the potential for another equity raise down the road? R. Vayda: The short answer is, as Keelan had indicated, we anticipate that we're going to meet all of our obligations out of cash flow from operations. A couple of things I'd like to say on the equity raise. Clearly, it is never an easy decision for management to go to the market. And frankly, there's probably never a particularly good price at which one should issue equity. That said, I think that the company has had a pretty good track record of treating shareholders as well as it can, particularly with respect to those things that are within our control. We didn't restructure, but with that comes this survivor's curse. When you look at the things that are encumbrances to our share price, it's 2. It's, frankly, the market and the pace and day rates of contracts. And second, depending upon the day of the week, it's the leverage. It's sort of the survivor's curse. So we took this exercise to heart. We did a lot of analysis and we did our best to ensure that this is something that we really wouldn't have to do in the future. So our expectation now is with our liquidity profile, our debt maturity schedule, the market conditions that we'll be able to meet our obligations at cash flow. You should expect to see us deploy any excess cash generated by the cash flow savings that we've talked about, the $250-so million that we anticipate in aggregate achieving in 2026 to reduce our debt balance. Operator: And we'll take our last question today from Noel Parks with Tuohy Brothers. Noel Parks: I was wondering, you were talking about there -- just from discussions that you could see exploratory drilling maybe picking up in that 2027, 2028 time frame. I just wonder if you sort of think about lead time and customers' internal capital discussions, do you have any sense as to when they might -- how far in advance they might start looking at trying to commit to rigs on some of those? Keelan Adamson: Yes. No, it's a good question. As you know, a lot of the activity that we perform on contracted rigs is largely focused on development, but our customers also squeeze in exploration wells that they have approved in their budgets into the program should the time lines align. I think the difference that we're seeing now is a real conversation in the world about the need to increase the supply of hydrocarbons. And if I cite the IEA report that was recently published, they speak about over $500 billion of the upstream investment, 90% of that is used every year to just simply replace the reserves that are being produced, right? And that's not taking into account any of the growth that is anticipated for the world. So as our customers are noticing that the decline rates in their conventional and also in their nonconventional, which is an accelerated decline rate, there isn't more conversation now about how do we produce that supply that's going to be required. So as we think about the commodity prices, the macro environment, I think our customers are going to continue to find opportunities in their programs of contracted rigs in '26 to put a few exploration wells in. But the conversations are now changing to a major customer talking about building an entire rig line around exploration in '27 and '28. And there's more and more of those major customers starting to talk about that. And that's what's giving us an awful lot of encouragement with respect to what we think that will transfer to in rig activity in the out years from '27 on. And that's kind of the subtle difference that we're hearing in the conversations I'm having certainly with our customers. Roddie, do you have anything to add on that? Roddie Mackenzie: No, I think that nails it, exactly that it's been a while since we've had this exploration discussion and I think the broader macro commentary really helps that. And of course, we are seeing that directly with the discussions that we're having with some of our customers. Operator: And there are no further questions at this time. I'll turn the program back to Alison Johnson for any additional or closing remarks. Alison Johnson: Thank you, David, and thank you, everyone, for your participation on today's call. We look forward to speaking with you again when we report our fourth quarter 2025 results. Have a good day. Operator: This does conclude the Transocean earnings call. Thank you for your participation and you may now disconnect.
Operator: Good day, and welcome to Cogeco Inc. and Cogeco Communications Inc. Q4 2025 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Patrice Ouimet, Chief Financial Officer of Cogeco Inc. and Cogeco Communications Inc. Please go ahead, Mr. Ouimet. Patrice Ouimet: Thank you, operator. So good morning, everyone. Welcome to our fourth quarter conference call. So as usual, before we begin the call, I'd like to remind listeners that today's discussion will include estimates and other forward-looking information. We ask that you review the cautionary language in the press releases and annual report issued yesterday regarding the various risks, assumptions and uncertainties that could cause our actual results to differ. So with that, I'll pass the line to Fred Perron for opening remarks. Frederic Perron: Thank you, Patrice. Good morning, everyone. For Cogeco Communications, the fourth quarter marked the end of year 1 of our 3-year transformation program focused on synergies, digital, analytics, network expansion and wireless, and we're pleased to report that we're on track. Year 1 was part of mainly focused on OpEx and CapEx synergies, and we delivered on those targets, as you can see by our 110 basis points year-on-year improvement in adjusted EBITDA margin and our $38 million year-on-year increase in free cash flow in constant currency. It's worth mentioning that the CapEx efficiency enabling our growth in free cash flow comes mainly from maintenance synergies as we're continuing to make important investments in growing and enhancing our networks. A recent report by Ookla, for example, noted a significant increase in our Canadian upload speeds as a result of our ongoing network upgrade initiative. And in the U.S., we've upgraded over 35,000 of our cable doors to fiber during the fiscal year, in addition to adding nearly 50,000 new homes passed across our North American footprint. Years 2 and 3 of our transformation will now add more emphasis on our top line performance as per our original plan. This will include additional investments in growing previously underdeveloped sales and marketing channels in the U.S. in the context of the evolving competitive environment as well as scaling wireless in Canada. When we met last quarter, we said that we were expecting strong continued Canadian customer growth, combined with some improvements in our U.S. subscriber metrics, and we're pleased to be delivering on that expectation. We just had our best Canadian Internet customer growth in 13 years. This growth was driven mostly by market share gains in our legacy footprint on our own network. The completion of new rural expansion programs in Ontario has yet to accelerate through fiscal '26 and '27, providing a new additional lever for us in the future. We've seen a reduction in competitor promotional activity in the quarter, which has more than offset some minor noise around FWA and wholesale, including our own deployment as a reseller under the Cogeco brand across Quebec. So it's fair to say that on balance, our Canadian competitive environment is evolving in a constructive manner at present time. Our launch of the Canadian wireless service is going ahead of plan, and October marked the deployment of this new service across most of our wireline operating footprint. Our positive early sales results on wireless have already enabled us to start pulling back on some of our initial introductory offers. On the U.S. side, our year-on-year financials were impacted by ARPU pressures, the cumulative impact of customer losses in the prior quarters, a difficult comparative period last year and a smaller rate increase this year than in the previous year. This resulted in a year-on-year decline in adjusted EBITDA, which was in line with what we had indicated to you last quarter. That being said, our additional sales and marketing activities are working. Our subscriber trends are now improving, and we're delivering on our long-stated goal of growing the Ohio customer base during the quarter. In fact, it's the first time since we acquired the Ohio business 4 years ago that we achieved customer growth in that state. We expect continued improvements in our U.S. subscriber metrics over the coming quarters. On October 8, we launched a completely revamped pricing strategy for the U.S. This new approach gives more value, predictability and transparency to our customers, including full price protection for the first 2 years. This is just one of many tactics that we're deploying to be more aggressive and more innovative in our U.S. go-to-market. Today, we're also publishing our consolidated guidance for the new fiscal year for CCA and CGO more broadly, which offers a continued growth in free cash flow in constant currency despite competition-driven top line pressures. Our adjusted EBITDA guidance of 0% to minus 2% year-on-year reflects additional investments in scaling previously underdeveloped sales and marketing channels in the U.S. and growing our Canadian wireless business, as previously explained. We believe these investments present attractive upside for us and are confident that investors will get disproportionate returns from them over time. We're still planning to grow our free cash flow to $600 million next year in fiscal 2027, which is a good base for further dividend growth as we're announcing today as well as further deleveraging. Finally, turning over to Cogeco Media. While competitive dynamics in the radio advertising market remain, Q4 revenue increased year-on-year, lifted by strength in our digital advertising solutions and continued listener engagement. On that, I'll turn it over to Patrice for more details on our results and guidance. Patrice? Patrice Ouimet: Thank you, Fred. So in Canada, Cogeco Connections revenue declined by 1.5% in the fourth quarter, mainly due to lower revenue per customer from fewer video and wireline phone service subscribers, partly offset by growth in our Internet subscriber base, which added 17,000 new customers during the quarter. Adjusted EBITDA declined by 1.4% in constant currency due to the lower revenue being partially offset by lower operating expenses resulting from our cost reduction initiatives and operating efficiencies. We added 10,800 homes passed during the quarter, mainly through fiber-to-the-home under our network expansion program, including those related to the Ontario subsidized program. In the U.S., Breezeline's revenue declined by 9.2% in constant currency due to the cumulative decline in the subscriber base over the prior year, a smaller rate increase in -- versus the prior year, along with a competitive pricing environment. The 6,300 decline in Internet subscribers was an improvement over the previous quarter, while Internet subscriber additions in Ohio recorded their first ever positive growth of 1,300 new subscribers. Adjusted EBITDA declined by 7.9% in constant currency due to lower revenue, offset in part by lower operating expenses driven by cost reduction initiatives and operating efficiencies. Note that last year's comparative Q4 period was the highest EBITDA level of all quarters for that year, largely due to the reorganization of our operating entities. Now turning to our consolidated numbers for Cogeco Communications. At the consolidated level, revenue in constant currency declined by 5.3% and adjusted EBITDA declined by 3.3%. This result is mainly due to the revenue pressure in the U.S., partially offset by strong execution on operating efficiencies as well as customer growth in Canada. Diluted earnings per share declined by 6.2% in reported currency, mainly due to lower EBITDA and higher financial and restructuring costs. Capital intensity was up at 21.8% versus 20.4% last year. Free cash flow in constant currency decreased by 27.4% in the quarter, but was up by 7.9% for the full year. Our net debt to adjusted EBITDA ratio was 3.1 turn at the end of the quarter, unchanged from the level reported in Q3. We have increased our dividend by 7%, having declared a quarterly dividend of $0.987 per share. And as Frank mentioned, with anticipated strong free cash flow in fiscal '26 and '27, we expect to continue to increase dividends meaningfully in the future. At Cogeco Inc., our revenue in constant currency decreased by 5% and adjusted EBITDA declined by 3.9%, with growth in radio, partially offsetting revenue declines at Cogeco Communications. Media operations revenue increased by 8.5%, driven by growth in digital advertising revenue. We have also increased the dividend at Cogeco Inc. by 7% in lockstep with that at Cogeco Communications. Let's now discuss our fiscal '26 guidance, which we are introducing today. On a constant currency and consolidated basis, Cogeco Communications expects revenue to decrease between 1% and 3% compared to the prior year. As growth in Canada is offset by competitive pressures in the U.S. Adjusted EBITDA is anticipated to decrease between 0% and 2% versus last year as we continue to face revenue pressures in the U.S. and are investing in new sales and marketing capabilities, especially in the U.S. as part of our 3-year transformation program, all while generating additional operational efficiencies. We will also incur some costs related to our Canadian wireless operations, including some IT costs recognized in adjusted EBITDA starting in fiscal '26, and I'll get back to this in a second. Turning to our capital expenditures. We are expecting to spend between $560 million and $600 million, including $100 million to $140 million in growth-oriented network expansion, resulting in a capital intensity of between 19% and 21% or 15% and 17%, excluding those network expansion projects. Free cash flow and free cash flow, excluding network expansions are expected to increase between 0% and 10% compared to fiscal '25. Our full year current tax rate is forecast to be 11.5%. In terms of segments, an important item to note is that beginning in Q1 of fiscal '26, Canadian Mobility, which had been included in our corporate segment during the start-up phase will not be recorded in our Canadian segment given the recent full-scale launch of the product. This reclassification will have no impact on the consolidated level and comparative segments for the prior year, and we will also adjust basically the results for the prior year for that. In addition, our IT costs related to Canadian Mobility, which were recognized below the EBITDA line as cloud computing costs in fiscal '25 during the implementation period will be recognized as OpEx within the Canadian segment starting in Q1 as those systems are now in operation. So overall, we expect the fiscal '26 Canadian segment's adjusted EBITDA to be impacted by about $20 million versus what we reported in fiscal '25. Of that, $11 million is simply the reclassification from corporate OpEx to the Canadian business and the balance is moving from below the EBITDA line to OpEx. That's basically the IT systems I was relating to. We nevertheless expect the Canadian operations growth to largely absorb those additional costs in fiscal '26 through customer growth and operational efficiencies. As it relates to Q1, we expect consolidated revenue and adjusted EBITDA to decline in the mid-single-digit range in constant currency. We then expect a material sequential improvement in our year-over-year adjusted EBITDA trends starting in the second quarter as we benefit from already quantified cost savings, rate increases and improving U.S. customer trends. More specifically in the U.S., we expect the Q1 year-on-year adjusted EBITDA variation to be slightly better than the Q4 variation that we just reported, followed by solid gradual improvements as we benefit from easier year-on-year comps in addition to the aforementioned factors. At the consolidated level in Q1, with our restructuring program largely completed, we do not expect material acquisition, integration and restructuring costs in the quarter. And we expect our financial expense to be about $10 million less than in the prior quarter in Q4. while our depreciation and amortization expense should be about $4 million lower than in Q4. Finally, at Cogeco Inc., we have issued the same financial guidelines as Cogeco Communications with the exception of net capital expenditures. And now Fred and I will be happy to take your questions. Operator: [Operator Instructions] Your first question comes from Aravinda Galappatthige with Canaccord Genuity. Aravinda Galappatthige: I just wanted to pick up on the sort of the comments around the IT spend in wireless. A bit more broadly, given that you've launched now and it's deployed across the footprint, are you able to sort of update us on sort of the total impact on Canadian EBITDA or the expectation that's built into fiscal 2026? I know about that you talked about the $9 million incremental piece from IT. But more broadly, given sort of the pricing changes you've done, I just wanted to see how much of a drag it could create in the first half or even for the full year. Maybe stop there. Patrice Ouimet: Sure. So yes, so just the reclassification of some OpEx from corporate to our Canadian business, and moving some IT costs from below the line to above the EBITDA line will create pressure of about $20 million on our Canadian numbers. Obviously, it doesn't change anything at the -- especially for free cash flow, if you look at the full company, it's 2 reclassifications. One will basically show the comparative values that will be adjusted in the prior year. That's basically what's moving from corporate to our Canadian business. The other one will not be reclassified in the past basically as this is moving forward. That's the IT cost. That being said, as I was saying earlier, we are expecting growth in our Canadian business otherwise at the EBITDA line. So we should normally be able to absorb this. To your wider question on -- if I got your question right, on what mobility does for us. Obviously, we're starting from basically a very small number. So I wouldn't say that the numbers will be meaningful in terms of the benefits in year because obviously, we're starting from a small base. But we do see benefits, and we've been very successful with the launch so far, and we see a lot of interest from our customers. And again, to remind you, the goal with mobility, it's primarily to bundle services for our customers or noncustomers that are neighbors of our customers in the regions that we serve. It can be used in acquisition. It can be used in retention as well. Aravinda Galappatthige: And then just sort of maybe just turning to the U.S., the wireless sort of experience so far. Is there anything -- any feedback you can provide or share in terms of how the churn profiles have been impacted by your wireless launch? I realize it's early, so perhaps it's not much, but anything you can share would be interesting. Frederic Perron: Aravinda, it's Fred. Yes, we've analyzed it, and we see a materially lower churn in the U.S. from customers also taking wireless from us. Now we have to be cautious because some of that is simply self-selection. So customers who like us better, less likely to churn are more likely to buy wireless anyways. But the churn difference is so pronounced that we believe at present time that there's a benefit above and beyond self-selection as it relates to churn benefit from wireless. Aravinda Galappatthige: Okay. And then lastly, just a bigger picture question on the fiscal '26 guide. I know, Patrice, you’ve talked about what Q1 would be like. Is it fair to suggest that the guide still assumes a close to mid-single-digit decline in the U.S. as far as EBITDA is concerned and then a little bit of catch-up in Canada? Or is it low single digits, both geographies? Patrice Ouimet: Yes. So we've -- yes, I haven't commented really on what we expect for the full year, but I could say for what we're assuming in the U.S. for the full year at the EBITDA level, obviously, in constant currency, we should do better than your assumption of mid-single digit, given that we see a better -- a good improvement in the customer situation because we did lose a lot of customers in the prior year, and we're expecting to do a lot better there. We've implemented a lot of tactics as well to achieve this and also to manage how we price our products, how we handle it in retention. And our program, our 3-year transformation program is continuing, and we have further cost improvements that we are planning to bank on. We talked about the chatbots before. We've changed our phone systems as well, automated phone systems that now have AI components. These are just examples, but there's other elements as well in our programs that will kick in, in the year. Frederic Perron: The other thing I would say about the U.S., Aravinda, is we've done a lower rate increase over the past year than we had in prior year in an effort to derisk the ARPU. That obviously, you can see in our Q4 results in the U.S., and you'll see in our Q1 results a little bit as well. But as we go into the next year, we have an opportunity to do rate increases in some segments that were not captured before. So it doesn't mean we'll do very large rate increases, but there are some segments that were previously not fully exploited. And therefore, we do see a bit of revenue upside from that starting in the second and third quarter. Operator: Your next question comes from Vince Valentini with TD Bank. Vince Valentini: Thanks for the extra detail on the wireless Canadian impact. But can I ask one other item on that is you've seen like you had a very strong start out of the gates. As you even say, you slowed down your marketing and pricing efforts as a result of that. Given all the customers you had out of the gates taking a free line for a year, you still have to pay the wholesale fees on that. Is that not a potential incremental drag on your EBITDA in the Canadian segment in 2026 as well? Patrice Ouimet: Yes. It's -- well, by the way, we have different types of products. So we do have paying customers as well. But -- and again, this is linked also with them being customers with Internet and maybe other products as well. But the numbers are still small, right? We're starting -- when you compare it to the size of our business in Canada, it's factored in our guidance, but I wouldn't say it's a lot. We have a bit more marketing costs we're doing, obviously, as we launch, but not that material. Frederic Perron: Yes, Vince, the launch promotion was something that was budgeted and is in our forecast. We thought it was an efficient way of getting started. So we consider it almost a marketing investment. But as you've said, we've already pulled back. And at this time, the free line for a year is only available on our talk and text plan without data, which very few customers take. Vince Valentini: Okay. Sticking with Canada and the more disciplined pricing environment you're seeing, does that not open up some opportunities for rate increases on your platform? And I know you don't like to talk about them before they're announced to your customers, but is there any broad sense you can give us as to what you've baked into your guidance for ARPU growth in Canada? Patrice Ouimet: Yes. So I think we'll stick with our policy of not talking about it in advance. But I would say, generally, we do have some price increases that we -- that are reasonable in our different products, especially for video and Internet. So normally, we put out guidance like this. We do have an expectation when they -- obviously, they don't cover the full year, and they're put through during the year. We did have some in recently that will impact the full year, but it varies by product. Frederic Perron: And I'll just add beyond the rate increases that we do, obviously, a reality of our business for the past many years is that new customers come in at a lower ARPU than existing customers, but with a more rational pricing environment is we're seeing the ARPU of new customers ticking up a bit in recent months. There's also the stickiness at the end of promotions, which has the possibility to increase as customers are not presented with as aggressive offers from competition. Vince Valentini: Okay. I'm going to switch to the U.S. You added -- correct me if I heard this right, you added 35,000 new fiber-to-the-home passings in just in fiscal 2025. Frederic Perron: The comment that I made in my section of the introduction is that we have upgraded 35,000 doors from cable to fiber. Vince Valentini: Right. So -- but that was -- that's not a total. That's the incremental in the fiscal year. Frederic Perron: Correct. Vince Valentini: So 2 questions on that. Can you give us any sense as to what the total fiber passings are now? And secondly, to get that extra 35,000, was that using the new technology that you sort of talked to us about last November? Frederic Perron: The second part of the question, the answer is yes, and that's why you still see a good CapEx from us. Patrice Ouimet: Yes. And we'll continue this in fiscal '26. So our program to selectively upgrade certain areas in the U.S. with fiber-to-the-home as it is a good cost benefit to us with this new technology. It doesn't apply everywhere, but there are some areas where it does a lot of sense. This will continue this year and probably a little bit in fiscal '27. Again, we can absorb this in our CapEx envelope. Overall, to your question, we don't disclose specifically our fiber component. As you know, most of our network is fiber, but the last mile, obviously, is -- we're still predominantly on coax. And it's generally more efficient to upgrade the coax than do an overbuild as we're doing selectively in the U.S. So I would say, overall, between the network expansions that we're doing, those are generally in fiber-to-the-home. We've been doing this for more than 10 years and the selective upgrades. It's still a small portion of our network that is fully fiber-to-the-home. But again, as we upgrade coax, we're able to deliver in many regions, actually 2 gigs even on coax by doing minor -- we're not even on DOCSIS 4 yet. And so we offer 2 gigs in several regions in Canada. So this -- I would say the future will be a mix of fiber-to-the-home, upgrades of coax and there's different ways of upgrading that. Eventually, we'll have DOCSIS 4 as well, but we did not rush it as we're able to generally have much faster speeds than what customers want. So the cost benefit is better for us to do it this way. Vince Valentini: Sorry, I'm going to ask one more on this because I don't think it's well understood by people. The cost per home passed when you did those $35,000, because of that new more efficient technology, can you give us an update on what the average cost was per home in terms of the CapEx? Patrice Ouimet: Yes. It varies by region, but I would say it's generally -- it's probably around $400 or so. But really, there's some that are less expensive than this and some more. So there's -- it's not just a one number. And the more dense it is and depending on how the structure of the network is, it is -- yes, so it is fairly effective when you look at this versus doing the traditional fiber-to-the-home with the traditional method. You know the numbers for competitors. So generally, this is a lot higher. This is what we do in network expansion as well. And when you look also at going through the coax route all the way to DOCSIS 4 with high splits, you can get to these numbers easily as well over time with the CPE changes. So yes, so that, I would say, is probably a good average to use. Vince Valentini: Sorry, Patrice, when we're talking about the U.S. segment. So when you say $400, are you talking $400? Patrice Ouimet: Yes, it is U.S. dollars? Vince Valentini: Okay. And last, just free cash flow, I'm sure others are asked about this, too, but just in general sense, I want to make sure I'm clear. Excluding rural projects, you're guiding to like $625 million to $690 million of free cash flow this fiscal year, and you're saying you can only do $600 million in fiscal 2027. Is that because you found new expansion projects so that, that bucket of CapEx doesn't go to 0? Or are you deliberately telegraphing that other items within free cash flow are going to go negative, like whether it's EBITDA or cash taxes or interest or something else? Patrice Ouimet: No. Or the other question you could have asked is whether the $600 million is actually too low a number. But I would say $600 million, we think is a good number to use. Obviously, we'll see where we are a year from now when we provide guidance for fiscal '27, but that's still our plan right now. Within our expansion numbers, we have these bigger projects that are generally subsidized. So there's still a lot going on in Ontario this year, which will finish in '27. There shouldn't be that much CapEx in fiscal '27 related to that. That being said, we are generally building in territory as well. So there's always new construction, new neighborhoods, new streets. So this will continue. Eventually, we will not break it down as we're going to be done with the bigger projects. So you'll just see one number. It will not be meaningful to split it out. But I would say these will continue. And also the other component is as we've built in many areas and we're loading customers, we are adding CPEs for these customers. So we have to obviously invest there. And sometimes depending on how we built the network, sometimes we had to install service lines as well, basically the drops we put from the street to the house. For some of the projects, it's pre-installed. And for some of them, it's not, it's really when customers want to connect, we pass this drop. So I would say these CapEx will continue in the future. Vince Valentini: So it's not telegraphing an EBITDA pressure or any other pressure? Patrice Ouimet: No Operator: Your next question comes from Jerome Dubreuil with Desjardins Bank. Jerome Dubreuil: First one for me. I'd like you, if possible, to give a little bit more detail on the turnaround you expect on the top line. We're at mid-single-digit declines in the quarter, but you're expecting an improvement if I look at the guidance. So maybe more granularity on this? Is it from wireless? Was there a tough comp or maybe an assumption of improvement in competition? Patrice Ouimet: Yes. Jerome. So you're talking at a consolidated level, right? Jerome Dubreuil: Yes. Patrice Ouimet: Okay. Great. Yes. So I would say, if we look at our Canadian business, we've been adding a lot of customers. As you know, we are still planning to continue to grow the Canadian business. So this translates into additional revenue. We have visibility on -- basically on our current client base -- customer base. We also know when we have new customers often on promotions, some that roll off promotions as well. So this is all factored in. And based on this, we'll eventually have some price increases as well. But I would say the key driver in Canada is really the additional subscribers we're able to load down that we were not doing as much of, let's say, 2 years ago. And that should produce better numbers on the top line in Canada than what we've seen in the past year. And in the U.S., I would say, similar story on the subscribers. It's just that we're starting from a negative number. We do see some improvements from what we reported on in Q4, but we're already well into Q1 right now. So we are seeing benefits. And we've put a lot of new tactics to play in go-to-market, and many of them are working well. So I would say this is the key element we're seeing for next year. We're still planning to see a negative number in the U.S. in terms of year-on-year. We still have video cord cutting and home phone cord cutting like the whole industry, but still an improvement overall. Frederic Perron: Yes. I'll only add, Jerome, First, on the Canadian side, we've been adding subs at a good pace for many quarters now, but the pressure in the past was ARPU. And what we're seeing now with a slightly better pricing environment is we're seeing a bit of upside on ARPU as we were talking about before with Vince, the ARPU of new customers, the ARPU at promo expiry and the possibility for rate increases. And it doesn't take much of an ARPU improvement given the strong sub loadings to benefit the revenue overall. And then in the U.S., we've touched on it earlier, but we've done -- we had done a materially lower rate increase over the past year. And now the elephant is going through the stake, and we expect better progression in the U.S., especially going to the second quarter. Jerome Dubreuil: Okay. Great. Second one for me. just continuing on Vincent's line of question on the DOCSIS to fiber-to-the-home upgrade, the coax, I should say, to fiber-to-the-home. Is this something you plan to do across your whole footprint? You kind of alluded to the fact that it could be more efficient to do that than taking the DOCSIS road map? Or is this something you really use as a tactic to maybe counter the fiber deployments? Frederic Perron: Thanks for the question, Jerome. And maybe starting at a higher level. When you look at our total CapEx envelope, so much of it is maintenance. The majority is -- business as usual maintenance. So when you see us reducing our CapEx, that is where the reduction in the efficiency is coming from. Our growth-related CapEx, which is everything you're talking about now continues, whether it's expanding our network to new rural areas or upgrading our network in the various ways that you're mentioning. So as it relates to network upgrades, we're doing a lot of mid-splits in Canada, in particular. We're really improving. It's now over 90% of our doors have a download speed of 1 gig and sometimes 2 gig. And we're also really improving the upload speeds as noted by Ookla, for example. And then in the U.S., we have this capital-efficient way of upgrading our coax network to fiber. For example, the 35,000 doors that we've done last year and our forecast for the coming year also implies that we will continue with both sets of programs that I was talking about for the U.S. and Canada. So it's a mix depending on the region, mid-splits, even sometimes some high splits in some regions, plus this capital-efficient upgrade of coax to fiber. Patrice Ouimet: Yes. And yes, definitely, that's the plan. And as you know, us, we've always, over the years, trying to be very capital efficient and always provide a lot more than what customers are requiring from us in terms of speeds and capacity and doing it in a capital-efficient way rather than overinvesting in the network that would not necessarily be used. So it is -- in the U.S., more specifically to your question on competition, for sure, in some regions, it does help to upgrade to fiber. But obviously, we only do it if it makes sense financially when you take a multiyear view of the otherwise upgrades we would need to do in these particular regions. Frederic Perron: Yes. Our U.S. competitive dynamics are getting predictable, much more predictable by state, by market in terms of who's likely to do some upgrades and our competitors who may be tempted to overbuild. So we have pretty granular projections at a market-by-market level, and we're using that to inform where we will upgrade that market to fiber, for example, as a protective measure, for instance. Operator: Your next question comes from Matthew Griffiths with Bank of America. Matthew Griffiths: So in the second year of your transformation program, I think you mentioned that you're going to see some more investments to sustain or to move you towards a path to sustainable growth. And not to be too nitpicky or anything, but is that growth like at the revenue level? Or are you talking growth on the free cash flow level? And maybe you can elaborate on like the investments, like what are you spending money on that you think is going to generate the sustainable growth going forward? And when will that -- kind of when do you expect that to materialize if it's top line, if it's obviously free cash flow, it's somewhat baked in already? Frederic Perron: Yes. Matt, it's Fred. I'll start with the last part of the question. Whatever investments we're making are fully baked into our guidance. There are many things we do that are not so material at the EBITDA or CapEx level. Well, we've already talked a lot about our CapEx investments anyways in upgrading our networks. So I'm not going to repeat that. But at the EBITDA level, a lot of what we're doing is not material investments in AI, analytics, pricing are not that expensive. The two that are material are growing certain sales channels in the U.S., which were underdeveloped. You do need to make an investment in staff and commissions on things like that as well as wireless in Canada. But again, that's baked into the guidance for the coming year. As it relates to which growth we want, certainly, we've already been delivering a growth in subs in Canada. We think ARPU has better upside than in the past. So therefore, I think revenue growth in Canada, and I'm not going to give a super precise time period here, but revenue growth in Canada is certainly within reach. In the U.S., it's about continuing our stabilization of our sub losses. We think that continued sub growth in Ohio is realistic. As it relates to the rest of the footprint, we're on track to diminishing those losses, and we expect lower losses in the next quarter as well. Overall, in terms of top line for the U.S., we'll have to see. It remains a challenging market, but we certainly don't expect the same challenging top line performance as what we've seen in the past year. Matthew Griffiths: Okay. That's helpful. And then on margins, obviously, the business is benefiting from the natural mix shift away from video and so on and towards Internet. But can you help us understand like how much your cost reduction program is contributing to the margin improvement in addition to the natural mix shift that you're seeing? Patrice Ouimet: Yes, it's a good question. I'm not sure I have the exact answer for you right now on this call, but I would say it's a mix of two. You're right. There is a mix shift towards more Internet, which does increase the percentage. As we look at the competitive nature of the industry, there's also the ARPU that plays into it. And so I would say the best way to look at it is to look at our OpEx. That does include some video costs in what we report publicly. But you can see that it's been shrinking. We can perhaps take it offline and try to give you a little more information on this. But I would say it's really a mix of the two because our cost reductions are quite material actually in what we've been doing in the past year. Matthew Griffiths: Okay. That would be helpful. And then maybe just one quick one, if I could sneak it in. In the past, you've talked about evaluating whether or not it makes sense to kind of divest some small systems throughout your U.S. footprint. Has that filed and closed at this stage? Or is that still something that is potentially out there? Frederic Perron: Yes, Matt, at present time, it's closed. We've looked at a few options. There were interesting possibilities, but not interesting enough, we judged at the time to strip out an asset because carve-outs are always challenging and could be a distraction for the organization in the midst of a big transformation. But who knows, we always keep options open in the future. Operator: Your next question comes from Maher Yaghi with Scotia Bank. Maher Yaghi: So I just wanted to maybe just dial on the homes passed increase in Canada. I mean, in the last 2 years, you've added approximately 70,000, 75,000 new homes passed. So -- and a lot of it is fiber, as I understand it. So can you just give us a perspective on the strength that you're seeing in your Internet subscriber gains in Canada? How much they're coming from these fiber edge-outs and new homes passed versus Oxio versus Cogeco out of territory? Just to understand maybe the return characteristics of these fiber rollouts that you're doing? Frederic Perron: Maher, it's Fred. A few things here. First off, yes, all -- most expansions that we do in both Canada and the U.S. are on fiber. As it relates to the return on those investments, they're quite good, in line with what Patrice has quoted in the past, and we do exceed 50% penetration of those new builds because they're rural areas with high demand. As it relates to contribution to our net growth, it varies quarter-by-quarter between network expansion, Oxio and the legacy business. All I can say is that for this past Q4, it was mostly -- first of all, it was mostly on our own network and less as a reseller that the growth came from. And it was actually mostly from legacy areas. So in the fourth quarter, network expansion was not the largest contributor to the growth. Now as we continue to build in Ontario in fiscal '26 and going into fiscal '27 as well, we do expect that network expansion will be a more material contributor to our sub growth. Maher Yaghi: Okay. And just a follow-up. The launch of Cogeco service under the Cogeco brand outside of your home territory, Oxio was -- as you've indicated in the past, has been a good success to capture out-of-market Internet subscribers. So maybe can you talk a little bit about the objective of launching Cogeco-branded service outside of your home territory in addition to Oxio that was already there? Frederic Perron: Sure. First, at a higher level, Internet resale in Canada between the different players is a fact of life, and it's been a fact of life for quite some time. The 2 of the big 3 that we don't already compete with on an infrastructure basis are already reselling our network in Quebec and Ontario and have been doing so for quite some time. I would say it doesn't appear to be material neither for our growth as a reseller nor for our churn at present time. So there seems to be more noise than anything else around all this. On your question more specifically, our strategic intent by opening up Cogeco as a reseller across Quebec is purely optionality. In a world where the resale dynamics continue to evolve. As I said, they're not material at present time, but we have nothing to lose from opening up another few million doors on the Cogeco brand. We -- as a smaller company, we benefit from asymmetry in this whole game, whereby we just covered 2 million homes in Canada and there are 15 million homes. So we get an asymmetric advantage. But so far, it's not much more than optionality. However, if for whatever reason we decide to push harder on this, now the systems are activated and it's pretty quick for us to push harder. Maher Yaghi: Okay. Can you disclose, how many -- you mentioned that you saw some good success with the wireless launch in Canada. Can you share some KPIs on that? Patrice Ouimet: Yes. So Meyer, we are not disclosing it at this point. As you know, we're starting from nothing. So it's still a small base. Very happy with so far, but I mean, it takes time to have critical mass. So over time, we do expect at one point to disclose the mobile subs, but it's not something we're planning to do for sure this year, and we'll see in the future. It's obviously important to make sure we don't release nonmaterial information that can have -- can be used by competition. So that's where we are at this point. Frederic Perron: Yes. I'll only say that the strong demand that we're getting, even though it's still going to take time to scale to Patrice's point, at least it's indicating to us that there's a way for us to run that business without it being a drag at an individual customer level. For example, we could always already pull back on some of our intro promotions. So I think at a unitary customer level, it's a good news. Maher Yaghi: Okay. And maybe just to double down on this, the pullback on the promotion. It kind of came at the same time as Rogers launched fixed wireless in your territory. Were the 2 related why you pulled back on wireless promotion? Frederic Perron: No. Absolutely not. We achieved the sub objectives that we wanted to achieve, and that's how we run the business. Maher Yaghi: So I'm trying to square the decision to pull back from offering 1-year service on wireless as a promotion to existing customers in Canada with the U.S. strategy where it's still going on, and it's been a year or so, less than maybe a year that you launched it, you're still offering free lines. So can you maybe just compare for us why it's still going on in the U.S. and not in Canada? Frederic Perron: It's purely a function of competitive dynamics and pricing dynamics in the market, Maher. The other players are doing it too in the U.S., the other cable players in particular. So that's what we have to do to be in the game at of time south of the border. Operator: Your next question comes from Stephanie Price with CIBC. Unknown Analyst: It's Sam Schmidt on for Stephanie Price. I wanted to ask a question around Ohio. The net additions turned positive in the quarter and U.S. subscriber losses also improved sequentially. Can you help unpack what changed there in terms of your strategy as well as in the competitive environment, both for Ohio and the U.S. more broadly? Frederic Perron: Sure. Good to meet you. I'll start with Ohio, and then I'll talk about the U.S. competitive dynamics more broadly. In Ohio, Ohio is -- and I think we've disclosed this percentage of our doors coming from Ohio. It's roughly 40% of our total U.S. doors that are in Ohio, and our penetration is quite low. So it's been some time where we see a lot of upside for us in that market, and we're starting to execute against that upside. So there were some sales channels, which were not as developed in the state. So we're starting to develop the channels. We keep optimizing our pricing as well. And over time, we think there are several quarters of growth in Ohio for us as we get closer over the years to what we believe is our fair share. U.S. competitive dynamics in general. Last quarter, we said that we saw an uptick in competitive dynamics or competitive intensity in the U.S. in 3 of our states. I would say at present time, it's more 2 of those states. One of them -- 1 of the 3 has eased back down. Of the 2 that remain, we have room to believe that will ease back down of those 2 as well over the coming months. We also see interestingly that FWA is not impacting us as a company as much as it was 2, 3 years ago. We rigorously track churn destination of our customers leaving us by state. And FWA is actually relatively low down the list at this time. You can only speculate why that is. We do know that some of the FWA players are now focusing more on the B2B segment where we're not as present. So even though 2 of the 3 FWA players are reaccelerating their sales, sometimes it's in the B2B segment. Otherwise, maybe they've tapped out in their relevant customer segments in our markets. Not exactly sure, but the bottom line is FWA is not impacting us as much as before. We still see intense promotions more generally from some of the national wireline players. So you net all of that out, you would -- I'd say the U.S. competitive environment remains intense, but has not worsened from the previous quarter, and there may be some slight improvement coming over the next couple of quarters, yet to be seen. Unknown Analyst: That's helpful. And then maybe just one on the Canadian competitive market outside of your network expansion. Are you seeing increased competition from competitors as they look to build out a footprint through TPIA or fixed wireless? And then I'll pass the line. Frederic Perron: It's really not very material for us, neither TPIA nor FWA in Canada. As I mentioned in an earlier question, TPIA competition has been happening for a long time, and it's not really impacting us. FWA is more recent, but it tends to be focused in Quebec, which is 1/3 of our Canadian footprint, and we're not really feeling it, as you can see in our strong sub results in Canada. And then on the positive side, there's been a real material pullback in promotional activity in the core wireline business that more than offsets in a positive way, the minor noise that we see in TPI and FWA. Operator: [Operator Instructions] Your next question comes from Drew McReynolds with RBC. Drew McReynolds: Two for me. Maybe for you, Patrice. In terms of the reinvestment levels that you make in the business as part of the transformation program, embedded into fiscal 2026 guidance, do your reinvestments in the business stay stable? Are you absorbing a sequential increase? Or likewise, does the reinvestment level begin to ease as part of the transformation program going forward? And then secondly, I think there's some language about $100 million in CapEx spent on longer-term growth opportunities over 5 years. Just wondering at a high level, what kind of growth opportunities you'd be looking to take advantage of with that level of investment. Patrice Ouimet: So on the transformation program, I would say when we look at better utilizing different go-to-market tactics and optimizing our sales channels, we are increasing and that's embedded in our guidance. We are increasing the use of those channels. Obviously, there's costs related to that. And obviously, that translates into new customers and new revenue. We'll see going forward as we're successful with it, obviously, the payback on these investments is very good. You have to look at the lifetime of the customer. But so far from what we're seeing, they're good. But I would say we've allocated some dollars in our guidance for this. Frederic Perron: Yes. Andrew, an example would be what we were talking about earlier in the previous question in Ohio, where we can really grow share to get closer to our fair share. So we're making the investment in achieving that, and it's starting to yield some benefit. So there's -- so that investment is increasing, but will pay back. The other example is wireless, as Patrice explained earlier. Patrice Ouimet: Yes. And on the second question on the $100 million, actually, it's something we've had -- we put it in the annual report, but we've had it for a few years. Basically, we have mentioned a few years ago that we might invest, and it's not CapEx actually, those would be investments in smaller companies to produce growth later on, so more in start-up mode. It's not something we've done so far, but it's not new disclosure actually if you go back to last year. So we'll see. If we do some, I do not expect it to be CapEx and no impact on free cash flow or anything. It would be more an investment on the balance sheet. Drew McReynolds: Okay. And then maybe one last one, and I may have missed this. In terms of the rate of network or footprint expansion you expect in fiscal 2026 relative to the 50,000 in fiscal 2025, do you have that for us? Patrice Ouimet: Yes. It would probably be similar. So I would say Canada because we're going to be -- it's a mix of what we're doing in Ontario and also, as I said earlier, what we're doing in footprint, so new neighborhoods and new streets. We will probably be around 40,000 addition in Canada. U.S. will be lower. We have less of these bigger programs, so probably closer to 10,000 new homes in the U.S. Operator: There are no further questions at this time. I will now turn the call over to Patrice Ouimet for closing remarks. Patrice Ouimet: All right. So we're right on time. So thank you, everyone, for these questions. I'm happy to take additional questions if you want to talk to us in -- before our next scheduled call for the Q1 results. Thank you. Have a good day. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to Prudential's Quarterly Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. I will now turn the call over to Mr. Bob McLaughlin. Please go ahead. Robert McLaughlin: Good morning, and thank you for joining our call. Representing Prudential on today's call are Andy Sullivan, CEO; and Yanela Frias, CFO. We will start with comments by Andy and Yanela, and then we will address your questions. Today's discussion may include forward-looking statements. It is possible that actual results may differ materially from the predictions we make today. In addition, our presentation includes references to non-GAAP measures. For a reconciliation of such measures to the comparable GAAP measures and a discussion of the factors that could cause actual results to differ materially from those in the forward-looking statements, please see the slides titled forward-looking statements and non-GAAP measures in the appendix to today's presentation, which can be found on our website at investor.prudential.com. And now I'll turn it over to Andy. Andrew Sullivan: Good morning, everyone, and welcome to the call. We had a strong third quarter. Our pretax adjusted operating income was $1.9 billion or $4.26 per share, a record high, up 28% from the prior year quarter, reflecting earnings growth in every business. And our year-to-date adjusted operating return on equity was over 15%. These results reflect higher spread income and more favorable underwriting experience across our global retirement and insurance businesses as well as higher fee income in PGIM. Current quarter results benefited from alternative investment income that was above our expectations as well as other favorable onetime items. Higher alternative investment income was driven by stronger private equity and hedge fund returns, partially offset by lower real estate returns. Our third quarter performance reflects sustained momentum across our businesses. Let me highlight a few examples. PGIM remains focused on delivering strong investment performance and strengthening core capabilities while continuing to invest in the business to drive future growth. This quarter, we achieved positive net inflows across both third-party and affiliated channels. In Institutional Retirement, we closed a Jumbo Pension Risk Transfer transaction, reinforcing our market leadership and complementing the robust longevity risk transfer activity so far this year. Our Individual Retirement, Individual Life and Group Insurance businesses are benefiting from our differentiated distribution and the actions we've taken to broaden our product portfolios and diversify our market segments. Individual Retirement delivered over $3 billion in sales for the seventh consecutive quarter. In Individual Life and Group Insurance, we delivered double-digit year-to-date sales growth. Turning to our International Insurance businesses. In Japan, where our business has been traditionally focused on protection products, we continue to expand our retirement and savings solutions, leaning into the changing nature of this marketplace. And in Brazil, we set a new sales record in the Life Planner channel. In addition, we continue to expand our third-party distribution network and deepen our strategic partnerships. While business performance was strong for the quarter overall, let me bring one area of pressure to your attention. Jennison, our active equity manager, continued to experience outflows, consistent with broader industry trends. These outflows are dampening our organic growth and earnings momentum in PGIM. We are encouraged by the third quarter results and remain committed to delivering stronger and more consistent earnings growth that creates long-term value for our shareholders. Moving to Slide 3. I've been clear on my 3 priorities as CEO. First, we are evolving our strategy to focus on opportunities that will deliver the most profitable growth over time and are allocating our capital accordingly. Specifically, we're looking to focus on areas with large and growing addressable markets in which we have highly differentiated capabilities and can earn attractive returns. Accordingly, in the third quarter, we completed the sale of our PGIM Taiwan business to focus resources on higher growth opportunities. Second, we are determined to execute with more consistency and discipline. We are quickly evolving to a unified asset manager model in PGIM and have taken actions to deliver run rate savings that will drive margin expansion in 2026. Client response to our new organizational structure, which includes a centralized distribution capability for institutional investors has been overwhelmingly positive. In fact, we now expect to double the percentage of clients engaging with 2 or more of our asset management businesses, which will drive additional margin growth over time. The sales momentum in our global retirement businesses underscores how we're meeting evolving customer needs around the world. In U.S. retirement strategies, year-to-date sales of over $30 billion demonstrate our leadership in the growing retirement market and contributed our highest earnings in the last 5 quarters. Additionally, over the past 3 years in Japan, we've launched 7 new products, reflecting our commitment to meeting the evolving needs of our customers through a comprehensive suite of protection and retirement solutions. As a result, sales in Japan have increased by about 35% over this period, with yen-denominated sales increasing by over 50%. And third, we are enhancing our culture with a focus on speed and accountability. As an example, we accelerated our succession plan in Japan, appointing Brad Hearn as CEO, reporting directly to me. This move ensures we have the right leadership in place to drive our growth strategy in Japan. Brad brings a strong track record of driving results and scaling distribution networks from his time leading our domestic Prudential Advisors business. His experience is directly relevant given the shifting nature of Japan's market towards retirement. He will continue working closely with Caroline, Jacques and the entire leadership team to share best practices and collaborate across businesses, ultimately helping us better serve customers and capture opportunities in this rapidly evolving market. We extend our thanks to Hamada-san for his 33 years of service in Japan. Before I turn it over to Yanela, I want to emphasize that across the enterprise, we're taking clear and decisive action to address these priorities. I look forward to sharing more in the quarters ahead as we continue to build on our momentum. With that, I'll hand it over to Yanela. Yanela del Frias: Thank you, Andy. I will provide an overview of the performance for our PGIM U.S. and International businesses. I will begin on Slide 4 with the quarterly operating results from our businesses compared to the year ago quarter. PGIM delivered higher asset management fees driven by market appreciation, positive net flows and strong investment performance, higher other related revenues from strong Fannie Mae and Freddie Mac originations and gains on seed and co-investments. Third quarter results also included $40 million in reorganization charges from integrating PGIM's multi-manager model, partially offset by a $25 million gain from the sale of our Taiwan business. Results of our U.S. businesses reflected higher net investment spread income in retirement strategies, including the benefit from stronger alternative investment income, coupled with more favorable underwriting results from Individual Life and Group Insurance. This was partially offset by lower fee income resulting from the runoff of our legacy Variable Annuity block and higher expenses to support business growth. In our international businesses, we also experienced higher net investment spread results, including the benefit from stronger alternative investment income and more favorable underwriting, partially offset by higher expenses to support business growth. Turning to Slide 5. PGIM has diversified capabilities in both public and private asset classes across fixed income, equities and alternatives. PGIM's long-term investment performance remains strong with over 70% of assets under management outperforming their benchmarks over the 5- and 10-year periods. In addition, the 3-year track record, which is an important metric for the retail channel, has 80% of assets outperforming benchmarks. PGIM's assets under management of $1.5 trillion increased 5% from the prior year quarter, driven by market appreciation, positive net flows and strong investment performance. Total net inflows in the quarter of $2.4 billion included affiliated net inflows of $1.8 billion and third-party net inflows of $600 million. Third-party institutional and retail inflows were both $300 million, mainly driven by fixed income inflows, partially offset by Jennison equity outflows as previously noted. Before I move on from PGIM, I want to expand on Andy's commentary regarding the rapid progress we have made reorganizing, including early financial impacts. The actions taken thus far will drive operating efficiencies and create reinvestment capacity, enabling us to continue expanding capabilities, enhancing client experience and strengthening our competitive position to support future growth. We expect to realize approximately $100 million in annual run rate savings by the end of 2026 and plan to reinvest about 1/3 of these savings to bolster sales and distribution. Compared to 2025, we now anticipate over 200 basis points of margin expansion in 2026 from these actions and are well positioned to reach our 25% to 30% margin target. Turning to Slide 6. Our U.S. businesses produced diversified sources of earnings from fees, net investment spread and underwriting income and benefit from our complementary mix of longevity and mortality businesses. Retirement strategies continued to have strong momentum, generating $10 billion of sales in the third quarter across its Institutional and Individual lines of business. Institutional Retirement sales of over $6 billion included a $2.3 billion Jumbo Pension Risk Transfer and was complemented by $1.5 billion of Longevity Risk Transfer transactions. Individual Retirement posted over $3 billion in sales, driven by continued momentum in fixed annuities as well as solid sales of registered index-linked annuities, reflecting the actions we have taken to broaden our product portfolio. Group Insurance sales totaled almost $80 million in the third quarter with year-to-date sales of $555 million, up 14% from a year ago, driven by growth in both Group Life and Disability. We are executing our strategy of both product and market segment diversification while leveraging technology to increase operating efficiency and enhance customer experience. The benefits ratio of approximately 83% remains at the low end of our target range, reflecting favorable life underwriting results and less favorable disability experience, driven by an uptick in severity and lower claim resolutions, which can vary quarter-to-quarter. In Individual Life, sales of $253 million in the third quarter were up 20% from the prior year quarter. This growth was driven by higher accumulation-focused variable life, including record sales in our differentiated FlexGuard Life product suite. Turning to Slide 7. Our International Businesses include our Japanese Life Insurance companies, where we have a differentiated multichannel distribution model as well as other businesses aimed at expanding our presence in targeted high-growth emerging markets. Sales in our International Businesses were down 6% compared to the prior year quarter. This was primarily due to strong U.S. dollar-denominated single-pay sales in Japan that benefited from the yen appreciating sharply in the prior year quarter. Year-to-date, international sales remained solid and are up 4% versus prior year, driven by growth in both Japan and Brazil. As we previously stated, while surrender activity in Japan continued to show signs of stabilization, it remains a near-term headwind that will partially offset new business growth. We also anticipate approximately $30 million of higher expenses in the fourth quarter, primarily due to timing, consistent with what we've observed in prior years. Turning to Slide 8. Our capital position and strong regulatory capital ratios continue to support our AA financial strength and our ability to grow our market-leading businesses. Our cash and liquid assets were $3.9 billion, which is above our minimum liquidity target of $3 billion, and we have substantial off-balance sheet resources. Also of note, our Board approved an economic solvency ratio operating target of 150% as part of our annual capital planning process. Prudential of Japan and Gibraltar Life remain well above this level. As we look ahead, we are well positioned across our businesses to be a global leader in expanding access to investing, insurance and retirement security. And with that, we're happy to take your questions. Operator: [Operator Instructions] Our first question today is coming from Wilma Burdis from Raymond James. Wilma Jackson Burdis: Just first question on the PRTs. We saw you had a large Jumbo Pension Risk Transfer this quarter, which has been a slow market this year. Maybe just give a little bit of commentary on that. And then also the longevity market in the U.K. We've seen a couple of entrants there. So just if you could give us an update on what you're seeing. Andrew Sullivan: Sure. So we still believe that the Pension Risk Transfer market will be softer in '25 versus '24. But we've seen an uptick in the pipeline for the second half of the year is proving to be more robust than what we saw earlier. Remember that, especially in the PRT market, it's an episodic market, particularly in the Jumbo space. That said, this is going to be a big market for years to come with $3 trillion in untransacted liabilities, funding levels sitting at 105%. We're very well positioned to win and to remain a leader given the strength of our brand, our underwriting, our asset management and service. So we're happy to see that the market is strengthening here in the back half of the year. When it comes to the LRT market, this is a very good opportunity as well. globally, pension plans are even more well-funded than they are here in the U.S. We focus on 2 core markets, the U.K. and Netherlands. In the U.K., we're seeing about $50 billion to $55 billion of pension risk transfers per year with about 80% of that volume seeking longevity reinsurance. In the Netherlands, there's about $330 billion in defined benefit pension money that's -- given the reform looking to transition to defined contribution. Much of that will seek pension risk transfer and reinsurance. Similar story to PRT, we're a leader in the space. We did 2 deals this quarter for $1.5 billion. That puts our year-to-date sales over $11 billion. So this is also just a very good market with healthy returns and plenty of room to grow. So we like the dynamics that we're seeing in both of the spaces. Wilma Jackson Burdis: Sounds great. And then PGIM flows have been improving. Could you just talk a little bit more about the drivers? And do you think this is an inflection point? Or what are you kind of seeing? Do you think this is an improvement that's going to continue? Andrew Sullivan: Yes, certainly. So -- and we've discussed this before. As it comes to flows, we assess success by looking at total flows, both affiliated and third party, and we look at it over longer time frames. So if you look at it from that lens, over the last 12 months, we did over $20 billion in total inflows. This quarter, we did $2.4 billion in total inflows. And in the third party, in particular, we were positive and split evenly between retail and Institutional. What we saw this quarter was very strong inflows across public fixed income, privates and alternatives. That was offset by Jennison equity outflows. This is systemic in the industry, and we're not immune given what's happened with the active to passive pressure. That said, active equity plays a very important role in our clients' portfolio and is important in the mix. As we look forward as far as an outlook perspective, given the consistent strength we've been showing in Institutional, we're optimistic. We're more cautious on the retail side as that is more volatile and clients tend to react quicker to changes in the environment. And we are working to lessen and overcome those equity outflows. Operator: Next question today is coming from Suneet Kamath from Jefferies. Suneet Kamath: I guess, Yanela, in the past, you've talked about this 3- to 4-point drag on EPS growth from the legacy VA and the surrenders. Can you maybe just give some color on how that -- you expect that to play out over the next few years? And then somewhat relatedly, you've been putting on all this new business growth, but is there a lag between when you write this business and when it actually shows up in the EPS results? Yanela del Frias: Suneet, yes, so let me start. Recall, when we provided the intermediate target of 5% to 8%, I did speak about these near-term headwinds being incorporated in the target and therefore, the growth not being linear. As these headwinds dissipate, we will see the earnings power of the new annuity sales and the Japan business continue to emerge. Specific to the 2 items, with regards to the VA runoff, we expect to continue to see the $3 billion to $4 billion quarterly runoff, which, as I said, has about a $10 million to $15 million AOI impact per quarter compounding, hence, the $100 million to $150 million that we've talked about before. As that block continues to run off and the account values of the new products grow, we will have a crossover point and the earnings headwind will be reduced. With regards to the higher-than-expected surrenders in Japan, we do continue to see stabilization. Given the stabilization, as we look forward beyond 2025, we would expect a more moderate impact of surrenders. With regards to the second point of your question, I would say we are seeing the benefit in EPS when we look at the core earnings growth in both Individual and Institutional Retirement this quarter. And as I said, over time, as the headwinds dissipate, that earnings growth will continue to grow. Suneet Kamath: Got it. And then just shifting gears, I wanted to ask about the private credit asset class, just given some of the headlines that we've seen over the past couple of weeks. Given your strength in fixed income asset management in general, I figured you'd have a good read on what you're seeing in the market and maybe more specifically, what you're seeing at PRU. Yanela del Frias: Yes. So let me talk about the general account for sure. Obviously, we're monitoring this very closely as we do with all markets. With regards to private credit and our portfolio, we've been in the private credit space for decades. Our private credit portfolio is largely private placements with strong covenants and other downside protections. And this portfolio has consistently performed better than equally rated publics during economic downturns, and we've seen this consistently. Approximately 90% of our corporate private credit securities are investment grade. Roughly half of the below investment-grade private placements are in the BB category and are very well underwritten. And lastly, our growth in private credit has been modest. So we've been doing this a long time, and we are very comfortable with the portfolio. Operator: Next question is coming from Tom Gallagher from Evercore ISI. Thomas Gallagher: A couple of questions about Japan. The 150% ESR target, can you guys kind of get into why you think that's the appropriate level? I think there's some confusion around what peer targets are, how they're higher than PRU's and generally, the domestic insurers in Japan are running at around 200% plus and why 150% like a fine number for you? And is that something you've gotten blessed by the rating agencies and regulators? Yanela del Frias: Yes, Tom. Let me explain what the 150% ESR target is and what it isn't because I agree with you, there may be some confusion. In terms of what it is, it is the level that we would hold after a market stress occurs. So this is the level we would not want to go below. And this type of stress includes shock to markets, rates and credit. This is how we set our targets across all our legal entities. And as you've heard me say before, we have capital resources to manage these stresses as well as to manage more severe stresses, including our contingent capital sources. So that's what it is. In terms of what it isn't, it is not what we would aspire to hold in normal times. So in normal times, we would hold higher levels as you saw at the March 31 date, where our ESR level was between 180% and 200%. So we plan to hold a level of capital above our target to provide a cushion that can withstand a market stress. And that is very consistent with how we manage our other businesses. And further, and to some of your questions, these ratios are a result of considerable thought, considerable modeling outcomes and does include dialogue with key constituents, including the rating agencies. As far as regulators, they're more focused on the threshold level for them, which is 100%, and relative to peers, different companies do have different business mix, and we believe that is a big driver of the difference in the levels. So I would just close by saying that our operations in Japan remain well capitalized. Our June results were well above our 150% target, just like our March 31 results were as we discussed last quarter. And our ESR is not a binding constraint when it comes to cash flows from Japan. Thomas Gallagher: That's all helpful. I appreciate it. And just my follow-up is, so you had the recent abrupt departure of your CEO in Japan. I guess my perception is it's somewhat related to some regulatory issues that have occurred in the market that have impacted Prudential in Japan. Can you elaborate what's happening there? And I just want to make sure you don't think there's going to be any impacts to sales, revenues when we think about things going forward in that business. Andrew Sullivan: Yes. So succession planning is something that we take really seriously here at PRU and do very well. So this change from Hamada-san to Brad was planned. So when you use the words abrupt departure, this was a planned succession change. We did accelerate it. And Hamada-san stepped down given some operational and compliance considerations, as you mentioned. Hamada-san felt and I felt as well, it was a good time to give Brad Hearn what I will call the driver seat. I want to -- as I did in my opening remarks, to thank Hamada-san for all he's done for the company. But Japan is in great hands. Brad Hearn is a 30-plus year veteran of the industry. Brad oversaw our Prudential Advisor capability here in the U.S. He was the architect and key driver of the strategic relationship with LPL. He saw the U.S. market go from independent insurance agent over time to financial planners, which is a very similar trend to which we're beginning to see in Japan. So he is the right leader to lead forward capitalizing on this changing nature of the market. As far as like what this might mean from a go-forward perspective, from a revenue perspective looking forward, I'd just say, keep in mind 2 things. One, the market is changing. It is rotating towards retirement and savings. And then recognize in our results, you're still seeing the surrender headwinds. We're pleased with sales year-to-date in Japan. They're up 4%. And we've seen our new product introductions are really taking hold. About 20% of our sales are from products that we've introduced in the last 24 months. And a majority of the sales are from retirement and savings. So this was a plan change that we accelerated. If you look at the -- Brad is the leader, the breadth of our product portfolio, the depth of our multichannel distribution, we know that all of that will help us overcome these headwinds over time and will help our growth. Operator: Next question today is coming from Jimmy Bhullar from JPMorgan. Jamminder Bhullar: I had a couple of questions. First, if you could just talk about what you're seeing in terms of claims trends and price competition in the Disability market. And then I had one on another product line. Andrew Sullivan: Yes. So thanks, Jimmy, and maybe I'll take this overall from both perspectives. So first, we are pleased with the quarter that we had in group, and we're very pleased with our results year-to-date. As you saw in the quarter, we saw very strong Life performance. So very, very happy about that. We did see headwinds on the Disability side. There's really 3 things that I would talk about when it comes to the higher disability ratio that we saw in the quarter. First, we saw an increase in the average size of new claims for both short term and long term. As you know, that will naturally vary quarter-to-quarter. Second, we saw lower LTD resolutions. Remember, last quarter for us was an exceptionally strong quarter, and it was exceptionally strong as a resolution quarter as well. So it's quite natural for that to step down after such a strong quarter. And then third, we had unfavorable experience in our New York Paid Family Leave book. That's very consistent with the industry. And I would note that New York recently raised pricing in Paid Family Leave, which is going to help offset that headwind. Pricing remains rational. We obviously closely monitor new business pricing, and we're not seeing anything different than we would expect to see. We also obviously spend a lot of time monitoring our book experience at the block and case level, and we've been quite successful at placing renewal increases where they've been warranted. So our group business is very well led. We have a very experienced team that stays on top of changes in the outside environment, and we have a good deal of confidence in the path forward. Jamminder Bhullar: Okay. And then just on competition in the RILA market. Your sales, I think sequentially were up, but they have slowed from what they were last year, and you've been citing competition as one of the reasons. So -- and I just wanted to ask you for more details on what type of -- are you seeing competitors or are you just seeing a more crowded market? Or is it that companies are offering terms and conditions which you feel you don't want to match? Andrew Sullivan: Yes, Jimmy, thanks for the question. This is consistent with what we've discussed about -- discussed last quarter. It has become more competitive, and you can use the word more crowded. I think that's a great way to frame it. We went from 5 competitors a few years back to 25 today. That includes some broader annuity players that have entered more recently. When you only had 5, the share was very concentrated. So it's quite natural for new players to work very hard to fragment that concentration. We expect it and have seen that there will be some aggressive pricing in the marketplace. What you should expect from us is disciplined growth, right? Capitalizing on the strength of our brand, the strength of the product portfolio and our wide distribution, we're going to always make sure we're growing, but we're also achieving the right level of profitability. And that's what you're seeing show up in the sales. If you look at that business in general, we've done greater than $1 billion of sales per month every single month of 2025. That is very consistent success, and that's what we would expect going forward. Operator: Next question is coming from John Barnidge from Piper Sandler. John Barnidge: My question is about the Partners Group partnership. How meaningful do you envision it? And are there other partnerships that could be added beyond Partners Group as we've seen life insurers not just stop at one for product creation? Andrew Sullivan: John, we're very excited about the partnership with the Partners Group. PGIM and the Partners Group are highly complementary and obviously bring to the table best-in-class capabilities from both sides. Really, this partnership is about working together to bring forth multi-asset solutions to Wealth, Retirement and Insurance clients, particularly in the Retail space. If you think about it, Partners brings capabilities that we don't have, like primary private equity, and we bring credit and real estate capabilities that are very additive to their strengths. So you should expect that one of the ways we'll look to grow our asset management capability and success is using partnerships. It's additive to help us grow, but it's not new. You saw us do this as we launched Prismic as well. John Barnidge: Okay. And then with the Board approving the ESR, what is the opportunity for Prismic as you see it in the coming year? Yanela del Frias: John, with regards to Prismic, I would say Prismic continues to be an important tool in our toolkit. Reinsurance is key to our business. It allows us to manage products in the most capital-efficient manner by matching capital and reserving regimes with economics. And to accomplish this, we use reinsurance with wholly owned entities, Prismic and third parties, and you've seen us do that in order to manage ESR volatility as we've talked about in the past. And we continue to work on an active pipeline with Prismic. That includes ongoing balance sheet optimization, financing new business growth as well as working on third-party capital -- third-party blocks, sorry. So the one thing I would say that is new about Prismic is that we did recently launch our first forward flow transaction with Prismic covering U.S. retail fixed annuities. It's in small quantities because we just began that, but it is our first forward flow transaction. Operator: Next question is coming from Jack Matten from BMO Capital Markets. Francis Matten: My first question is on Individual Retirement. Your core earnings growth there took a nice step up this quarter. It looks like at least part of that was on kind of better spread earnings. Just wondering if you could discuss further the earnings growth outlook for that business. Are there ways you can keep offsetting the headwinds from VA runoff? And any impacts from Fed rate cuts that we should be thinking about in the coming quarters? Yanela del Frias: Yes, Jack. So a couple of things. Yes, to your point, we did have nice core earnings growth there. So there were 2 things. We did have higher spread income as well as higher fee income in the business. And that is a result of both business growth and favorable markets. With the continued strong sales that we have seen, we did have an increase in spread earnings. There was also some reinvestment benefit as reinvestment yields continue to be above portfolio yields. So that's the first driver. And in addition to that, the benefit from market appreciation did more than offset the runoff of our legacy variable annuities, increasing fee income. So that is definitely a driver that we're seeing. With regards to offsetting the runoff, obviously, the earnings here are going to be driven by both markets and spread. In terms of rate cuts and the impact on spreads, there is no material impact of changes on short-term rates for us. As I mentioned, our reinvestment yields continue to be higher than our portfolio yields. And so from a long-term perspective, we do have our sensitivities that we shared on interest rates. And so I would remind you, if we had a onetime 50 basis point decline in long-term interest rates with no recovery after 12 months, we estimate an annual AOI impact of approximately $0.20 per share. Andrew Sullivan: Jack, I would just add that this is a market with a lot of tailwinds. It's a market that's now consistently over $110 billion per quarter. If you think about the aging society, that aging society's need for protected income, the fact that there's $7 trillion in money markets on the side and $40 trillion in unprotected retirement assets sitting in retirement accounts, there's just a lot of tailwind, and we're well positioned to capture share in the market given the strength of our capabilities. So we like what we see, and we expect to see growth here. Francis Matten: Got it. And then the follow-up is on expenses. I think we were lower this quarter across the company, I think both in corporate and other and the operating segments. I guess could you just talk about any kind of expense efficiencies that you're driving across the organization? And looking forward, should we think about whether it's a certain expense ratio or level of savings next year and maybe some in corporate or the operating segments? Yanela del Frias: Yes, definitely. And I would start by saying that for us, expense discipline is a lifestyle, not necessarily a diet. So we don't think about specific initiatives. We are constantly looking for continuous improvement, and that provides resources to continue to invest in the business as well as potentially falling to the bottom line. We do have an intermediate target for operating expenses of 10.5% to 8.5%. And when we did set the target at the end of last year, we were already at the top end of the range, and we do expect to continue to make progress with regards to that target. Operator: Next question is coming from Alex Scott from Barclays. Taylor Scott: I wanted to come back to PGIM and just some of the comments you made about the margin improvement over time. I'd be interested in the restructuring reorganization charge that you had this year and how much of that directly translates into more immediate savings on expenses? And will you have any more of those kind of reorganization charges as we think about going into year-end and early next year? Andrew Sullivan: Yes. Thanks, Alex. Maybe let me take that in 2 different steps. Let me talk a little bit about the integration and then talk about the margin. Just to keep front and center, the integration, the reason we did that was really driven by customer behavior and the way that we see customers buying. They absolutely want to work with fewer asset managers that have more breadth -- that's why we decided to go to market as one PGIM. I'm very proud of Jacques and the leadership team at the rapid progress they made that they already fully changed and leaned into this new model. And the change is being well received in the marketplace by our clients. We're already seeing early signs of cross-sell momentum. And as Yanela talked about in the opening, this will lead to real bottom line savings and strong efficiencies. That absolutely is going to be helpful from a margin perspective. Our margins in the quarter were 23.7%. That was impacted by really 2 different, I'll call them one-timers, the $40 million of severance, but also the Taiwan sale. Without those, the margin in the quarter would have been 25.9%, so in our 25% to 30% range. The path to getting towards the high end of that range at 30% is very clear. We are starting to see the beginning of the improvement in the fixed income and real estate market. That certainly will be helpful. We are seeing traction in our major growth initiatives with real progress across ETFs, asset-backed finance and direct lending. And to your point, we will maintain a laser focus on expenses. And that means both looking for lower priority areas that we can shift investment out of as well as just across the entire company, we have a fantastic opportunity with AI and new technology to become more productive. So we are confident in our ability to achieve the high end of 25% to 30% and the changes that we're starting to make more rapidly are giving us good momentum. Taylor Scott: That's really helpful. Next one I had is on capital management. Just in light of seeing some better growth coming through, could you update us on just capital management priorities overall and mix between sort of growth capital versus redeployment and thoughts on M&A outlook? Yanela del Frias: Sure, Alex. So I would start by saying that our capital deployment priorities have not changed. We remain focused on achieving our growth objectives and take a very disciplined approach towards capital deployment to support this. Our top priority has and continues to be to invest in our businesses at attractive returns while continuing to pay a healthy dividend along with share buybacks. And we are comfortable with our current level of capital deployed to shareholders, which over -- was over $700 million in the quarter, and we feel that we maintain a balanced mix. And as you know, our guidance and our intermediate target is a 65% free cash flow ratio after investing in the business. Andrew Sullivan: And I would just jump in on the M&A side. We've talked about we're evolving our strategy to recognize the changing world around us and leaning into the best areas for growth and return. As we do that, obviously, as I've always said, organic growth is always job one, and we think we have some very good organic growth opportunities. But we do view M&A as an important tool to be utilized over time. You've heard me on many calls now. I'm a deep believer in being very proactive in the marketplace. I've used the words in the know and in the flow. That means across our very best growth opportunities, so things like asset management, being very active and always being aware. As always, though, we're going to be very intentional, methodical and disciplined in what we do in the M&A space. Operator: Next question today is coming from Ryan Krueger from KBW. Ryan Krueger: In regards to the headwind from variable annuity runoff, I guess one alternative that could limit that would be pursuing more variable annuity risk transfer. I know you've already, of course, done a couple of transactions already, but I was hoping to get an update on if that's something that you'd be maybe consider pursuing again. Andrew Sullivan: Ryan, I'm going to raise this up and not just focus it on variable annuities because there's other areas that this would apply to. Recognize we've made very good progress on our product pivots. And on the reinsurance transactions, we're pleased that we have those behind us. And we have reduced the exposure to traditional variable annuities and guaranteed universal life substantially, but greater than 60%. As I said last quarter, we don't view this as a start or a stop. We're always seeking to optimize our balance sheet, our capital, our cash flows. And as we sit here, there is a healthy market available for transactions. There's plenty of capital available. There are plenty of counterparties that are seeing value in these legacy books of business. So we are, and we will continue to assess those opportunities. Obviously, we will keep you informed when we do something. Ryan Krueger: Great. And then in January, you had announced that you were pursuing a strategic partnership with The Dai-ichi. Is there anything you can provide in terms of an update on that and what that could potentially include? Andrew Sullivan: Yes, absolutely. The partnership is off to a very good start. And I would just say, recall there from what we announced, there are 2 major aspects to Phase 1. First, we will distribute Dai-ichi's Neo First cancer product through our Life Planner system. That demonstrates the strength and the value of that Life Planner system and others recognize that strength. The second part of that is we will manage material assets over time for Dai-ichi and in particular, including private credit. The assets that we have begun to manage assets for Dai-ichi. It's steadily growing and will soon reach $1 billion in assets under management. This is a very important partnership for us. And the Dai-ichi CEO, Kikuta-san and I meet with regularity. And we do have a menu of looking at things of how we might expand this relationship. But we're also both very clear that job 1 is doing these current things very, very well to earn the right to do the next set of things. Operator: Our next question today is coming from Cave Montazeri from Deutsche Bank. Cave Montazeri: First question is on tech and AI. You've been investing in technology and big data analysis for a long time now. Do you think that the new generation of AI tools are adding more urgency to invest even more in tech right now than, let's say, 3 years ago? Or do you view this as being just business as usual in terms of technology investments? Andrew Sullivan: Cave, we do believe that AI is going to have a profound impact on Prudential over time. And to your point, we have been investing in this for quite some time, and we're obviously going to keep doing that. Investments are ramping up, and they're ramping up because we see the value of that enhanced level of investment, I think, as many do. They're also ramping up, though, because the quality of the tools available to use are much better than they have -- than they were even a year ago. Where we're focused is 2 core areas. First is improving our customer and adviser experience, and using AI to personalize the process and to have faster decision-making. And then second, there's just a very strong opportunity to improve the efficiency of the organization, both accelerating employee productivity at the individual level as well as simplifying processes across the company. So this is an area where investments are ramping up, and it will enable and inflect our performance over time. Cave Montazeri: My follow-up question, and maybe there's a bit of a competitive sensitivity around it, so feel free to not answer it. But how much do you spend on any given year on these investment in AI and growth initiatives from a technology standpoint? Andrew Sullivan: Well, Cave, you nailed it. We're not going to provide that figure. But maybe I'll just kind of frame it that we believe technology is intertwined and is core. There's no difference between business and technology today. So the level of investment is significant, and we feel it's appropriate and provides great return to the shareholder. Operator: Next question is coming from Elyse Greenspan from Wells Fargo. Elyse Greenspan: My first question, I know you guys provided a little bit of forward guidance for next year, right, just within PGIM and margin improvement. And then just based on how you see other things sitting today, do you guys expect to get back or to get within that 5% to 8% EPS target that you guys laid out next year? Yanela del Frias: Elyse, again, if you recall, when we talked about the targets, we said it wouldn't be linear. We talked about the near-term headwinds. And over time, as those dissipate, we would have higher growth. The actions we've taken in PGIM obviously will produce operating efficiencies and create reinvestment capacity and drive growth. We are not, at this point, updating the targets, and it is too early to provide an update. So I would just say we still are targeting the 3-year growth to be between 5% to 8%. Elyse Greenspan: And then my second question, I guess, goes back to the ESR, right? I know you guys are now laying out this 150% target, right? And last quarter, you guys had given us the range, that 180% to 200% where you were at the end of the fiscal year. And I believe you said that you're well above the 150% million. So can you give us a sense, like are you still within the 180% to 200%? And I know the disclosure will start to come next year, but would you, I guess, disclose if you fall outside of that 180% to 200% range? Or if you could just give us a sense of just what the disclosure is going to be from now into next year? Yanela del Frias: Yes. So you could -- between now and next year, you could think about our disclosure being very consistent with how we talk about RBC for PICA. RBC for PICA is published on an annual basis. And in the interim quarters, we talk about our level relative to that target. It will be the same for the rest of the year until we are publishing in Japan, the quarterly RBC. And so what we said in March 31 is that at the fiscal year-end, we were at 180% to 200%. That is well in excess of the 150% target. What we said this quarter is as of June 30, we are well in excess of that target. Operator: Next question is coming from Tracy Benguigui from Wolfe Research. Tracy Benguigui: I have a follow-up on private credit. I get that the traditional place life insurers like to be is private placements, and you have a long track record in the space and many of the private placements are rated. But the market is evolving and new private credit asset classes have emerged in recent years. So my question is on an allocation perspective, what is your appetite for some of these newer type of private credit assets like residential mortgage loans, asset-backed lending, middle market loans and infrastructure? Yanela del Frias: Yes. Tracy, what I would say is we have a strong portfolio constructed to be resilient and perform well. We always evaluate new asset classes. So absolutely, there are new asset classes in private credit, and we're looking to evaluate the asset classes that offer attractive relative returns and diversification opportunity. But this is always done in the context of our robust risk and capital frameworks, and we will continue to do that. Andrew Sullivan: Yes, Tracy, I would just add in, obviously, that's from a general account perspective, but these are important businesses in PGIM. And we've been expanding our capabilities from an asset class perspective in the credit space. And you'll recall, we just brought together public and private credit together into a $1.1 trillion manager because that's how customers are buying. But we have leaned in and really strengthened. I'll give 2 examples, direct lending. You'll recall a couple of years back, we bought Deerpath Capital. And between our organic growth in direct lending and Deerpath, we're now over $14 billion in assets under management. We're also leaned into asset-backed finance, which is part of our $145 billion securitized products business. And we're one of the leading players out there in public and private ABF. These are capabilities that grew out of the general account. But it's important both to have the right capabilities for RGA, but also to get real commercial success out of them as well. Tracy Benguigui: My next question is on the VUL growth. It was nearly 20% this quarter. It is a more market-sensitive product, and you're the market leader in the space. I was looking at Wink data, it looks like you're #1 and you have nearly 30% market share. So it seems like you like the product more than others. And I'm wondering what is it about the product that you like? And what's the earnings profile of VUL that maybe others are missing? Andrew Sullivan: So thanks, Tracy. Maybe let me start by saying VUL is less market sensitive than the product set that we moved away from. You'll recall that we pivoted away from guaranteed universal life to variable universal life, in particular, variable universal life accumulation products. As far as why we're seeing such great success in the marketplace, I'd just say a couple of things. First is the strength of our distribution. We have one of the strongest distribution capabilities in the marketplace between our Prudential Advisor capability and our third-party relationships. We also have a relatively new product in the marketplace, FlexGuard Life, and that product is a VUL product and had a record quarter. To be clear, though, others are entering the space. They do see the attractiveness, and it is becoming more competitive. We feel we have everything that we need to remain a leader, but we would expect to see more pressure as more of our competitors are getting into this part of the market. Operator: Next question today is coming from Wes Carmichael from Autonomous Research. Wesley Carmichael: I had a broad question on longevity. If I think back a number of years, I remember Prudential had a slide in the deck that showed, call it, the balance between mortality and longevity risk. It seems to me with some of the divestitures on the Life side and growth in PRT, Retail annuities, Longevity Re. I'm just trying to wonder how you're thinking about the balance of Longevity. And I guess I ask in the context of Swiss Re is calling for a significant improvement in mortality and morbidity from GLP-1 drugs. So I wonder if that's a risk if you're shifting more towards longevity products. Yanela del Frias: Yes, Wes. So a couple of thoughts there. I would say, number one, LDTI had significant changes to how that risk emerges in our balance sheet and our earnings. So that's one of the reasons we don't provide that anymore. We do obviously look at longevity and mortality. We track all drivers of mortality improvement, not just GLP-1, so it's something we look at very carefully. We feel we're well balanced, and we have a significant capacity actually to take on more longevity. So we're very comfortable with where we are today. Wesley Carmichael: All right. That's helpful. And a question on Individual Life, maybe it's a little bit specific. But last year, you guys announced the transaction with Wilton. But in that press release, you also announced some restructuring of the Life captives and I think that improved run rate earnings power. Are there any additional opportunities for captive restructuring? And we've heard that financing charges for some of those older captives have kind of increased substantially. So just wondering if that's still an opportunity. Yanela del Frias: Yes. I mean -- so obviously, last year, we had what I would call a big project where we restructured those. We -- it was very helpful, and it improved our profile. What I would say is we're constantly looking at how we optimize our balance sheet and ultimately, how we match the economics of our products to the reserving and capital standards, and we will continue to do that, whether it's with captives or other areas of our balance sheet, but we are not actively looking to do anything else at this point. Operator: Our final question today is coming from [James Kane] from Morgan Stanley. Unknown Analyst: This is [James Kane] on for Bob. On group insurance, how should we think about the total benefits ratio going forward given that it's been trending at the low end/below the target range for the last couple of quarters? Andrew Sullivan: So James, it's Andy. So first, I just will say we look at that annually. So we will, at the end of this year, be looking at our benefit ratio range because we obviously recognize what you're saying. I made comments earlier in the call, we're very pleased with the performance of the business, really benefit ratio comes from discipline in pricing, really strong underwriting and then on the Disability side, having top-notch claims management. We feel we have all 3 of those, and the business has really been operating well on both the Life and the Disability side. We have a very experienced team there. They're obviously watching the environment. If unemployment were to tick up, we would expect not just for us, but for others, the benefit ratio to increase. But at this point in time, we like where the business is running. We'll reevaluate at the end of the year what the right range should be. Operator: We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments. Andrew Sullivan: So thank you again for joining us this morning. Before we close out the call, as I often like to do, I want to take a moment to recognize the Prudential team. Our employees are doing the hard essential work of serving our customers as we sharpen our strategy to deliver the long-term growth that we expect. I look forward to updating you on our progress in February. Thanks, and have a great day. Operator: Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.
Operator: Good morning, and welcome to the Restaurant Brands International 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 Kendall Peck, RBI's Head of Investor Relations. Please go ahead. Kendall Peck: Thank you, operator. Good morning, everyone, and welcome to Restaurant Brands International's earnings call for the third quarter ended September 30, 2025. Joining me on the call today are Restaurant Brands International's Executive Chairman, Patrick Doyle; CEO, Josh Kobza; and CFO, Sami Siddiqui. Following remarks from Josh, Sami and Patrick, we will open the call to questions. Today's discussion may include forward-looking statements, which are subject to risks detailed in the press release issued this morning and in our SEC filings. We will also reference non-GAAP financial measures, reconciliations of which can be found in the press release and trending schedules available on our Investor Relations website. As a reminder, organic adjusted operating income growth excludes results from the Restaurant Holdings segment. In addition, on February 14, 2025, we acquired substantially all the remaining equity interest in Burger King China from our joint venture partners. BK China has been classified as held for sale and reported as discontinued operations in our financial statements, as we are actively working to identify a new controlling shareholder. That said, BK China's KPIs continue to be included in our International segment KPIs. A breakdown of BK China's KPIs and its impact on our 2024 financial statements can be found in the trending schedules available on our website. For calendar planning purposes, our preliminary Q4 earnings call is scheduled for the morning of February 12, 2026. And now I'll turn the call over to Josh. Joshua Kobza: Thanks, Kendall, and good morning, everyone. Thank you for joining us. Q3 was a strong quarter for us. In a tougher consumer environment, our teams and franchisees once again delivered results that set us apart. Comparable sales were up 4%. Net restaurant growth was 2.8% and system-wide sales grew 6.9%. Combined with disciplined cost management across the business, this top line performance drove 8.8% organic adjusted operating income growth and double-digit nominal EPS growth. These results demonstrate that our strategy is working, fueling continued momentum through the strength of our brands, the dedication of our teams and franchisees and the value we're delivering to guests every day. Across our largest segments, we continue to see strong execution. Tim Hortons Canada and our international business, which together represent roughly 70% of our adjusted operating income, delivered another quarter of impressive results. Both are performing at a high level and have delivered 18 consecutive quarters of positive same-store sales, underpinned by great food and beverages, strong operations and engage franchisees. I'm also encouraged by the continued progress at Burger King in the U.S. The team is making meaningful strides strengthening the brand's value proposition through delicious menu innovation, better operations and impactful remodels. The benefits of this work are showing up in solid absolute results and sales outperformance versus the Burger QSR segment. Even in a challenging macro backdrop, we continue to deliver great results the right way. Providing guests quality products, exceptional service and unmatched convenience. With that focus and with disciplined execution across our teams, we remain confident in our path to delivering at least 8% organic AOI growth in 2025. Now let's turn to our results, starting with Tim Hortons, which represents roughly 44% of our operating profit and stands out as a consistent performer and contributor to RBI's growth. Tim Hortons in Canada continues to exemplify what happens when you get the fundamentals right and keep innovating. It's a business built on strong brand love, great restaurant level execution, affordable everyday value and a steady stream of menu innovation that keeps our guests coming back. Comparable sales grew 4.2% in Q3, outperforming the broader Canadian QSR industry by roughly 3 points. We continue to build on our breakfast leadership and saw a 6.5% growth in breakfast foods, driven by our 100% Canadian freshly cracked Scrambled Egg platform and the launch of our Loaded Croissant breakfast sandwich. Guests also responded enthusiastically to our fall baked goods like the Spice vanilla filled donut and Halloween Timbits bucket. In the PM daypart, the team is thoughtfully expanding our menu. The Thanksgiving stack, a seasonal in addition to our premium hot sandwich platform performed well. And our $8.99 dinner deals after 5:00 p.m. are attracting new guests and strengthening our position in dinner meal occasions. Total beverage sales grew 4%, reaching record highs in both cold and espresso-based beverages. Our improved iced lattes were a particular standout and helped to drive 10% growth in cold beverages. Our fall beverage lineup is also performing well, featuring Chai Lattes, the return of Pumpkin Spice and new protein lattes that are resonating with health-conscious guests. We also expanded the rollout of our new espresso machines, an important investment from our franchisees that will further enhance espresso beverage consistency and quality as this category continues to grow. Operationally, our restaurant owners and team members continue to deliver excellent guest experiences. Guest satisfaction remains at record highs, and speed of service has improved across every daypart, now reaching our fastest Q3 levels since 2019. Importantly, PM execution and guest satisfaction scores keep improving, a key focus area as we work to capture share and is historically underutilized daypart. We're also advancing our digital initiatives. Kiosk installations are on track to reach about 800 restaurants by year-end, and are driving higher average checks and strong adoption among younger guests. And we recently announced an exciting new loyalty partnership with Canadian Tire, one of Canada's largest and most trusted retailers launching in late 2026. This partnership is together two of Canada's most iconic brands, allowing guests to link their rewards accounts and unlock even more benefits. It's one of several initiatives designed to expand our loyalty base and deepen guest engagement. With over 7 million active Tims reward members already spending about 50% more on average than they did before joining, we see significant potential ahead. Finally, we remain on track to return to modest net restaurant growth in Canada in 2025. In August, I joined Axel and his team in Nova Scotia and Prince Edward Island, where we saw firsthand that even in some of our most established markets, there is still room to grow given the strength of demand for Tims. I'm proud of the results the team delivered in Q3 from strengthening our leadership in breakfast and beverages to unlocking growth in PM food. With a continued focus on innovation, operational excellence and digital engagement, I'm confident in the long-term growth trajectory for Tim Hortons. Now our international business. which drives 26% of our operating profit and accelerated meaningfully this quarter. Same-store sales increased 6.5% and net restaurant growth of 5.1% drove system-wide sales growth of more than 12%. These results reflect the strength of our global franchise network and the effectiveness of our balanced playbook across menu innovation, marketing, digital and operations. Our same-store sales outperformed the industry in several key markets. including France, the U.K., Spain and Germany. In France, performance strengthened with the successful launch of our Baby burger boxes in July, a shareable snacking platform that's been a big hit with our guests. In September, we expanded our chef collaboration platform to the U.K. with the launch of the Gordon Ramsay Wagyu burger made with 100% British Wagyu beef, which drove strong engagement and sales. This quarter, we also leveraged our global scale with a cross-market promotion of Naruto, the popular anime series, which performed well across countries like Germany, Brazil and China. I visited several international markets this quarter, including the U.K. and China and was impressed to see the consistency of execution and enthusiasm across the system. In the U.K., Burger King is now our fifth international business to surpass $1 billion in system-wide sales and continues to deliver strong top line growth, adding more than $115 million in sales over just the last 12 months. Meanwhile, Popeyes in the U.K. is set to open its 100th restaurant in November, just 4 years after its debut in East London. Popeyes is seeing strong traction across EMEA, where the brand now has more than 1,000 restaurants. In Turkey, the team will open 100 restaurants this year, reaching nearly 500 locations by year-end. Both markets are great examples of the brand's international potential. Popeyes now ranks among the world's top 10 Western QSR brands outside the U.S. and stands out as the only one that's been growing system-wide sales by over 35%. In China, we're making significant progress at Burger King with results again exceeding our expectations. Comparable sales grew 10.5% in Q3, with momentum building throughout the quarter, and unit economics once again improved quarter-over-quarter. Performance was driven by elevated marketing, including the launch of our new Crisper chicken burger, strong guest response to the Naruto campaign and continued growth in delivery. Under the leadership of our new local team, we've also continued to strengthen operations to build a stronger foundation for long-term growth. The results we're seeing at Burger King China reinforce our conviction that is a high potential business. supported by strong brand awareness, favorable category dynamics and improving unit economics. Sami, Tiago and I spent time in Shanghai in September, meeting with several of our prospective partners, and we left encouraged by both the level of interest in the brand and the alignment around our vision for the business. We see a clear path to reigniting growth in this important market and remain confident we'll find the right partner to continue driving it forward. While in Shanghai, we also spent time with the team at Popeyes China, which continues to perform well and remains on track to open around 50 restaurants this year. Looking ahead, we believe we have a clear runway to accelerate development and capture share of the growing Chicken QSR segment in China. Taken together, our results highlight the strength and diversity of our international portfolio with strong execution, great local partners and a shared commitment to the guest experience, fueling double-digit system-wide sales growth. Turning now to Burger King, which represents roughly 17% of our operating profits. In September, I joined the team in Phoenix for their convention. The energy was amazing with franchisee confidence in the plan and team near all-time highs. That confidence has been earned over the past 3 years, as Tom and the team, together with our franchisees, execute reclaim the plan with focus and consistency, raising the bar on food and service quality, elevating our marketing and modernizing the restaurant experience. This focus continues to translate into results with our U.S. comparable sales growing 3.2%. We've outperformed the Burger QSR category for many quarters by staying true to our balanced marketing strategy. We're leaning into the Whopper, providing everyday value that guests can trust and reigniting Burger King's connection with families through innovation and fun partnerships. Our Whopper By You platform is delivering strong results, engaging our guests through personalized takes on their favorite flame grilled burger. The Barbecue Brisket and Crispy Onion Whoppers exceeded expectations, reinforcing the power of our flagship product, and the platform's extension to Whopper Junior is broadening our reach with women and Gen-Z guests. Our $5 Duos and $7 Trio value platforms are also performing well, and the launch of our You Rule Value campaign builds on that success. Celebrating guest choice and personalization while further strengthening our You Rule positioning. In an environment where peers are leaning into short-term deals or headline price cuts, our disciplined value strategy continues to resonate. Looking ahead, we'll maintain this measured approach while keeping our flame-grilled burgers at the center of our story. And we'll support our efforts with innovative family promotions like our recent Monster menu. Our marketing and menu innovation are being matched by steady improvements in operations, which are equally as important to delivering guests great everyday value. Since launching Reclaim the Flame in 2022, Burger King consistently improved in guest-driven operational surveys and revisit intent now ranks among the top 3 out of 12 QSR brands. These gains reflect a sharper focus on the fundamentals, quality, accuracy, friendliness and consistency and close collaboration with our franchisees to sustain that momentum. We're also making good progress modernizing the system. With remodeled restaurants having strong uplifts in the team's net of control and average restaurant sales post remodel of around $2 million, with beef costs elevated, we're mindful of the near-term impact on franchisees. While we still expect roughly 400 remodels in 2025, we're mindful of the commodity cycle and impactson profitability as we manage future remodel schedules with our franchisees. At Carrols, performance again outpaced the system, underscoring the importance of strong operations and the impact of modern image. Comparable sales at Carrols were 4.8%, and remodels are delivering updates -- uplifts ahead of the system average, reflecting the success of our new image, which is now featured in nearly 2/3 of Carrols remodels completed since 2023. We're also advancing the refranchising of Burger King restaurants through a Crown Your Career program as well as with experienced restaurant operators. Overall, Burger King's results show that our plan is working. Operational improvements, creative marketing and strong franchisee alignment are driving sustained outperformance versus the broader Burger QSR category. Finally, turning to Popeyes and Firehouse Subs. At Popeyes, results were softer this quarter, with U.S. comparable sales down 2% and net restaurant growth of 1.9%, resulting in system-wide sales growth of 0.9%. We are not satisfied with our performance and know there's more work to do. While our limited time offers like dipipelineers, drove solid trial from new guests, repeat visitation fell short. And while our wings revamp in August delivered improved guest satisfaction, it proved to be only modestly incremental. It's clear that we need to do a better job focusing on our core offerings, especially our bone-in chicken, tenders and sandwich platforms, and we need to deliver consistent value for everyday guests. We also know that price is just one piece of the value equation. And Jeff and his team are stepping up efforts to improve the overall experience at Popeyes by reprioritizing resources to support our franchisees, focusing investments on restaurant and equipment upgrades that have the biggest impact ensuring that new units are opened exclusively with our top operators. It may take some time for these operational improvements to flow through to sales, but we remain very confident that Popeyes has every right to win and take share in an increasingly competitive Chicken QSR environment. Popeyes has the best chicken in QSR. It's slowly marinated, hand battered and fried in-house and is rooted in the authentic Louisiana heritage. On top of this, we have a relatively modern asset base. with roughly half of the Popeyes system having been opened in the last decade, good unit economics and strong franchisee alignment. Finally, Firehouse Subs delivered a solid quarter with comparable sales up 2.6% and net restaurant growth of 7.7%, which drove 10.7% system-wide sales growth. Performance reflects continued progress in expanding our footprint across North America with great engaged operators and a standout result in Canada. Mike and his team have already opened 100 net new restaurants over the past 12 months, which is 5x the pace of growth from when we acquired the business. This strong result keeps us on track for another year of accelerating development in 2025, supported by enthusiastic franchisees, solid paybacks and growing brand awareness. With that, I'll hand it over to Sami. Sami Siddiqui: Thanks, Josh, and good morning, everyone. I'm excited about the momentum we're seeing in our business, and I'm proud that we were able to accelerate both top line and bottom line results in Q3. Our focus on balanced marketing and great guest experiences is driving that performance. And I feel confident that the groundwork we're laying today positions us well for consistent long-term growth. At the RBI level, we're complementing strong brand execution with financial discipline and thoughtful capital allocation, setting us up to deliver another year of 8% plus organic AOI growth, while continuing to invest in areas of the business that will drive sustainable returns over time. Today, I'd like to discuss our Q3 financial results, capital allocation and guidance for the remainder of the year. Starting with our financials. For the third quarter, system-wide sales grew 6.9%. Organic AOI grew 8.8% and nominal adjusted EPS increased 10.7%. Organic AOI grew faster than system-wide sales this quarter with operating leverage driven by disciplined cost management, including an $8 million reduction in segment G&A and an $8 million tailwind from lapping last year's fuel to flame ad fund contribution at BK U.S. These benefits were partially offset by an $8 million year-over-year AOI headwind from BK China. As a reminder, consistent with prior quarters in 2025, we are recording results from BK China in discontinued operations as we work to find a new local partner. Adjusted EPS increased $1.03 -- increased to $1.03 per share this quarter from $0.93 last year, representing nominal growth of 10.7%. This was driven by our AOI growth as well as a $14 million year-over-year decrease in adjusted net interest expense from $142 million last year to $128 million, reflecting the benefits of our 2024 refinancing activities and cross currency swaps. Our adjusted effective tax rate this quarter was 17.8%, bringing our year-to-date rate to 18.1%. For the full year in 2025, we continue to expect our adjusted effective tax rate to be in the 18% to 19% range. Now turning to cash flow and capital allocation. We generated $566 million of free cash flow, including the impact of $110 million of CapEx and cash inducements and a $35 million benefit from our swaps and hedges. We also returned $282 million of capital to shareholders through our dividend and we fully repaid the approximately $100 million remaining on our Tim Hortons facility that was maturing in October, consistent with our plan to prioritize deleveraging. As a result, we ended Q3 with total liquidity of approximately $2.5 billion, including $1.2 billion of cash and a net leverage ratio of 4.4x. Looking ahead, our capital allocation priorities remain unchanged. We'll continue investing in our business, maintaining an attractive dividend and reducing leverage. As I said before, one of our key priorities is to return to a more simplified business model. As part of this, we're refranchising Burger King restaurants, and we remain on track to refranchise between 50 and 100 restaurants in 2025. About half of these will be through our Crown Your Career program, which means the actual deconsolidation of those restaurants will take place over time as candidates graduate from the program. In addition, we're actively engaged with Morgan Stanley to sell Burger King China, and we feel confident in the progress the team is making to find a new local partner. Together, these initiatives are key steps towards simplifying our structure, strengthening our franchise model and creating a more capital-light platform for long-term free cash flow generation. Before shifting to our 2025 financial guidance, I'd like to touch on beef costs. As Josh mentioned earlier, our Burger King U.S. business is seeing elevated beef costs, which are creating some short-term margin pressures. Beef represents roughly 1/4 of the Burger King U.S. commodity basket and year-to-date prices are up high teens versus last year. This equates to a mid- to high single-digit increase in the overall commodity basket for Burger King U.S. in 2025. We expect this to be temporary as the increase is largely tied to the cyclical nature of U.S. herd rebuilding and we're optimistic prices will normalize over time. In fact, you've already seen cattle futures come down in the last week or so, and we continue to monitor movements in that market. In the meantime, we're working closely with our franchisees to identify efficiencies and margin opportunities across the P&L. Now I'd like to discuss four updates to our 2025 guidance. First, we continue to expect Tim Hortons supply chain margins to average around 19% for the full year, with Q4 as the softest quarter in the mid-17% range, reflecting the typical seasonality of the business, and the impact of higher average cost of inventory, including within our CPG business. Second, we now expect segment G&A, excluding restaurant holdings, to come in at the low end of our guidance of $600 million to $620 million. Third, we expect 2025 CapEx and cash inducements, including capital expenditures, tenant inducements and incentives to be around $400 million, down from our prior guidance of $400 million to $450 million. And fourth, within Restaurant Holdings, BK Carrols restaurant level margins will continue to be impacted by the 50 basis point ad-fund contribution step-up year-over-year and commodity inflation, primarily related to elevated beef costs. In addition, our early-stage investments at Popeyes China and Firehouse Brazil resulted in a net AOI drag of $7 million in Q3, and we will expect a similar impact in restaurant holdings in Q4. We anticipate these expenses will continue until we transition ownership to new local partners. Finally, we continue to expect 2025 interest expense, NRG and organic AOI growth to remain consistent with our prior guidance. This includes adjusted net interest expense of around $520 million, net restaurant growth of around 3% and organic AOI growth of 8% plus. As a reminder, organic AOI growth in the fourth quarter will see a $52 million net benefit from lapping 3 items: $41 million of BK Fuel to Flame ad fund expense and $20 million of net bad debt expenses in Q4 of '24, partially offset by $9 million of BK China revenues also recognized in Q4 of '24. Stepping back, I'm confident we're making good progress towards our goal of returning to a more simplified and highly franchised business. We're ahead of schedule on refranchising the Carrols restaurants and continue to make great progress on the Burger King China sale process. And even as we execute on these strategic initiatives, we remain firmly on track to deliver another year of 8% plus organic AOI growth in 2025. And with that, I'll turn it over to Patrick. J. Doyle: Thanks, Sami. This team is driving strong results. And importantly, they're doing it the right way. Quarter after quarter, our teams and franchisees are delivering for guests and staying focused on what matters most, creating value for guests by improving their experiences in our restaurants while maintaining discipline around our pricing. That's what sets RBI apart right now, and it's working. We've got 5 amazing businesses that are each at a different point in their journey. Tim Hortons and our international business continue to set the standard with steady high-quality growth built on strong fundamentals. At Tims, Axel and team keep raising the bar with exciting menu innovation and outstanding execution in the restaurants. You can feel that momentum from the strength that we're seeing in cold beverages to continued leadership in breakfast. The brand is connecting with guests in a way that feels fresh and relevant every day. Tim's is firing on all cylinders, and our runway for consistent growth is long. Internationally, Thiago and team are delivering another year of great results. growing system-wide sales double digits and outperforming our peers in many of our largest markets. What I love about our international business is how consistent the playbook is, great food, engaged local operators and an unwavering focus on the guest experience. That model scales. We've proved it with Burger King, and now we're proving it with Popeyes which is generating the best system-wide sales growth in international amongst our scaled global peers. Burger King U.S. is showing what focus, patience and follow-through can deliver. Franchisee confidence is near all-time highs. Operations are improving, and the brand is clearly earning its way back. After nearly 2 years of outperforming the broader QSR burger category, you can feel the turnaround taking hold. These things don't happen overnight. But you know when a brand starts to click again, and that's exactly what we're seeing at Burger King. I'm proud of our franchisees, and I'm proud of Tom and the team leading BK. Popeyes on the other hand, has some work to do. We know it's not performing where it should be, and Jeff and team are leaning in by simplifying and improving operations, sharpening the value proposition and getting back to what makes Popeyes so special. It's incredible food and Louisiana heritage. As we increase the pace of operational improvements in our restaurants, Popeyes food is too good and the brand is too strong for us to not be growing faster. And Firehouse continues to build momentum with strong development and a lot of enthusiasm from franchisees who see the long runway ahead. Mike and his team are moving the brand in the right direction and starting to accelerate the pace of scaling this business. What makes RBI stand out is our bias for action. When something isn't working, we move aggressively to make it right. We run this business like true owners and take a long-term view, investing in the areas that strengthen both our business and our franchisees. From investing in Back to Basics at Tim's to supporting Reclaim the Flame at Burger King U.S., to stepping in to stabilize BK China. We're not afraid to do the hard work to make every one of our business is great. There is no kicking the can here. Long-term success means creating an ever-improving guest experience, compelling franchisee economics that attract and grow great restaurant operators and efficient use of RBI's resources to achieve that growth in order to generate consistent and compelling returns for our shareholders. We also know that we need to simplify our business back to being nearly 100% franchised. So we're taking steps to get that done, refranchising our Carrols restaurants and finding a new partner for Burger King China. We are going to be a much simpler story. We've got engaged franchisees, motivated teams and a culture that values doing things the right way for our guests, our operators and our shareholders. That combination of long-term investment, operational discipline and accountability gives me a lot of confidence in where we're headed. I'll close by saying thank you to everyone across our system. These results don't happen without incredible teamwork and passion from our restaurant operators, managers, crew members and corporate teams around the world. You're building something that lasts and it's a lot of fun to be a part of it. And with that, I'll turn it over to the operator to take questions. Operator: [Operator Instructions] Our first question comes from Dennis Geiger from UBS. Dennis Geiger: Great. Congrats on the solid results. I wanted to ask a little bit more on Burger King U.S. given the continued industry outperformance, the continued execution against plan despite the difficult environment. I think, Patrick, you and Josh both spoke to like feeling the turn. But could you speak a little more to that turnaround trajectory that the brand is on and maybe if it's possible to draw some parallels to the Tim's turn in previous years. And I know you guys spoke to the ops, the marketing, the franchise, the alignment, but just maybe highlighting some of the biggest opportunities still from here to get to where you want the brand to be. Joshua Kobza: Yes, thank you for the question. I'll start, and Patrick feel free to add on. I think we're really pleased with the work that Tom and the team have done now over a number of years. When we set out on this plan, we sort of -- we listen to our guests and our franchisees and understood what they wanted from the brand. And I think they wanted things like more modern assets. We're working on that. They wanted more consistent operations. We've made tremendous progress on that over the last few years. Our franchisees wanted to see a better focus on profitability. We brought that and saw a lot of progress. And we wanted to see the outcome of all of that being outperformance versus the segment, which we've been lagging behind in the prior periods. And we've now seen that pretty consistently over the last couple of years. So I think that combination of sort of listening to guests, understanding what they wanted from the brand and making sure that we were really well coordinated and working together with our franchisees, I think, is what's driven progress. As I look forward over the rest of this year, we're going to stick to the same things that we talked about at the beginning of the year. I think I laid out a couple of different focus areas, we said that we wanted to focus on the Whopper in flame grilling. We want to bring families back in the restaurants, and we wanted to have consistency in our value offerings through the year. And throughout all the macro ups and downs of various quarters, we stuck with that plan. And I think that really has paid off. And I think you kind of see that in the results and especially in the Q3 results. And the things that we talked about doing will be basically what you see from us in Q4. As I look forward from there into next year, I think that gives us a great foundation to build off of. And Tom and Joel and the team shared some of that plan with our franchisees recently at our convention. I think there was tremendous excitement and enthusiasm from those plans. And I think kind of what we've done gives us the base to then further elevate the brand and to keep focusing and elevating the focus on flame grilling the Whopper, I think we'll take it kind of into its next chapter next year. We'll have more to share probably in the next few months or on our Q4 call to give you a little bit more specifics around that, but that's basically the plan going forward. Patrick, anything you want to add to that? J. Doyle: Yes, Dennis, I think that the parallel though is exactly right. I mean what we did at Tims in Canada is exactly the same thing we're doing at Burger King. The needs may have been different. The restaurants -- at Burger King, we're in more need of updating and remodeling than they were at Tims. The food was great and is great at Burger King, but we're going to continue to do work on that. One of the interesting things is as you know, in Canada, you have contractually more control around pricing. And so our pricing in Canada was very consistent. We were very careful about making sure we were delivering value across the menu. And I think Burger King and our franchisees have done a very nice job of making sure that we're not getting ahead of ourselves on pricing, and that's created consistent value. But the improvement in value that you're seeing for consumers at Burger King is not because we are doing deep discounting or anything like that, it's because we're improving the consistency of execution, the attractiveness of the restaurants that they're going to the service levels, the food quality, all of those things are what are improving the value for consumers. And we aspire to the 18 straight quarters of positive comps that we've gotten at Tims now, and by the way, 18 straight quarters of growth in our international business, which is from doing the exact same thing, terrific execution in the stores, on average, great compelling franchisee economics, which allow them to reinvest into the stores, keep them looking great and that delivers very consistent results. And so it's still -- we've got a lot of innings to work through on Burger King, but we're very comfortable that we're seeing the results starting to play through. Operator: Our next question comes from David Palmer from Evercore ISI. David Palmer: Thanks for those comments on Burger King. Just as a follow-up, and you were talking about beef costs and the impact that that's having on cash flow, no doubt, you also talked about the fact that you're having some pretty good sales momentum. And so I would imagine that there is optimism in the system, but you're dealing with a cash flow hit from some of the stuff on the inflation side. Is there any impact from that even if temporary in terms of the plan to get the restaurant counts reversed, reimaging, invested on pace, refranchising of Carrols ad fund contribution. Is there any impact from that even if it's temporary. And then separately, on Burger King U.S., there's always this concern that a major competitor is going to hurt the brand with their recovery, and we're now a week -- a year away from a food safety incident and a major burger player that rocked their results. Do you see that as something that will -- as we begin to lap that, that will impact Burger King indirectly through the rest of this quarter? Or any comments on that would be helpful. Sami Siddiqui: Dave, it's Sami. I'll take the first part of your question, and then I'll pass it over to Josh to comment on the second part. With respect to Burger King U.S., we are pleased with the sales progress, particularly in Q3 and really the pretty consistent outperformance to industry. With respect to beef costs, in particular, those have been a clear headwind. I mean beef costs this year have been at all-time highs. And as we think about that and we think about sort of the dynamics there, being up high teens percentages year-over-year being about 25% of the commodity basket that does impact us. I think it is impacted by sort of two dynamics. One is sort of this herd rebuilding cycle in the U.S. But it's also impacted by some of the trade agreement dynamics for markets where beef is sourced from. I think we view these kind of impacts as temporary and our franchisees view it that way as well, although they are a significant impact. We've actually been monitoring the market. And even if you look at the last week, as there's been optimism around some trade deals, whether it's been with Argentina, whether it's been with Mexico, whether it's been with Brazil, we're sensing our optimism that there could be some relief on beef costs. And with respect to the impact on the plans, I don't think that changes our plans. We're still on track to do around 400 remodels this year. on the margin, that may shift things from 1 year to the next, but franchisees are confident they view kind of this as a temporary sort of headwind and that it will reverse, and we're going to continue to out-execute the competition. Joshua Kobza: Thanks Sami. Dave, just on the strategy and type of impact of competitors, I don't think anything that the competitors are going to -- are doing is impacting Tom and the team's plan. I think that's one of the strengths of what we've done all year long is we haven't deviated from the plan. We've kept consistent even as you've had some macro ups and downs and you've had some shifts in focus from different competitors. I think sticking to our playbook, focusing on our strength and being consistent, things like value, one of the best things that we can do is making sure that we have consistent value propositions. Guests who are focused on their budgets. They want to know when they go to Burger King or anywhere else. They want to know what they're going to get. And we've stuck with our $5 Duos and $7 Trios and made sure that they know when they come to Burger King, that's what's going to be available over a long period of time. We give guests options. We let them have it their way a little bit and pick what they want to have as a part of that -- those bundles, but we're trying to have a bit more consistency in some of those constructs. And I think that seems like it's been working well for the business. Operator: Our next question comes from Danilo Gargiulo from AB Bernstein. Danilo Gargiulo: Just I was wondering if you can comment on your satisfaction about the launch of the protein latte in Canada, specifically whether you think you've got the right level of advertising behind? Or if you think it was overshadowed by some incremental menu offering over there. And given that you don't have major competitors that are necessarily focusing -- overly focusing on the protein platforms over there. What do you think the comp uplift could be as you're expanding the platform and potentially think through innovation for the coming quarters and years? Joshua Kobza: I would frame the protein lattes as one part of our broader push to innovate in cold beverages. And I think Axel and Hope and the team here have done a fantastic job on that. I think we've been talking about it for at least 3 years now that our strategy was going to be cold bev and PM food. And I think we've made consistent progress there, bring exciting new innovations to market. Within the cold beverage push, we've been focused on iced lattes a lot, and that overall platform has been a huge success for us. We saw growth well into the double digits of iced lattes in this quarter. So I think that's great. Protein lattes are just -- they're one more iteration of that idea. I think it's been working pretty well so far. We've seen high incrementality of that new product. So I think it's great, but I think we'll have to see where it goes in the future. We'll probably bring some new innovations around it. We're happy with it so far. But I think we've got to give it time and see what new things we bring over the next couple of quarters there. Operator: Our next question comes from Brian Bittner from Oppenheimer. Brian Bittner: And congrats on the impressive results. Sticking with Tims, obviously, the results continue to be solid, hitting on all cylinders as Patrick highlighted, can you talk about the share trends for the brand in Canada? Are you seeing those share trends accelerate? And just secondly, can you paint a picture of what type of macro environment you're operating in, in Canada. Everyone is obviously talking about a much softer and softening environment in the United States. So curious what you guys are seeing in the Canadian macro maybe relative to the U.S. macro? Joshua Kobza: Brian, what I would point to in terms of share trends is one of the comments I made in our prepared remarks we're outperforming by a pretty consistent margin, and we have over the last couple of quarters. I think I mentioned a little bit ago. Our same-store sales are about 3 points higher than the other large QSRs. So I think we're taking share on a pretty consistent basis by a healthy margin, and that's a result of all of the great work that the team is doing up here and the strength of the brand. In terms of the macro here in Canada, there are some softer stats on things like unemployment or consumer confidence, but I wouldn't say it's been changing so much sequentially. I think that's sort of been the case for a few quarters now. And I think the results this quarter with over a 4% comp show you our ability to deliver even in some of those tougher macro environments, and I think that comes down to doing the fundamentals right and having a great everyday value proposition. If you look at -- I think Patrick sort of mentioned it a little bit earlier, we were really disciplined about price over the last few years. Tims has always been known for delivering great everyday value with compelling price points, and we kept disciplined in that. People know they can come to Tims for a really good quality product at a very fair price. And that's the kind of thing that I think allows you to perform well even in some of the tougher macroeconomic environments, which I think we observed over the past quarter or 2. Operator: Our next question comes from Gregory Francfort from Guggenheim Securities. Gregory Francfort: My question is actually on the international business. I mean, pretty impressive comp from Burger King and also, I guess, across the brands. Some of the major markets there that are driving that, are you guys seeing your share gains accelerate or do you see kind of uplift in the macro in those markets that may be you have the biggest overlap. And I'm just curious what you're seeing on the ground and how much of it was share gains versus the overall market for QSR improving. Joshua Kobza: Greg, it's Josh. Thanks for the question. I think we've seen pretty broad-based improvement across the international business, especially in our European markets and some of our Asia markets. There are some places where I think the macro has gotten a little bit easier, but there are an awful lot of cases of improvements in relative share. I'll give you just a couple of examples. There are quite a number underpinning the overall results. I'd say probably the biggest one is in France. That's our largest market within the International segment. And we had a -- we had been seeing a bit of softer comps prior to Q3. And Alex Simon and the team there at Burger King in France did a fantastic job with some really great new product launches. The baby burgers that I mentioned was a huge success and we really shifted the trend in terms of relative market share there in Q3. So that was a big win and definitely a departure from trend. We've also seen improvement in some other markets. China is, for sure, one of those, where it has been a tough market for us over the last couple of years. And I would say the thesis that we went into China with this year has played out even better than we expected. We made some changes to the teams, put in place some really talented and experienced local leaders, we improved some of the marketing, launched some new products, brought back some media focus and have really turned the corner in a meaningful way on the same-store sales. I mentioned we were plus 10% in the quarter, which is a terrific result and shows you the kind of the potential of the brand there. So that -- I think that was a big shift in relative market performance. And then we had another one that's top of mind for me is Japan. I've talked about it for a while. It's been doing really well. But the comps there have been great. The restaurant growth is terrific because the paybacks are good. So I think we're -- we have a huge opportunity in Japan. It's always been one of our biggest opportunities in the world. And the team there is really doing a great job going after that and growing our market share in the market. So not exhaustive, but gives you a few examples of some of the places where on top of some macro that maybe is a little bit better, I think we're doing a better job in each of those markets, too. Operator: Our next question comes from John Ivankoe from JPMorgan. John Ivankoe: Two-parter, if I may. Firstly, Josh, in your prepared remarks, you mentioned the 400 Reclaim the Flame remodels in '25 and then mentioned beef prices. And it did seem like that you may have been talking down the number of Reclaim the Flames expected in '26. So tell me if I kind of caught that inflection or not? And if it's appropriate, how many remodels we should expect in '26 just to kind of level set everyone? And then secondly, also in prepared remarks, I heard that it would take a while to deconsolidate the units that were part of Reclaim the Flame, I just want to understand what that means. So it will be a refranchising transaction that the store fully remains on balance sheet. So I just want to understand that. And how long of a transition period are we talking about until those units can be fully refranchised from a practical perspective as part of your career. Joshua Kobza: John, I'll take the first part on the remodels, and then I'll let Sami talk about some of the Crown Your Career refranchising. So in terms of the remodels, as we said, we expect to do about 400 this year. We're really pleased with the uplift, and I think there are even better uplifts in some of our company stores and the sizzles that Carrols are doing. I think the intention of the comment is just to be mindful of the fact that beef prices have been elevated and that does have some impact on our franchisees' profitability. It's not going to change our long-term plan. Our vision and plan continues to be very much the same that we want to get to around 85% of the system on modern image. We're obviously just keeping an eye on those beef prices and any impacts that, that can have on our franchisees' profitability. The good news, as Sami mentioned, is that we've already started to see those beef prices come down, which will be helpful to franchise profitability and provides more cash flow for our franchisees to fund those remodels. And I think in terms of 2026 remodel numbers, I don't think we're ready to put a number out there quite yet, something we'll probably look at doing once we get into the beginning of the year, maybe the Q4 earnings call. Sami Siddiqui: And just quickly on your deconsolidation of refranchised restaurants via Crown Your Career. I think a couple of things, and we've talked about this in the past. When we think about refranchising the Carrols restaurants, there's sort of 3 categories of folks we're refranchising to. Number one is existing operators who have capacity for more or strong operators in our system. Number two is kind of traditional refranchisings to new operators, new franchisees who are entering our system. And then the third bucket is this Crown Your Career bucket, which are typically smaller restaurant managers above restaurant leaders, folks who may have a little bit less capital but are focused on running very small portfolios of restaurants, call it, anywhere from 1 to 5 or 10 restaurants and really growing with the brand. And those Crown Your Career restaurants and as part of that program, what we do is someone enters the program and they stay in the program from anywhere from 1 to 3 years as we monitor kind of their progress, how our sales, how are operations performing and then they graduate from the program. And we don't have set graduation dates. It's really around how quickly are the restaurants turning around and how ready is the operator to be a full-fledged franchisee. And so those may vary over time. The good news is, as you think about it, we're already ahead of schedule in our refranchising. We want to do between 50 and 100 refranchisings this year. Of those, about half will be in the Crown Your Career program. And then those folks will graduate over the next 1 to 3 years. and those restaurants will come off our books in that appropriate time. So we're really pleased. We also think the Crown Your Career program is an excellent pathway to ownership for small operators, and that's ultimately what powers the Burger King brand. Operator: Our next question comes from Christine Cho from Goldman Sachs. Hyun Jin Cho: Great to hear that you're on track with your Burger King remodel this year. And I think you mentioned the mid-teens average sales lift for these stores and with even higher performance for the Sizzle images. I was wondering if you had any insights you can share on the year 2 and 3 sales trajectory post the remodel? Do these stores continue to outperform? Or do they eventually kind of return to a similar comp trajectory with the broader fleet? And additionally, how should we think about kind of the impact on Burger King's comps and returns over the next few years as the mix of Sizzle image continues to increase within the portfolio? Sami Siddiqui: Christine, like Josh mentioned, we're really pleased with the remodel uplifts that we're seeing in the teens and particularly with the Carrols remodels where we're seeing with the Sizzle images even better than that. I think as we look into kind of year 2 uplifts, it's about 100 basis point continued uplift from the remodels. That sort of evolves over time as new restaurants kind of enter our data set, but we've kind of been consistent around this 100 basis point uplift, and you can kind of flow that through the comp impact. We expect to end this year around high 50 percentages in terms of the percentage of the portfolio that's modern image and continue to kind of be on track for around 85% modern image by the end of 2028. Operator: Our next question comes from Andrew Charles from TD Cowen. Andrew Charles: Okay. Great. I know we'll get an update on the 4Q call for 2025 store level cash flows by brand, but it's no secret that U.S. industry cash flows are hurting this year just given elevated beef prices and consumers seeking value. Do you have a target for $230,000 of BK store level cash flow in 2026 in order to sustain 50 basis points of marketing spend incurred by the franchisees. And I'm just curious your confidence to reach this as well as key priorities to reach this beyond sales growth. Joshua Kobza: Yes. Thanks, Andrew. I would say on the ad fund, there are two ways that we can extend the higher ad spend, both by -- one by hitting the franchise profitability target or through a franchisee vote. So there are kind of two pathways to that. I think, obviously, there has been some headwinds from beef costs in 2025. So we're cognizant of that. And like I said, thankfully, those beef costs have started to come down. So I think it's too early to say kind of exactly where we'll land next year, but we're certainly keeping an eye on it. I think the other piece of that is just our relationships with the franchisees are really great. I think we all have a lot of conviction that we did the right thing in increasing the ad fund rate. I think if you look at the same-store sales performance over the last couple of years, it's very clear that on top of the other important changes we made in BK, the advertising spend, the increased advertising spend and the quality of the advertising are having an excellent ROI for everybody in the system. So I think everybody gets that. And I think because of that, I think we should be able to find a good path to extend it over time. Operator: Our next question comes from Sara Senatore from Bank of America. Sara Senatore: Okay. I just wanted to ask a couple of questions on Tims, and I apologize if I missed anything, but I wanted to first ask about the top line drivers. You mentioned loyalty members increase in spend by about 50% versus prior to joining, can you give me a sense of how -- what percentage of your total -- like unique customers, the 7 million loyalty members might account for, I'm just trying to think about as you -- the opportunity to grow that loyalty base as a top line driver because it's a pretty big increase. And then maybe the second point about top line is just you mentioned total beverage sales grew 4%. Obviously, if cold is growing 10%, the implication is maybe brewed coffee decline. Are there any margin implications for franchisees just in terms of that product mix shifting? Joshua Kobza: So Sara, just first on your first question in terms of loyalty members as a percentage of unique customers, we'll have to come back to that, we just don't have it in front of us right now. In terms of the beverage mix, we have seen a shift. I think the shift from hot to cold beverage is something that you've seen across the industry, both in the U.S. and in Canada. And it's one of the reasons why it was a big part of our innovation focus over the last few years to make sure as the customer preference shifts towards cold beverage, we've got all of the products that they want, and we're leading that shift in Canada. So you're naturally seeing if beverages are growing 4%, you're seeing higher growth in your cold bevs and you're seeing lower growth in your hot bevs that is something we anticipated. And that's why the kind of the innovation priorities are what they are. In terms of margins, they're both good margin products, both very healthy businesses. for our franchisees. So no big impact that comes out of that shift, I would say, in terms of the percentage margins. J. Doyle: And Sarah, it's Patrick. The one thing I'd add is the cold bev can be a little bit more complicated. And one of the things that I'm proudest of with our franchisees in Canada is our speed of service is better than it has ever been in Canada. They're doing just a terrific job of managing that as you continue to see the shift from hot bev to cold bev. Operator: Our next question comes from Brian Harbour from Morgan Stanley. Brian Harbour: Yes. I guess just on the Popeyes side. I appreciate there's sort of some of the opportunities you laid out there. But any -- is there anything from your perspective with like customer exposure, sort of like competitive dynamics that's also affecting that business right now? Or what do you see as sort of the real hurdles to seeing improvement there? Joshua Kobza: Yes, Brian, I think there's a lot of controllable stuff. I think it's been the case that we know we've got the best products in the industry, but we've got some inconsistency in our operations. And we're making some progress there, but I think we need to make more sustained progress. And I think that's what's going to allow us to improve the sales trajectory. So I'd say that's the biggest focus from my perspective. I think secondarily, as I mentioned, I think we can shift some of our marketing and innovation focus from a little bit more LTO focused. You've seen things like dippers and pickles, which gain a lot of customer interest, but sometimes don't drive the sustained sales growth that we'd like to see. So you're probably going to see us shift back a bit of that focus to some of our more core platforms. So those are the places that I'm focused on. I think that's what's going to drive the turnaround. I don't see something in kind of a customer-based SKU or anything like that, that's probably responsible for sales. If you go back over the last few years, we grew our same-store sales tremendously when we focused on the core and got things right. So I think this brand is amazing. It's in exactly the right segment. It has every right to win. We've got relatively new assets. I think like half of the stores were built in the last 10 years. It gets tremendous reaction when we do new things. It gets a lot of engagement online. So I think we've got every right to win. We've got a couple of things we need to work on, and we're very much focused on those. Operator: Our next question comes from Jeff Bernstein from Barclays. Pratik Patel: Great. This is Pratik on for Jeff. I had a broader question on the quick service category in the U.S. Can you comment on whether you're seeing the lower-income consumer trade back into fast food with greater frequency now that there's emphasis on value across the board? And also, are you seeing signs of middle and upper-income consumers finally trading down from some of those higher priced options as maybe there's more caution around discretionary spending. Joshua Kobza: PrPratik, what I would say in terms of the income cohorts is we haven't seen a big departure over the course of the year. I think we mentioned over the last couple of quarters that we did see a bit softer relative performance of the lower and middle income consumers. That hasn't changed too much, so nothing too new there. I think we've been operating in that environment pretty much all the year. . And what's worked for us is that we've been staying focused, executing well and delivering consistency and consistency in value among other things. And you saw that play out in our results in Q3. The one thing I would call out is that October has started out a bit choppier in the U.S., though nothing that would cause us to change any of our plans at this point. . And I would just keep in mind, we do run a large global and diversified business where 70% of our AOI is generated outside the U.S. So we feel good about the overall trends globally and ability to deliver our 8% AOI growth. But I do want to call out the U.S. trend in October, which I imagine a lot of you guys have already seen. Operator: We currently have no further questions. So I will hand back to Josh for closing remarks. Joshua Kobza: Great. Thank you, everybody, for the time today. We appreciate very much the hard work by all of our teams and franchisees around the world in helping us to produce a good quarter here. We look forward to updating everyone on our progress on our Q4 call and wish you a great day. Operator: This concludes today's call. Thank you for joining us. You may now disconnect your lines.
Operator: Thank you for standing by. At this time, I would like to welcome everyone to the Murphy USA Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Christian Pikul, Vice President of Investor Relations and FP&A. You may begin. Christian Pikul: Hey, good morning. Thank you, everybody. Thank you, Jeannie. With me are Andrew Clyde, Chief Executive Officer; Mindy West, President and Chief Operating Officer; and Donnie Smith, Chief Accounting Officer and Interim Chief Financial Officer. After some opening comments from Andrew, both Mindy and Donnie will provide an overview of the financial results, operating performance and a review of our 2025 guidance metrics before we open the call to Q&A. Please keep in mind some of these comments made during this call, including the Q&A portion, will be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. As such, no assurances can be given that these events will occur or that the projections will be attained. A variety of factors exist that may cause actual results to differ. For further discussion of risk factors, please see the latest Murphy USA Forms 10-K, 10-Q, 8-K, and other recent SEC filings. Murphy USA takes no duty to publicly update or revise any forward-looking statements. During today's call, we may also provide certain performance measures that do not conform to generally accepted accounting principles or GAAP. We have provided schedules to reconcile these non-GAAP measures with the reported results on a GAAP basis as part of our earnings press release, which can be found on the Investors section of our website. With that, I'll turn the call over to Andrew Clyde. Andrew Clyde: Thank you, Christian. Good morning, and thank you all for joining today's call. I'm quite positive. This is a call I will always remember as I expect it to be my last earnings call as Chief Executive Officer of Murphy USA. It has been an incredible honor to serve as Murphy USA's leader, and doing so has been the pinnacle of my professional career. For those joining live today or reading the transcript later, I would encourage you to take away 3 things from today's call: continuity; resilience; and momentum. In terms of continuity, yesterday's announcement signaled both continuity in Murphy USA's leadership and continuity in our long-term capital allocation strategy. Having foretold this day to investors as a hypothetical in the past, we certainly appreciate the need to be as clear about future strategy and capital allocation as we are about future leadership. And as both our 50-50 strategy, and Mindy are well known to investors, we believe this announcement sends a clear message about what Murphy USA will continue to deliver and what investors should continue to expect. At the end of our Murphy USA Board meeting last Thursday, I officially notified the Board of my intent to retire as President and CEO at the end of the year. The timing reflects a very thoughtful, intentional and multiyear CEO succession plan, which led to Mindy's appointment as Chief Operating Officer back in February of 2024. And after almost 2 years in the current structure, we are ready to make the final transition. As you saw in yesterday's press release, Mindy becomes President of Murphy USA immediately and will become CEO and a member of the Board of Directors on January 1, 2026, and I'll remain as adviser to the company through February 2027. Mindy and I took this company public in 2013, and she has been by my side every step of the way through the peaks and the troughs, through the campaigns that made the business better, through the major inflection points like COVID and the Walmart transition that shape the business we run today, leading by example in establishing a winning culture. In short, she is well positioned to lead Murphy USA into its next chapter, providing the continuity that all our stakeholders will value from a successful transition. In terms of continuity in our capital allocation strategy, the Board took this opportunity to authorize a new $2 billion share repurchase program as we were about 80% through the existing $1.5 billion program, while at the same time renewing our dividend policy at its 4-year anniversary where we have naturally increased the cash pool for dividends. Having repurchased about 60% of the share since the spin ahead of target dates and increasing dividends at a compounded annual growth rate of 20% since inception of the dividend, Murphy USA is committed to the continuity of its capital allocation approach to reward long-term investors. Complementing our 50-50 approach is the Board's commitment to new-to-industry store growth and reinvestments within the existing network, and Mindy will touch on both sides of the 50-50 strategy in her remarks as she will carry this very bright torch into the future. In terms of resilience, Murphy USA's third quarter results speak for themselves. Despite earning $0.02 per gallon and less on fuel margins, we generated the same EBITDA as Q3 a year ago due to the underlying improvements made to the business and the enduring strength of our core category capabilities that yielded outsized results. Updated guidance metrics for the full year highlight the team's efforts as merchandise contribution is expected to be in the upper end of the guidance range as exceptional Q3 results and Q4 momentum more than offset first half temporal effects. And OpEx and G&A expenses are both expected to finish positively below the low end of our guidance due to ongoing initiatives in our previously announced staff restructuring. With regards to fuel, in our most recent investor meetings, we described the low price, long supply and consequently low volatility environment is a trough, the most challenging for an EDLP fuels retailer and contrasted it to the 2022 peak. Ultimately, how a firm responds in a trough speaks to its true resilience and whether it can sustain its commitment to an EDLP strategy and emerge a winner on the other side when the cycle normalizes. And Murphy USA has done just that. Through capabilities that strengthen its competitiveness and enhanced customer stickiness, we are performing significantly better than in the prior trough environment, and we continue to lean into value. Most importantly, we continue to see the structural component of the retail fuel margin grow as the marginal retailer remains challenged and passes through to customers its higher breakeven requirements. This does not only supports Murphy's ability to lean into price in the current low price environment, but highlights the upside potential for when margins normalize, and we certainly expect the cycle to normalize. In fact, over the life of any 25-year store investment, one should expect 3 peaks every 6 to 8 years and 3 troughs based on the last 25 years experienced with normalized periods in between. And when we invest, we are basing our economics on mid-cycle factors, noting there is significant upside over time from the consistently increasing structural component of the margin. In terms of momentum, while Q3 merchandise results are exceptional, we would argue that on an annualized basis, the performance reflects ongoing trends that we expect to continue. For example, nicotine promotional dollars have grown at an impressive 12% CAGR since 2020. While we will never be able to predict exactly what products are being promoted in which quarter, our capabilities to engage consumers in the category are unparalleled. In other areas, QuickChek reported its fourth successive quarter of same-store food and beverage sales growth, and total center store categories grew by 5%, while same-store operating expenses moderated, increasing by only 2.8% for the quarter, and ongoing campaigns are designed to further this momentum. New store openings are now projected to be over 45 for the year with a strong pipeline supporting 50-plus stores in 2026 and into the future. Currently, nearly 40 stores are under construction that will open in Q4 and early Q1 of 2026. While the newest stores ramping do not have the same subsequent year EBITDA impact of stores further into the ramp, getting this first group of about 50 stores under our belt creates a line of sight to future earnings growth as new build classes come on board. Before handing over the call to Mindy and Donnie for additional remarks, on a personal note, my announcement comes with a great sense of accomplishment for what the Murphy USA team has achieved together in the past 13 years and a deep appreciation for an opportunity one can only dream about. As I noted in our internal announcement yesterday, the most resilient for us in our business is our team members, the people who make it all happen each and every day. I cannot begin to express my appreciation for their leadership and followership as we have strived to make the business better. Their efforts and sacrifices are too numerous to name, and provide the inspiration and energy for future initiatives to keep on making the business better. They define the winning spirit culture at Murphy USA, and I believe it is one of the greatest hallmarks a company can have. And for that, I'm both internally grateful and exceptionally proud. So it is with confidence of an enduring business model, a robust growth and capital allocation strategy and a winning Murphy USA spirit reflected in our future leader and leaderships and team members that I'll look forward to in my next chapter, both personally, professionally and as a Murphy USA shareholder. I'll now turn the call over to Mindy to review some highlights around our capital allocation strategy and third quarter results. Mindy? Mindy West: Thank you, and good morning, everyone. But before I start, it has been a great ride, Andrew, with a lot of ups and downs. You built the foundation of this very successful public company and have improved it in every type of environment, which is just remarkable. And I want you to know, I truly appreciate your wisdom, your mentorship and your friendship. You will be missed. But it is not goodbye because you know that I'm going to be calling you. For those of you who don't know much about me, I joined Murphy Oil, the same year in which we opened our very first Murphy USA store. I was also here by Andrew's side as we launched this company as a public entity. And at that time and since, we highlighted 5 key value pillars still relevant today, one of which investing for the long term has been illustrated through our continued commitment to our 50-50 capital allocation, balancing growth and share repurchase. So with our new Board authorization, as you said, I am happy to carry the torch into the future. Now let's talk about third quarter results. As Andrew alluded to, we are pleased with the third quarter. As mentioned, third quarter EBITDA was $285 million, virtually flat to the prior year despite all-in margins running about $0.02 lower. This is a significant achievement and is representative of our philosophy that especially during challenging times, we dig in and make the business better. So when the next peak environment presents itself, the earnings power and operating leverage will be that much stronger for longer-term investors. Let me break down fuel performance just a little more, which remains strong despite that low price, low volatility environment. Average per store month volumes were down 1.8% in the third quarter and down 0.7% on a 2-year stack. However, all-in margins of $0.307 including retail margins of $0.283 are stronger than one might expect in this environment. If we compare to peak all-in margins of $0.343 that we experienced in 2022, that included roughly $0.04 of impact attributable to that once and every 6-year falloff in prices in the third year of 2022, coupled with about $0.015 to $0.02 of margin attributable to the tight supply and high volatility environment, and then further adjust for the $0.02 we are now investing to short volumes in the current low price environment. Given all that, we might expect all-in margins to be in the $0.26 to $0.27 range. So to reiterate, we firmly believe the current margin structure includes $0.03 to $0.04 of structural uplift since 2022, which would translate to materially higher fuel contributions in a return to normal environment for Murphy USA. Important to note, fuel margins are highly correlated with the environment in which we are operating. While investors frequently ask why margins are lower year-over-year, why can't they see more of a structural uplift, our answer continues to be that current results are largely attributable to the low volatility and low price environment, which is masking the potential of our business in a normal environment where we believe we would experience several pennies of incremental margin opportunity. Turning to merchandise. Total margin contribution dollars were up $24.4 million or 11.2% in quarter 3. There are 2 key drivers of these exceptional results. First, nicotine categories are up over 20%, driven by strong promotional activity and center of the store categories grew approximately 5%. Through the continued evolution of Murphy Drive Rewards and other capability building initiatives, Murphy USA has dramatically increased the efficacy of our promotional efforts across the store, especially when it comes to executing needle-moving product offers to support our vendor partners. While promotional opportunities of this size do not show up every quarter, when they do, manufacturers recognize our ability to execute. We don't always know when or how these opportunities will arise. But when combined with our team's innovative and creative approach to optimizing promotional impact, it's important to recognize the third quarter margin benefit is not onetime. For instance, while not a data point we would otherwise go out of our way to provide, in the third quarter, we also saw strong promotional activity in the traditional smokeless products that drove double-digit margin growth in that category. So taken together across a wide variety of products over time, the collective impact of nicotine promotional dollars has been both significant and sustainable. In fact, since 2020, nicotine promotional dollars have grown at a very impressive 12% CAGR, as Andrew mentioned, and performance that we would expect to replicate going forward. Turning to center of the store, where total margin dollars were up about 5%. We saw strength across the board, driven by mid-single-digit gains in our largest categories, packaged beverages, general merchandise, candy and lottery, where the $1.9 billion Lotto jackpot did help to drive traffic and transactions. Total food and beverage sales were up 2.7% in the third quarter. Margins remained pressured, though, down 2.2%. At QuickChek, we continue to focus on price and value for our customers, which is propping up sales and traffic and translating to better performance across the rest of the store. Excluding food and beverage, total non-nicotine sales and margin at QuickChek were both positive for the first time in 2025, up 3.1% and 5.8%, respectively. Of course, merchandise sales do not happen in a vacuum. To grow sales and effectively execute promotional opportunities, the store has to look good, be well stocked and in functional working order, in addition to being properly staffed. Yet per store operating expense was only up a modest 2.8% in the third quarter or 5.6% on an absolute basis, 2/3 of which is attributable to new and bigger stores. So we continue to enforce restraint in our expense profile, controlling what we can control to ensure the network is running as efficiently as possible. We are making significant strides in reducing loss prevention year-over-year and holding labor expense study, which is helping to reduce our overall cost structure. Bottom line, Murphy USA is performing at a fundamentally different level than it was in the prior trough due to the capabilities we have built and our ability and commitment as a management team to make the business better. As a result, we are improving our competitive position through best-in-class promotional execution and relentless discipline around maintaining a low cost structure, both at the store level and the home office. I am highly confident in the resilience and durability of our business model. And as noted in the capital allocation update we released in conjunction with our third quarter earnings, we are taking action to strengthen shareholder distributions and help maximize shareholder value as we navigate towards the next peak in the cycle. First and foremost, we remain steadfastly committed to new store growth, primarily through our acceleration of our new-to-industry store program to 50-plus stores and opportunistic supplementing organic growth with small-scale M&A opportunities as they arrive. Second, we have received board authorization to begin executing against a new $2 billion repurchase program through 2030 once we close out the remaining $337 million on the existing $1.5 billion authorization. Third, we expect to continue to grow the dividend payout 10% annually, starting with an additional 10% increase or $0.63 per share for the dividend payable on December 1 of this year. Lastly, we will explore other reinvestment opportunities in the network to help improve the customer offer and reinvigorate the same-store base, while maintaining a leverage ratio at or below 2.5x for the long term. I'll close out my comments with a little color around October's performance. Preliminary October fuels results continue to reflect the strong fundamentals I mentioned earlier, despite the transitory impact of low prices and low volatility. Average per store month volumes are running 98% of prior year at retail-only margins approximating $0.32, exhibiting resilience amidst an otherwise lackluster price profile. Here is another important takeaway for October. Even at these lower absolute price levels, when we saw prices fall early in the month and margins ran up to the mid-$0.30 level, we were able to put some of that on the Street to create separation against our peers, and in that environment, we saw volumes at about 100% of prior year. The run-up in prices towards the end of October mitigated some of that impact, resulting in slightly lower volumes. But the point is, the team is executing extremely well against our strategy and the fundamentals are supportive when a little volatility in margin shows up even if only for a brief period. So that business is behaving as we would expect and October results reflect underlying strength that would be even more apparent in a higher price, higher volatility environment. With October largely behind us, we do have a higher degree of confidence in our 2025 guidance metrics, which we updated in our earnings press release. So I will now turn the call over to Donnie. Donald Smith: Thanks, Mindy and Andrew. Starting with our new store development program. We are continuing to make excellent progress. During this quarter, we brought 8 new stores into service, along with another 11 raze-and-rebuilds, bringing the year-to-date total as of September 30 to 22 and 20, respectively. In Q4 2025 and Q1 of 2026 combined, we expect to open roughly 40 new stores, all of which are currently under construction. This figure includes a small package of 4 stores we purchased in the Denver market that should be opened by year-end, an example of an opportunistic small-scale real estate play in an attractive market where we want a bigger presence. This gives us line of sight to at least 45 new store openings in 2025 as we continue to grow the new store pipeline, positioning us for 50-plus stores in 2026 and beyond. For fuel volume, we expect 2025 volumes to come in below the low end of our original guided range, which was 240,000 to 245,000 gallons per store month. Year-to-date through the third quarter, average per store volumes are approximately 236,000 gallons per month, reflecting both the Q1 storm impact and the lower relative price sensitivity of customers in a low absolute price environment as we have discussed in previous calls. Based on current trends and our expectations for the remainder of the year, we're adjusting our full year fuel volume guidance to between 235,000 to 237,000 gallons per store per month. For merchandise contribution dollars, as previously discussed, third quarter results highlighted the strength of our promotional engine, causing us to tighten our full year guidance at the upper end of the range to between $870 million and $875 million. On the expense side, if you've seen us on the road over the last 6 months, you've probably heard us talk about self-help and how we're actively managing our costs and driving savings across the organization to help improve performance amidst the challenging fuel environment. Our efficiency initiatives continue to demonstrate benefits as evidenced by the new labor model we rolled out in the spring that has helped ensure we have the right people in the store at the right time, which is also controlling labor costs and reducing overtime. Similarly, we are seeing benefits in loss prevention where in-store training and other investments have paid dividends through reduced shrink. Collectively, these efforts are making an impact, resulting in a lower projected monthly per store operating expense range of $36,200 to $36,600 per store month, down from our original guided range of $36,500 to $37,000 per store months. On the home office side, as noted in the press release, we completed an organizational restructuring during the quarter, which will help streamline our workflows and processes and eliminate technical redundancies while preserving our agile, data-driven decision capabilities. As such, our 2025 SG&A guidance range is being adjusted lower to $230 million to $240 million for full year 2025, which is exclusive of the restructuring charge. From a tax perspective, year-to-date income taxes have come in lower than planned due to some discrete state tax refunds we received and acquisition of some federal energy tax credits. As such, we are tightening the all-in expected effective tax rate to between 23.5% to 24.5% for the full year. When you input all this into the models and use $0.30 per gallon as a fuel margin placeholder for the full year 2025 versus the $0.295 year-to-date through Q3, you should end up somewhere pretty close to $1 billion of adjusted EBITDA, which likely shouldn't surprise anyone, given how we framed our original 2025 guidance in January. At that time, the midpoint of our ranges suggested adjusted EBITDA of about $1.06 billion at $0.315 a gallon. At $0.30 and about 5 billion gallons, $0.015 variance in margins would generate plus or minus $75 million, all else being equal. As we look at year-to-date performance, we have more than offset the impact of lower volumes with improved merchandise performance, OpEx efficiencies and G&A cost savings. With that, I'll hand the call back to Andrew. Andrew Clyde: Thanks, Donnie and Mindy. And let me close out the call by thanking the analyst community and our investors for your support, your challenge and your candidness over the last 13 years. Your questions early on about a business that wasn't necessarily well understood when we spun off really pushed us to think more deeply about our unique way of creating value, allocating capital and building a flywheel that played to our strengths, helping us win with all our stakeholders. Your challenges around future potential headwinds and the sustainability of fuel margins pushed us to think more analytically about industry structure and the behavior of the marginal retailer. I can probably point to less than a handful of slides over 13 years across all our conferences and meetings where over 90% of our discussions focused around. I would like to thank our conversations that helped to shape the broader narrative, not just for Murphy USA, but for the convenience industry as a whole. Thank you for being a catalyst, a partner with us and keep pushing us in the years ahead. We'll now turn the call over to questions. Operator: [Operator Instructions] Your first question comes from the line of Ed Kelly with Wells Fargo. Edward Kelly: Andrew, congrats on your retirement. So I wanted to start just on fuel margins. It sounds like the quarter is off to a good start on the margin front, rack prices have been down. But the data would suggest that's -- and I think you're telling us that maybe that's fading a bit. Any color on the cadence in terms of fuel margins so far in the quarter and maybe what you're seeing in the last week? And then I just wanted to follow up on something that you mentioned about investment to drive volume. Obviously, you've seen some elasticity on more of the recent work. So what is that telling you about your plans moving forward in terms of putting some money on the Street to drive better volumes in this environment? Mindy West: Thanks, Ed. I'll take that question. Yes, as I said for the month of October, we did see a run-up in prices towards the -- we did see a run up in margin at the beginning of October. That spike kind of normalized itself as we ended the month. So while the impacts were short lived, the market did behave exactly as we would expect during that time. And so when you talk about your questions about investing for traffic, we absolutely know on a site-by-site basis where we need to be versus our key competitors and where the right pricing position is. And so really, our margins are more a function of the low -- and our volume are really more a function of just this low price environment where our customers are just not as price sensitive and are going to go to a more convenient location. It doesn't mean we leak off every trip, but assuming we may leak off 1 of every 3, 1 of every 4, that certainly starts to have an impact. When I look over this last quarter, the thing that sticks out to me most was it was remarkable for its flatness, which really resulted in little volume or margin creation opportunities. And just to illustrate the lack of volatility as I looked at this with my analyst group a couple of days ago, post-COVID, we have never seen a quarter where every month's retail margin was pretty much exactly the same. And in fact, you can add May and June to that list because they weren't that different either. So essentially 5 consecutive months of flat margin. So when we look at the margin side, despite very low volatility, fuel margins are remaining strong at $0.30 all in. So that's showing that even in an environment entirely unproductive and value capture opportunities or volume capture opportunities, what we managed to do was actually pretty impressive and really speaks to that structural component still being in there. And then as I said, in October, when we saw that brief price run-up, we executed, we generated the margin and volume recovery you would expect. So what I would say is the fuel engine isn't broken. It just needs to jump start to get things moving. We saw them in October. It wasn't long lived, but we will see it again, and we will be there to capitalize on that. Edward Kelly: Great. And just maybe a follow-up on the ZYN promo in the quarter. Obviously, a nice event for you. Can you just maybe talk about your execution of that event and what differentiates you there, the traffic benefit that you saw? And then looking out the potential for additional similar promos or events that you might see that I think you're indicating that you don't see it as a one-off. So just more color there. Mindy West: Yes, great question. And we don't get into the details of any particular promotion. I'm sure you can appreciate, in any given quarter, as we say, there are dozens that contribute to our results. Some are more material than others. Obviously, this one was material. So I do appreciate your question because I think what's important about this one is it really does showcase the strength of our ability to execute for our vendor partners. This is really more about a strategic partner investing to drive share, utilizing our large and very loyal nicotine customer base. It also provided the added benefit for us growing awareness in an already growing category and driving traffic to the store and utilizing our operations, just outstanding ability to execute and deliver on a promotion. We will expect that to continue as manufacturers are going to continue to invest and reduce risk products. And Murphy USA can be an important catalyst to that because when you think about it, we sell 5x the industry average volume. Our promotions also have about 4x the industry average upsell. So that makes us 20x more effective using their money. And we also are able to measure that halo effect of promotions because of our loyalty engine that really major in nicotine. So when the promotions come, and they will, we're happy to execute on their behalf, and we have the engine in the store with the sales culture that is very strongly reinforced, our manufacturers know that we can deliver. So while this one, yes, was maybe a one time this year and really material impact, we certainly expect there to be other promotions throughout the sweep of time and continue to propel that CAGR of promotional dollars going forward. Operator: Your next question comes from the line of Bonnie Herzog with Goldman Sachs. Bonnie Herzog: Congratulations to all of you. Andrew, you're going to be missed. So stay in touch, but happy for you in this next chapter. I had a quick follow-on question on ZYN. You guys just raised your merch contribution guidance for the year after, I guess, pointing to the low end of the range last quarter. So obviously, expectations improved and you had good performance in the quarter. Should we assume most of that's driven from this ZYN promotion in September? Or were there other drivers that give you the confidence to kind of raise your merch contribution guidance for the year? Mindy West: Bonnie, I'll take that one. It does definitely include ZYN. When we think about the first half of the year, the timing of cigarette promotions and also the Lotto jackpots resulted in comps kind of below our expectations, which we talked to in the last call. Those did turn around in the second half. Obviously, this one promotion was part of that. But also one key data point I'll share. Nicotine pouch volumes were growing around 45% in promotion. In October, we have seen that jump to 120% of prior year volumes, and we will likely see that halo effect continue on into November. And also, just as importantly, noncombustible nicotine products have fully offset our decline in cigarettes, but it's also not just a nicotine story. We have seen growth in the center of our store categories, as I said, up 5% in margin dollars, and importantly, also saw strength across the board. It wasn't just in one place. It was in packaged bev, it was in general merch, it was in candy. So I think that highlights the underlying strength of our offer in addition to the nicotine. Andrew Clyde: Bonnie, one thing I will add here is if you think about some of the investments we talked about a year or so ago, our digital transformation initiative and the expected impact on sustainable center of store growth, we're seeing all that benefit, and we've been seeing it for the last few quarters. The relaunch of QuickChek Rewards driving food and beverage same-store sales growth there and investing in value through that advanced program suddenly driving the food and beverage, but also the center of store. So these are some of the investments that we've highlighted over the last couple of years that in this environment are really flowing through across categories. So it's just coming together in a really nice way. Bonnie Herzog: Okay. That's helpful. And if I may, I wanted to ask about capital allocation. You raised your quarterly dividend by an impressive 19%. And the Board also authorized a new share repurchase program. So it does seem like you're increasing returns of cash to shareholders. So how should we think about that relative to your ability to grow the business? I mean, should we assume growth moving forward might be more moderate and maybe you're seeing a bigger opportunity to return more cash to shareholders versus reinvesting? Just any color there would be helpful. Andrew Clyde: Yes, Bonnie, let me take this one. When we say our 50-50 capital allocation, I mean, we mean 50-50. We've done strategic work over the last couple of years to test the bookends of that. And we're really confident at that level of balanced capital allocation that makes sense. If you remember, when we initiated a dividend 4 years ago, we benchmarked it against peers at about a 0.67% yield. We haven't kept up with that yield because of the outstanding share price performance. And so with this auto pilot program, where the cash pools raised 10% every year and the quarterly dividends simply then a function of the shares outstanding, we simply took this as an opportunity to increase that, to bump up the yield for long-term investors who are holding the stock, especially when the stock is a little bit in a trough. If you think about the incremental $4 million from that extra 10% in the pool, that's one store, right? And we're going to more than make that up given the growth pipeline that we have in front of us. The other thing I would note, the bonus depreciation benefits that we're going to get from the One Big Beautiful Bill is over 10x that amount, and that's going to go back into reinvesting in the stores, whether it's remodels, maintenance programs with dispensers or future raze-and-rebuild growth in out years. So the dividend is just simply a way to recognize long-term shareholders holding the stock. When we model out the business at the 50 store a year growth in a normalized environment, we're generating significant excess free cash flow in years in the future that more than allow us to do that, take care of the balance sheet, take care of the share repurchase program. And so as we complete the end of a $1.5 billion program, we heard loud and clear from investors, it's really important as you think about the transition to be just as clear about future strategy and capital allocation. So it's really important to send this message at the same time that we're committed to this balanced growth and returns to shareholders, and we'll continue to maintain that balance as well as our conservative balance sheet. Operator: Your next question comes from the line of Irene Nattel with RBC Capital Markets. Irene Nattel: I'll echo the congratulations, Andrew, and it's been great. Just a couple of follow-up questions, if I may. You talked about the halo effect on in center of store of the ZYN promo. If you kind of dissect out the transactions from those -- from the customers that benefited from the promo versus those that maybe didn't because they just don't use nicotine, was there any difference in consumer behavior? I guess in other words, how much was the growth really just a halo from the promotion versus the rest of the customer base? Mindy West: I'm not sure, Irene, that we're fully able to parse that out. But what I will tell you is that the uptake for the ZYN offer were largely customers that were already coming in there to purchase another nicotine product anyway. So it wasn't necessarily an extra trip or incremental traffic that we were driving. It was just kind of an and to a visit they already had. So I think that, that speaks well to the center of store because I think that, that category was increasing on its own, and we would have seen that even despite the nicotine promotion. Obviously, the Lotto jackpot helps us as well because we know that, that also is a factor that can drive an incremental trip into the store. But for the ZYN only, I would say that there may have been some secondary impact on center of the store, but I think it would have been very small as those customers were in the store to buy nicotine anyway. Andrew Clyde: Yes. And one thing to add to that, Irene, is we talked about the temporal effects of the lottery and the nicotine promotion in the first half of the year, we are reporting a really strong Murphy-only center of store activity in the first half of the year. So this as many says, this maintains that momentum. It offsets the temporal effects for the first half of the year. And when you look at it over any 12-, 24-month period, it's a really steady cadence despite some lumpiness from quarter-to-quarter that we saw this year. Irene Nattel: That's great. And then coming back to the whole capital allocation discussion. I'm wondering what level of EBITDA or free cash flow underpins that $2 billion program if you want to keep your leverage at around 2.5x because if we kind of look at current consensus numbers and we assume that 50-50, the $2 billion implies about $400 million a year over 5 years, let's say. And it's a little -- you're kind of getting a little tight there. Andrew Clyde: Yes. So we'll lean into the balance sheet, as we've talked about, in '26, '27 with the cadence of the new stores and the expectations from those which are ahead of our projections in terms of returns. We expect that to turn the other side. So just like we did with the $1.5 billion program, we gave ourselves 5 years to do it. We're completing it in just a little over 3, given ourselves 5 years to do the $2 billion at current equity prices. We can see ourselves doing that quicker as well. So you're right, it gets a little tighter. We've always said we can go over 2.5x. Our covenants aren't hit until 3x, 2.5x is a longer-term target that we expect to stay within. So if we bump above it for a short period of time to take advantage of some downward pressure, we'll absolutely lean into that and the balance sheet that we've established. Operator: Your next question comes from the line of Pooran Sharma with Stephens Inc. Pooran Sharma: Just wanted to say, hey, congratulations, Andrew. I know we'll probably interact a few more times here, but wanted to say it's been a pleasure working with you and wish you nothing but the best in the future. My first question, maybe just for Mindy. Mindy, you've talked about how you've been with the company really from the beginning. And I just maybe wanted to focus on your prior positions. I mean I think you held the CFO role. You were put into the COO role. Can you maybe talk about how that kind of prepared you or how that has prepared you to take on the CEO role coming this new year? Mindy West: Great question. And you're the first one that's asking that. So I'll be thinking through my response here. I think I have a great background for this role. One, I grew up in this business, so very familiar with our culture and the way that we do things and the way that we work. Through the CFO lens, especially at spin Andrew and I got to take this company public. And so we're taking public a company that existed within a subsidiary of a subsidiary of what used to be a fully integrated oil and gas company that was investment grade. So it kind of got to incubate under that environment in a very entrepreneurial way, which was fantastic. But obviously, when you think about taking something public, suddenly you need to have a lot of discipline. You need to have guardrails in place. You're now no longer investment grade, so every penny matters. Everything that wasn't material in that business before, now suddenly became material. So that gave me a great basis for what does it take for a public company? What do we really need to care about? How do we manage our performance? How do we make commitments to our shareholders and keep those and at the same time, balance our growth prospects and ambitions with maintaining a very solid and resilient balance sheet? So I think from the financial aspect, I have that pretty much down. I don't remember exactly what year it was that Andrew decided to add fuels to my CFO role. I want to say it was around 2017, 2018. And so that got me a real feel for one of the main engines of growth within this company, one of the main drivers of EBITDA fuels. Obviously, a very complex department as well. And so that gave me some exposure to some of the more commercial aspects of the business, especially the main commercial aspects of our business. So I got to season in that for a while. But then when you think about, okay, what was missing, it was really that connection with the customer because I had never done anything that was business to customer. It was only business-to-business from the commercial side. So bringing the COO role underneath me gave me one exposure to what we sell inside the store, so the merch category for the first time, but also a real understanding of the mission that we are serving for those value-conscious customers, how much they really count on us to be able to get through their lives on a month-by-month basis. And so that experience really rounded me out because now, I understand absolutely the financial discipline side, I understand the commercial aspect side, but I also understand that connection with the customer and also the connection with the staff that is actually serving that customer and how much we absolutely expect from them and how we need to make sure that whatever we do, we're simplifying their ability to serve our customers every day. So hope that answers your question. That's the first time anyone has ever asked me that, but I think that, that all 3 of those roles really did serve to round me out and prepare me in this journey to become CEO. Pooran Sharma: Yes. No, absolutely. I appreciate the color there. I guess on my follow-up, maybe just wanted to focus on costs. I think in the past, we're following a peak margin environment. You've been known to focus on costs and take them out. And so with this earnings release, we saw a reduction in store OpEx and SG&A. Just wanted to get a sense of how much opportunity is there ahead? Do you see like a good amount of opportunity to take out cost in 2026 and 2027 if you need to? Just wanted to get a sense of potential magnitude there. Mindy West: Obviously, this onetime restructure with order of magnitude far above what we would be able to do in the future because this was intended to be kind of a onetime reset of SG&A costs. But look, we're going to continue to optimize our business. So what you saw at this restructure, we streamlined our operations to scale the business properly and to force us to do more with less. So we've now made us leaner, but I think now we're uncovering opportunities, identifying what are those other opportunities for automation, for consolidating resources where it makes sense to streamline the workflow, to look at some of the overlaps in the business where we're not as efficient as we could be. So now that we've become leaner, I think the next step is how do we get more efficient. And so I do think that there is more to come there. And then we're going to continue to optimize the performance of our existing store network. I think we're off to a great start with our store productivity excellence initiative and other ones. And so we will continue to hold the line on costs. It's obviously really important now when the external macro environment for fuels is a bit of a challenge. But it also will reap benefits for us in the future when that does turn around and does normalize because we will be able to bank more of that extra margin because of the efforts and diligence that we're applying now. So do I think that it's going to be order of magnitude in a one time, one sell swoop, what it was in this quarter? No. But there are certainly plenty of opportunities that we already do see, and I'm sure we'll uncover new ones as we go forward. Operator: Your next question comes from the line of Bobby Griffin with Raymond James. Robert Griffin: My congrats to both of you guys as well on the new roles. Andrew, it's been a pleasure to work with you and get to know you over the last years. And Mindy, I look forward to continuing the relationship. I guess, first, I wanted to circle back. It was a comment in both of you guys' prepared remarks, and it's the nicotine promo CAGR over the last 5 years, I believe, 12%, which is pretty notable on a 5-year basis. And during that time, we start to see the evolution of the nicotine category with alternate nicotine. So I'm just kind of curious, as you think about that type of environment over the next 5 years, what does the change of the category and the composition of the category would alter nicotine due to that type of opportunity from promo dollars? Is altering nicotine going to, in your view, be accretive to that, make it look even better or less? Or just kind of curious how you think about that changing of the category. Mindy West: Absolutely, Bobby. Yes, we look at that as an opportunity because we own that customer. We know that customer better than anyone. And so again, just to our knowledge and ownership of that customer, along with our ability to execute, along with our loyalty program which majored and nicotine, we are ideally suited to help the manufacturers move those customers down the risk spectrum and incidentally moving them into what are higher-margin products. So we would absolutely expect that to continue because they get a great ROI. They know what they are getting when they invest with us. Andrew Clyde: Yes. Bobby, I think back over the last 13 years, and some of the things that have surprised me the most and someone who pays attention to industry structure and how that influences performance and competition, If you think about the tobacco category, it's a fairly concentrated industry amongst the manufacturers. And you can put the packaged beverage companies in the same category, yet the amount of innovation we've seen over the last decade is phenomenal from what you would expect to see in a concentrated industry, right? So you're seeing this continuum of risk introduce new products. You're seeing the different players making investments. Some working, some not working as well. Making acquisitions, some working, not working as well. And there's actually pretty good competition amongst those players. And as they introduce new products, new brands within those products, et cetera, part of their go-to-market strategy has to be through retailers who can get their product in front of customers. And on the nicotine side, as Mindy noted, we're the only retailer in the space who intentionally build a loyalty platform around the nicotine category. And so the benefits that we're able to provide to these manufacturers who continue to innovate, which we are very thankful for, I think is just going to continue to evolve. There's also a lot of upstarts in the category, right? So as others try to get a toehold into nicotine pouches where the top 3 players might control 90%, there's companies out there that want a shot, and they just have to look at packaged beverage like energy drinks to see well, Celsius was one of those small players. And you know what, they finally got a toehold in the category. So there's a lot of Davids out there looking at the Goliaths, and they, too, realize the only way they can get the customers' attention, right, is going to be through the broader capabilities we have, especially the store upselling capabilities because they're not going to get the preferred shelf space where the customer can see it in the back bar, they're going to get it because of the upselling. So I'm really excited about the future of these categories, but even more excited about our capabilities as we continue to hone them for both packaged beverage and nicotine providers. Robert Griffin: Very good. That's helpful. And I guess lastly for me, when you think about the $0.02 that you guys referenced, a margin on the Street to help drive volume, and the potential of that going away where you could keep it or not have to do that, is that purely just a volatility pricing environment returns to "more normal," or is there also a competition aspect in certain key markets for you guys that is basically independent of the underlying commodity environment? So that would actually have to behave differently, too, for you to be able to get those $0.02 back. Mindy West: Probably I would say yes and yes, kind of. So when I think about your first scenario, it's really more a function of just this low price environment, especially given that we're sub-$3 because prices do matter. People just, for whatever reason, are just not as price sensitive, are not willing to go across -- drive across town to save $0.02 a gallon when prices are below $3 versus above $3. So really, the phenomenon that would need to change would be the overall price profile being higher. With regard to competition, that obviously has an impact, especially in key markets where we're seeing competitive intrusion because really good competitors are going to act the same way that we do when we go into a new market, which is the price load to gain share. That's not actually irrational, that's a very rational thing to do. And what happens is when everybody gets their share, then everybody raises prices and plays nice. So over the sweep of time, that doesn't have an impact, but in certain key markets during certain months, absolutely. But we disrupt the market in the exact same way when we open our site. So that's why I say, yes and yes, kind of because, yes, there will be a competitive response for those new-to-industry sites, but it only lasts for a few months for just a short period of time. Andrew Clyde: And Bobby, the only two cents I would add there, no pun intended, is -- and we've always seen competitive entry. And I think what we're seeing now is just kind of more isolated in locales, as Mindy said, that dissipates. It's not like there's the big play like where Walmart rolled out so many neighborhood markets in a period, and you saw that effect more at scale. I think another thing when we talk about peak to trough, fundamental difference between, I would say, kind of the low price trough we're in now versus the one post 2014 is when we had $0.16 all-in margins and you had significantly lower margins after your variable cost, putting $0.01 or $0.02 on the Street was a significant, much more significant part of your available gross margin. And so if you go back to those periods, the volume impact that we witnessed is significantly more impactful than what we're seeing now. And so in this type of environment, you can put $0.02 on the Street because partly, you're getting a couple of cents every year from the structural dynamic that happened then, but not at the same level of inflection. And at $0.30 margins, the variable margin that's left is significantly greater. And so it's much more beneficial to maintain that volume, even if it's at 98%, 99%, no one in the higher price, more normalized environment, the customer goes back to their more normalized behavior and you get that back. So those are the kind of trade-offs, and I'd say this trough, we're doing much better than the prior one for a whole set of reasons. But part of it is the fact that the higher structural margins we're enjoying allows us to make some different decisions with respect to price-volume trade-offs. Operator: Due to time constraints, our final question comes from the line of Jacob Aiken-Phillips with Melius Research. Jacob Aiken-Phillips: I guess congrats is in order to all 3 of you given the next -- you've taken a new step in your professional journeys. So I guess to start off, a little bit more on fuel. I'm curious. The run-up in early October, were you also putting a couple of cents back on the Street? And can you give a little more color on what drove the increase in October? Then also the updated guidance seems to imply that you'll have positive fuel gallons and maybe positive same-store fuel gallons in 4Q. So any thoughts generally on that? Mindy West: Yes, I'll take that question, Jacob. Thanks for your question. The tightness in the market was due to a refinery that was briefly offline for a week or 2. But in a well-supplied environment, it all normalized pretty soon. The pipeline was reversed in order to get product back up into the Midwest. And so it ride itself quickly. But during the course of those couple of weeks, that was literally the most sustained run-up that we had seen in a while. So that allowed the market to completely restore. We restored with it, which then allowed us to create some separation and essentially achieve some really nice margin and get 100% of our volume. Carrying that forward, I can't extrapolate that into the rest of the fourth quarter because we really haven't seen that yet. I was just giving that as an example of when we do see that happen, we are able to respond. The market is also responding in the way that we would expect it to, which will then allow us to create time periods in which we can get outside margin and as well as volume. But this past quarter was just essentially flat, which we've always said is the worst environment for us from a fuel standpoint. We did see some pickup in October. I hope we see it going into Thanksgiving. That would certainly be nice to carry some high margins over the holiday period. But not ready to extrapolate the rest of the quarter that we're going to be at 100% of last year's volume. Jacob Aiken-Phillips: Got it. That's helpful. And then sorry to ask another question on capital allocation. But you reaffirmed the 50-50 and the share buybacks and increased the dividend. I'm just curious, it seems like you're trying to accelerate new store growth to 50 plus next year, maybe some accelerated R&Rs and perhaps some other remodels or other smaller projects. So I'm just curious how we should think about CapEx next year? And if that number is elevated, should we expect repo to be up or is that more balanced over the next few years? Andrew Clyde: We haven't given our CapEx guidance for next year, we're finalizing our plan on that, certainly as part of our ramp to get to the 50. This year, we had real estate that goes into that. So one of the things we're clearly looking at is the trade-off between more raze-and-rebuild versus remodels and maintenance programs. We do expect significant bonus depreciation benefits from One Big Beautiful Bill, that can actually address a lot of that incremental capital that we're talking about and using those tax benefits for reinvestment. And as we said on the share repurchase, we'll continue to be disciplined and also opportunistic on that given we've got the balance sheet we can lean into should we want to take advantage of particular opportunities. So we look at this like anything over a 3- to 5-year period, not just the next 12-month period. And that's why we remain very bullish about the business as we think about where we're going to be, '28 to 2030, where we view the fuel margins to normalize, where we look at our store count, where we look at EBITDA and look where the outstanding share count is. So we expect to see attractive returns, both on new stores to reinvestment capital as well as the share repo over that period. And we'll be back -- actually, Mindy will be back in February with the guidance for 2026, which will include that capital. So I think this wraps up today's call. I've enjoyed these earnings calls. I talked to CEO peers, they kind of speak to me, my gosh, we got our earnings call coming up or we've got the investor meetings or whatever. Spending time with the analysts and investors has been one of the most fun parts of this job. We've had an incredible story to tell. We've had incredible people to tell the story with. We have an incredible talented group of team members that actually live the story where we get to be the chief storytellers, and we're really proud of that, but also the capital allocation discipline that we know investors care about. And I think this message coupled with continuity of leadership with Mindy succeeding me and clearly knowing the business and the people and the team and how we create value and our capital allocation approach positions this company in excellent shape for the near term as well as the longer term. I look forward to seeing some of you on the road or one-on-one calls as we kind of wrap up some year-end investor discussions. And thank you again for supporting Murphy USA and me as CEO during this tenure. Thank you very much. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Cactus Quarter 3 2025 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Alan Boyd, Director of Corporate Development and Investor Relations. Please go ahead. Alan Boyd: Thank you, and good morning. We appreciate you joining us on today's call. Our speakers will be Scott Bender, our Chairman and Chief Executive Officer; and Jay Nutt, our Chief Financial Officer. Also joining us today are Joel Bender, President; Steven Bender, Chief Operating Officer; Steve Tadlock, CEO of FlexSteel; and Will Marsh, our General Counsel. Please note that any comments we make on today's call regarding projections or expectations for future events are forward-looking statements covered by the Private Securities Litigation Reform Act. Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC. Any forward-looking statements we make today are only as of today's date, and we undertake no obligation to publicly update or review any forward-looking statements. In addition, during today's call, we will reference certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release. With that, I will turn the call over to Scott. Scott Bender: Thanks, Alan, and good morning. I'm extremely pleased with our third quarter performance. Pressure Control margins improved sequentially due to our tariff mitigation and cost reduction efforts, while Spoolable Technologies sales and margins exceeded expectations on higher international shipments. These outcomes are the result of extensive efforts and focus from our team, and I'm very grateful. Some third quarter total company financial highlights include revenue of $264 million, adjusted EBITDA of $87 million, adjusted EBITDA margin of 32.9%. We paid a quarterly dividend of $0.14 per share, and we increased our cash balance to $446 million. I'll now turn the call over to Jay Nutt, our CFO, who will review our financial results. Following his remarks, I'll provide some thoughts on our outlook for the near term before opening the line for Q&A. Jay? Jay Nutt: Thank you, Scott. As Scott just mentioned, total Q3 revenues were $264 million, a sequential 3.5% decline and total adjusted EBITDA was $87 million, approximately flat from the second quarter. For our Pressure Control segment, revenues of $169 million were down 6.2% sequentially, driven primarily by lower frac rental revenues as we continue to focus on our consumable business. Operating income increased $2.2 million or 5.2% sequentially, with operating margins increasing 290 basis points and adjusted segment EBITDA was $2.1 million or 3.9% higher sequentially, with margins increasing by 320 basis points. The margin increase was primarily due to the implementation of cost reduction initiatives, tariff mitigation efforts and reduced legal expenses. For our Spoolable Technologies segment, revenues of $95 million were down 1% sequentially on lower domestic customer activity levels, mostly offset by increased international sales. Operating income decreased $2.2 million or 8% sequentially, with operating margins decreasing 210 basis points due to higher input costs. Adjusted segment EBITDA decreased $2 million or 5.2% sequentially, while margins declined by 160 basis points. Corporate and other expenses declined $0.5 million to $9.1 million in Q3, which included $3.2 million of professional fees associated with the announced plan to acquire a majority interest in the surface Pressure Control business of Baker Hughes. Adjusted corporate EBITDA was down slightly to $4.2 million of expense. On a total company basis, third quarter adjusted EBITDA was $87 million, flat from the second quarter. Adjusted EBITDA margin for the third quarter was 32.9% compared to 31.7% for the second quarter. Adjustments to total company EBITDA during the third quarter of 2025 include noncash charges of $6.1 million in stock-based compensation and $3.2 million for transaction-related professional fees and $247,000 for continued severance actions to right size the organization for lower activity levels. Depreciation and amortization expense for the third quarter was $16 million, which includes an ongoing $4 million of amortization expense related to the intangible assets resulting from the FlexSteel acquisition. During the third quarter, the public or Class A ownership of the company averaged and ended the period at 86%. GAAP net income was $50 million in the third quarter versus $49 million during the second quarter. Book tax expense during the third quarter was $14 million, resulting in an effective tax rate of 22%. Adjusted net income and earnings per share were $54 million and $0.67 per share, respectively, during the third quarter compared to $53 million and $0.66 per share in the second quarter. Adjusted net income for the third quarter was net of a 25% tax rate applied to our adjusted pretax income, consistent with the prior quarter. During the quarter, we paid a quarterly dividend of $0.14 per share, resulting in a cash outflow of approximately $11 million, including related distributions to members. We ended the quarter with a cash balance of $446 million, a sequential increase of approximately $40 million. Inventory build has represented a working capital headwind year-to-date, which has decreased our usual pace of cash flow with most of the increase in the carrying value being due to tariffs rather than increased quantities of inventory on hand. Net CapEx was approximately $8.2 million during the third quarter of 2025. In a moment, Scott will give you our fourth quarter operational outlook. Some additional financial considerations when looking ahead to the fourth quarter, include an effective tax rate of 22% and an estimated tax rate for adjusted EPS continuing at 25%. Total depreciation and amortization expense during the fourth quarter is expected to be approximately $16 million, with $7 million associated with our Pressure Control segment and the remaining $9 million in Spoolable Technologies. Our full year 2025 net CapEx outlook remains in the range of $40 million to $45 million, including the $6 million equity investment made into Vietnam. Additionally, the annual TRA payment and related member distribution was delayed to October of 2025 from our previous plan to settle in the third quarter. The payment and related distributions were made earlier this month and totaled approximately $23 million. Finally, the Board has approved a quarterly dividend of $0.14 per share, which will be paid in December. That covers the financial review, and I'll now turn the call back over to Scott. Scott Bender: Thanks, Jay. I'll begin by touching on our current understanding of the highly fluid tariff situation. Through the third quarter, there were no substantial changes in the tariff rates applied to our goods, which were detailed on last quarter's call. We continue to pay an incremental 70% tariff on most goods imported from China for a 95% total tariff rate and a 50% tariff on most goods imported from Vietnam. We're seeking further clarity on recent announcements of tariff reductions in the Far East. But based upon the latest information, we expect some reduction in the fentanyl-related tariff rate from China. That said, the Section 232 tariff, which remains at 50% is far more impactful to our operations. At this point, we are several months into our efforts to mitigate the tariff impact to our business. I'm proud of the work our team has done to flex the organization and supply chain to improve profitability, and I'm appreciative of the support of our customers and vendors throughout this process. Our Vietnam plant is increasing its pace of shipments, and we still expect substantial displacement of Chinese shipments into the U.S. by mid-next year as we await the finalization of our API certification. I'll now move on to our expectations for the fourth quarter of 2025 by operating segment. During the fourth quarter, we expect Pressure Control revenue to be relatively flat versus the $169 million, excuse me, reported in the third quarter, aided by modestly increased activity in our frac rental business, which offsets normal holiday slowdowns. We believe that most industry activity declines for 2025 are behind us and expect the fourth quarter U.S. land rig count to drift modestly lower through the year-end. Adjusted EBITDA margins in our Pressure Control segment are expected to be in the 31% to 33% for the fourth quarter, staying relatively stable from the third quarter and inclusive of typical seasonal declines in field service utilization. This adjusted EBITDA guidance excludes approximately $3 million of stock-based comp expense within the segment. Shifting to our Spoolable Technologies segment. We are particularly pleased with the progress we're making on the international side of the business. We achieved our highest international revenue since the acquisition during the third quarter, which served to further our geographic diversification. We expect this momentum to continue. We were recently awarded our first gas service order from a major Middle East NOC and shipped a large order for a new customer in Africa. Additionally, we recently booked our first commercial order in another major Middle East market for shipment in the first half of 2026, which is our first sour service order in the region. We're further encouraged by customer interest in newly developed products. For the fourth quarter, we expect total Spoolable Technologies revenue to be down low double digits sequentially, which is consistent with the typical seasonal pattern in this business. We expect adjusted EBITDA margins to be approximately 34% to 36% for Q4, which excludes $1 million of stock-based comp in the segment, moderating third quarter levels on lower volume. Adjusted corporate EBITDA is expected to be a charge of approximately $4 million in Q4, which excludes 2 million of stock-based comp. Regarding our planned acquisition of a majority interest in the Surface Pressure Control business of Baker Hughes, integration planning and administrative legal filings are proceeding smoothly, and we expect that transaction will close in early 2026. In conclusion, the third quarter demonstrated real progress from our actions to enhance our operating results. The improvement in pressure control margins reflects the agility of our organization in responding to highly dynamic market conditions as we've demonstrated through past cycles. The stronger Spoolable Technologies international revenues are the result of a long-term concerted effort to increase our sales focus in key global markets, which should be enhanced by the increased footprint offered by our announced acquisition of a majority interest in the Baker Hughes Surface Pressure Control business. Domestic activity looks -- levels remain subdued, but I'm confident in our ability to continue to outperform and deliver industry-leading returns for our shareholders. I'd like to close by thanking our associates for their focused commitment on executing for our customers throughout a turbulent market. With that, I'll turn it back over to the operator, and we can begin Q&A. Operator? Operator: [Operator Instructions] Our first question comes from David Anderson of Barclays. John Anderson: I have a rather broad question to start. You'll probably hate the question, but I'll ask it anyways. I was wondering if you could just kind of give us a sense as to where your kind of your U.S. customers are thinking -- kind of what they're thinking and what they're asking about in the current environment. 4Q is a little bit softer. There's no sense of urgency out there. You characterized it just now as subdued. I think you've also said customers have been acting as oils in the 50s. I was just wondering, are your customers concerned that oil price is going to take another leg down? Are you seeing more than the usual pricing pressure out there? Or is this more of a situation where things -- where customers are actually kind of fairly bullish or are just sort of staying flat at these levels, waiting for kind of an oil price signal for next year? I'm just trying to get a handle as to how we should think about upstream spending in '26 from these 4Q levels that we're going to see coming out here, just some of the puts and takes. Scott Bender: Yes. I mean, David, that's obviously a question that weighs heavily on us. I'm going to give you my personal opinion. And I think that the downside risk of oil prices is far greater than upside potential. If I was a betting man, I'd suggest it was going to be between $55 and $60, but I also think our customers have taken that into consideration with their plans. I can tell you that they are currently far less transparent than they have been in the past because we're very much in a wait-and-see environment. And a major part of that, David is, you know this is not only the surplus availability coming out of OPEC+ but it also has to do with questions about the administration's implementation and enforcement of Russian oil sanctions. The Russians have proved to be very adept at circumventing sanctions as have the Iranians. So I think that all of our customers are concerned about that. But none of them, I think, are basing their budgets on $65 oil or even $60 oil. The other, I think, important aspect is that we believe that our larger customers who maintain relatively large inventories in the core drilling basins and core basins will be far less susceptible to lower oil prices than some of the privates or independents. John Anderson: I was going to ask about the Spoolable side. I was wondering if you could expand a little bit on the international opportunities and kind of talk about kind of what was unusual in this quarter that Spoolables were higher. And also if you could talk about some of the more attractive markets for this product. I think you said Africa, a couple in the Middle East. You're now -- you've also talked previously about cross-selling opportunities with SPC in the Middle East, but you're already getting awards ahead of that. Could you sort of just talk about a couple of those different markets that you're seeing for Spoolable and kind of '26 and '27 opportunities? Scott Bender: Sure. I'm going to defer to Steve Tadlock. Stephen Tadlock: David, I think in Q3, I mean, really, in terms of markets, we're seeing it worldwide, which is -- we're obviously very pleased by that. When I kind of stepped into the role 2 years ago, we probably had our best concentration in Latin America, and that's just some of the individuals we had down there representing us on the team. And since then, we've expanded personnel and put them -- we've utilized the Cactus Wellhead Australia team. They've done a great job. We got our first delivery in Q3 to Australia. We added another individual in Southeast Asia, who's seeing some traction. We've added somebody in the Middle East who's -- as Scott mentioned, we had our first sour service order for next year for a Middle East region -- we've never done -- a country we've never done business in. So it's really across the board. We're just seeing a lot of interest in the product. I think the introduction of the sour service product in the past year has really opened up the worldwide market just given the larger sour needs overseas versus the U.S. So I think that's kind of fundamentally what's happening. It's increased focus, more personnel and the orders kind of build on themselves. So more traction, somebody moves to another company or they hear about another company using our product, and it's spreading. Operator: Our next question comes from Scott Gruber of Citigroup. Scott Gruber: Really excellent margin performance here in Pressure Control during the quarter. Can you just unpack that a bit more for us? Was that greater acceptance of tariff surcharges than anticipated? Or did you pull the cost lever harder during the quarter? Just unpack that Pressure Control margin beat a bit for us. Scott Bender: Mr. Gruber, you know I'm not going to comment on price changes. Don't you? Yes, you do. Scott Gruber: I tried. Scott Bender: You always try. Let me just say it's a combination, but I'm not going to focus on the relative contributions. So think about this. We really are blessed to have the best supply chain guy in the industry. He happens to be my brother, but I'm still objective about that. So he's done a great job of getting -- receiving cooperation from our suppliers. That's the first point. I think the second point is that we have some -- we do have some very understanding customers because we've supported them, and they continue to support us. And then we're very aggressive in terms of flexing the organization in terms of activity. Keep in mind, and I've said this before, that because we're primarily in a variable cost business, it's much easier for us to flex down than it is for oilfield service companies that have relatively high fixed costs. So it really is a combination of all those things. It's -- the team has just done a great job. We've also redirected our supply chain to minimize the impact of tariffs and because we have purchasing power and which, by the way, will only be enhanced, we expect by the addition of Baker Hughes SPC business. So Scott, it's not the answer you wanted, but it's all I can give you right now. Scott Gruber: No, I appreciate all the color. And I wanted to ask about that new wellhead system that you guys were about to introduce kind of 6, 12 months ago and then the market started softening. Where do you stand with that now? It seems like we're finding some potential stability in the market. We'll see where oil prices go. But you got your Pressure Control margins back up. You've kind of worked through the tariffs issue. Just give us your latest thoughts on introducing that new system in '26 or whether that's going to be delayed further. Scott Bender: Yes. So I can answer that question, Scott, Q1. Operator: Our next question comes from Stephen Gengaro of Stifel. Stephen Gengaro: I think 2 for me and one follows up a little bit on Scott's question. The -- I think -- and you can correct me if I'm wrong, but I think last quarter, you alluded to it being harder to support margins with the tariffs. It sounded like part of that was because of lower customer activity. But it seems like that tone has changed a bit and the results were clearly very good. Could you comment on that at all? Scott Bender: Yes. Because Stephen, just to remind you, what happened to us in the previous quarter is that the tariff rates changed very unexpectedly in I think, it was May or early June when the Section 232 moved from 25 to 50. So we frankly had not anticipated that and received no indication that, that was the case. Now that -- and as a result, it made it very difficult for us to make a case to suppliers, customers not knowing where we were going to land. We have greater clarity on that, which helps us to address our suppliers and our customers. So I would think it's more about the increased tariff environment than it is about activity levels. That said, we've been very pleasantly surprised with how our particular customer base has held up. But again, I want to emphasize, Stephen, that our expectations are that those customers with holdings in the core areas of our basins, because our customers are the larger publicly held E&Ps that we expect that to hold up relative to the rest of the market. Stephen Gengaro: Great. And the follow-up to that was without asking you about market share. But when you think about Pressure Control and you think about activity levels, you've been outperforming that, right? And I would imagine as we go forward here, notwithstanding how the rig count evolves, you'll continue to outperform that, driven just primarily by the stability of your customers. Is that fair as we think about? And I'm thinking like a North America comment? Scott Bender: Yes. As I mentioned, we're not getting a whole lot of clarity in terms of next year. But I think it's also fair to say that our market share is not going to be -- is going to be a function of new names. And we're seeing some increased interest from some significant players. I believe that's going to continue. So I'm guardedly optimistic that we'll be able to defend and potentially expand it. The question is, how big is that pie going to be? And I just -- I can't estimate that for you. I just think that our pie is going to be significantly larger than some of our competitors. I would also say that we've seen some very large competitors try to increase market share during this period of anemic growth, frankly, at the expense of, I think, their margins. So I can't control that. Operator: Our next question comes from Arun Jayaram from JPMorgan Securities. Arun Jayaram: I wondered if you could provide any updated perspective on the Cactus SPC transaction, which you indicated you expect to close in early 2026. How is the integration planning going? But any updated views would be much appreciated because that is an important swing factor as we think about your earnings power next year. Scott Bender: So specifically, what are you asking me? Arun Jayaram: Yes. Just your thoughts on kind of the earnings power of that segment next year? Obviously, there's been some crosscurrents in Saudi, although we were on the Nabors call yesterday, and Tony mentioned how there could be an improvement in activity as you got into the back half of -- or second half of 2026. So yes, I was wondering if you've been to the Middle East recently and just could offer any kind of data points or fresh perspective. Like I said, there's just been some cross currents as we think about potential spending trends next year. Scott Bender: Yes. I was there about 2 weeks ago. So I think the Saudis are probably projecting the possibility of increased activity in the second half of '26, but that hasn't translated into orders. And those are just facts. And the international market typically, when we have a slowdown in the U.S., you normally see about a 12-month lag in the international market. So I expect the international market, even the Mid East to have a relatively weaker 2026 than in 2025. There is no concrete objective evidence, which would only be manifested by order placements. So I just -- I can't be terribly optimistic about the Mid East. It just Brent is going to be in the low 60s, and that's got to somehow translate into reduced activity. Now what we are seeing is some U.S. companies becoming more active in the Mid East. And I think that's -- which is really good for us because they happen to be our customers. And there is an absolute undeniable focus on unconventional drilling. And they really are welcoming Western companies. And as a result, the Western companies bring in the suppliers with whom they're most comfortable. So I feel good about that. Will that offset the overall decline? Not likely, but it will mitigate the impact. Arun Jayaram: Great. That's helpful. I really appreciate that perspective. Maybe just my follow-up. Maybe give us an update on your sourcing plans internationally. How is the ramp going in Vietnam? And maybe just some thoughts on that. Scott Bender: Yes. So I can defer to Joel on that. He's in the room with us. Vietnam is progressing. Well, Joel, I'll let you handle it. Joel Bender: Yes, it's progressing well. We're starting to move some of the wellhead into the U.S. that we need to be able to assemble and monogram. We're currently in line with API to get our audit to be monogrammed. We filled the paperwork out. We submitted all the required additional documentation. So we're expecting to have that audit in the next -- hopefully in the next 90 or so days. So we'll have that done after the first of the year. One of our requirements is to be able to provide API monogram equipment from that facility. But in the interim, we have started to move wellhead housings and tubing head bodies into the U.S. that we'll do the assembly at our Bossier City facility. So it's progressing well, expanding, adding headcount, adding fixtures for testing. So pretty pleased with the progress. Arun Jayaram: Any sense once you do get API certification, what kind of mix Vietnam can have perhaps next year? Joel Bender: We're going to focus primarily on the wellhead out of there towards the end of the year. We'll start bringing some of our gate valves. But the primary focus for the beginning of the year and the year will be getting as many of the wellheads and the tubing head assemblies. I would say somewhere in the magnitude of at least half. Operator: Our next question comes from Don Crist of Johnson Rice. Donald Crist: Scott, I just wanted to ask one question on kind of the macro front. I mean we're hearing a lot more chatter about unconventional drilling in many different countries around the world. And obviously, there's a lot more activity kind of move in that direction. But I just wanted to know from your standpoint, what do you think the time frame would be to kind of see a material pickup in unconventional around the world, whether it be in Turkey or Libya or any other places that aren't big today in unconventionals. Just kind of a time frame perspective because nobody seems to give that number out. Scott Bender: Well, I can tell you this with absolute certainty that we've seen an exponential increase in unconventional requests. throughout the Middle East. I'm less optimistic about Argentina, frankly, because there's just not that many rigs running in comparison to the Mid East. A lot of interest in Saudi, a lot of interest in Abu Dhabi. I would probably tell you that by the end of 2026, we're going to see -- in fact, I think we have our first unconventional shipment, Joel, scheduled for when? Joel Bender: It's probably going to go January to February. Scott Bender: Yes. So it's basically a U.S. product. So I don't anticipate, obviously, any issues with that. So I think we'll see a steady ramp-up. The real interest right now is to compare the results of using an unconventionally -- a design specifically addressing unconventional with what they're using in terms of flashed equipment. So this will be pending the results of the time savings. So if the time savings or anything at all approaching the U.S., I think that once word spreads and it spreads quickly, I think you're going to see a serious ramp-up. So let's call it fourth quarter because they need time to drill these wells and analyze the efficiency. So I can tell you, my gut feeling is '27 will be a significant contributor. And I think that by the fourth quarter of '26, we're going to see some meaningful shipments. Operator: I'm showing no further questions at this time. I would now like to turn it back over to the Chairman and CEO, Scott Bender, for closing remarks. Scott Bender: All right. I want to thank everybody for their continued interest in the company, and I'm really pleased with this team's efforts in terms of dealing with sort of an anemic market and a very uncertain tariff landscape. This really is a reflection of not only how flexible our team is, but also the fact that we are and will always be heavily invested in consumables and variable cost businesses. So thanks again for your interest. Have a good day. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Imerys 2025 First 9 Months and Third Quarter Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speakers today, Alessandro Dazza, Chief Executive Officer; and Sebastien Rouge, Chief Financial Officer. Please go ahead. Alessandro Dazza: Thank you. Good afternoon or good evening to all of you, and thank you for joining us today to review Imerys first 9 months and Q3 2025 results. Next to me this evening, as usual, Sebastien Rouge, our CFO. And as usual, please let me start by giving you some highlights for the 9 months we just closed. Imerys' performance for the 9 months is the result of a positive start to the year and a softer second part. Q3 reflected an honestly unexpected slowdown in the U.S. economy as a result of uncertainty caused by the U.S. tariff policy. Europe, even if overall activity remains low, seems to be turning the corner positively. Revenue for the first 9 months was EUR 2.583 billion, slightly down 0.7% like-for-like versus last year. Even in this context, which remains challenging, Imerys posted an EBITDA of EUR 421 million, in line with last year like-for-like and excluding the contribution of joint ventures. This demonstrates the resilience of our company also in difficult times. The adjusted EBITDA for the third quarter '25 was $140 million, representing a 17% margin and again, reflecting disciplined pricing policy, ongoing continuous cost management and positive business dynamic in the polymer and additive businesses. For the full year 2025, the group confirms its adjusted EBITDA target in the range of EUR 540 million to EUR 580 million. Last important as we do not see a significant market recovery or at least is being delayed on top of the ongoing actions on costs, and I will come back to this, the group is launching a comprehensive cost reduction and performance improvement program aimed at simplifying its organization and adjusting its industrial footprint to restore profitability. Finally, some key updates of the quarter. First on EMILI. Imerys has received an indication of interest from a potential investor to acquire a minority stake in the EMILI Lithium Project. Classic, subject to customary due diligence and approvals, this investment should be formalized by the end of January '26 and would allow the completion of the definitive feasibility study of the commercial plant sometimes around the end of next year. Consequently, any decision concerning future phases such as the construction of the industrial pilot plant are on hold and will be made in due course based on market conditions and capital allocation considerations. Second, important good news, Imerys signed today an agreement to purchase SB Mineração in Brazil. SB Mineração is a Brazilian company specialized in the production of ground calcium carbonate or GCC, based in Cachoeiro in the state of Espírito Santo. The company is a leading producer of GCC for various applications, in particular, polymers, thermosets, paints and coatings. In '24, the business generated approximately USD 30 million in revenue with a solid profitability. With this acquisition, Imerys would strengthen its footprint in Brazil, where it is already one of the main producers of carbonates. The completion of the transaction is subject to customary closing conditions, including regulatory approvals. A word on our decarbonization road map. We signed an important partnership in October with LNG to supply green energy to approximately 25% of our European operations via a 10-year corporate purchase agreement for the annual generation of 200 gigawatt hour of renewable electricity in Spain. This agreement will enable the reduction of 70,000 tons of CO2 equivalent per year or 14% of our Scope 2 emissions, so a significant step. Finally, our Imerys Graphite & Carbon business signed 2 strategic partnerships aiming at enlarging its innovative product portfolio for batteries. One is with Cnano, the global leader in carbon nanotubes, the second one with Shanghai ShanShan, who is the global leader in synthetic graphite for lithium-ion batteries. I will not enter the details and more details are available on our website on the 2 specific projects. What is important, both partnerships directly address Europe's crucial need for a regional, resilient and competitive battery supply chain based on state-of-the-art technologies. If we move on now to the next slide. Here, you see Imerys sales performance by geography for the first 9 months, which gives a good picture of the a bit contrasted economic activity by area. Europe represents about 50% of our sales or slightly less, enjoyed finally a light recovery in Q3, thanks to improving construction and industrial activity. And you see this if you compare to what we published in July with the Q2 results. Nevertheless, on a full year basis, year-to-date, business is still lagging behind last year, and we know due to soft activity in industrial sector and a poor construction market until recently. North America, the big surprise of the quarter really subdued in Q3, confirming a trend that we have seen at the end of Q2, mostly affected by tariffs, a weak industrial or weak, sorry, residential markets and a bad quarter in filtration, partly, frankly, relating to our own production issues relating to CapEx and some industrial topics. For the 9 months, sales are basically flat compared to last year or in line with previous year. We should not forget the significant impact of the devaluation of the U.S. dollar, negatively impacting sales at the level of 4% compared to last year, so becoming significant. In Asia, sales are growing nicely, not only in India, but also in China, which remains quite dynamic, especially around new technologies, electric vehicles and strong exports in general. South America, very strong first half, a bit weaker Q3, but I remain confident it will be a good year in South America. On the next slide, as usual, a deep dive on what really shows the robustness of Imerys' business model. On the left side, you can see the evolution of our adjusted EBITDA year-on-year. We do have a significant impact of perimeter, as we saw before, coming from the divestiture of the assets serving the paper market last year in July and of joint ventures, as we have been discussing since the beginning of this year. FX playing a role, as I mentioned before, but fundamentally, the core of Imerys' activity remains solid and adjusted EBITDA was resilient, almost flat compared to last year. On the right side, the balance price costs, which highlights the good continuous work done on cost reductions, first of all, but also on Imerys' agility to react to market changes in terms of pricing when needed. We know this balance remains a key factor for future success. Let's now look at our main underlying markets and their trends, and I'll be quick as we have partly already addressed the main trajectories and trends by geography. So overall, I would say what we saw in Q2 was confirmed in Q3 with overall markets, say, below expectation, especially construction and automotive, while growth in electric vehicles continues strongly, and while tariffs have a limited direct impact on Imerys, the uncertainty created by these tariffs is impacting more in general business activity and unfortunately, specifically some of our customers. To rapidly conclude on this side, construction finally, and potentially restarting in Europe, remains below expectation in the U.S. Consumer goods, resilient, certainly in the U.S., maybe slowing a bit in America for the reasons we have mentioned. Automotive, continued low production levels in Europe and in North America. China, good, benefiting from strong exports, but also these internal stimulus packages or policies launched by the government and of course, very strong EV growth in the area. General industrial activity, soft in Q2 in Western economies, strong or solid in China. so far for market trends. Sebastien, I hand over to you for more details on our accounts. Sébastien Rouge: Thank you, Alessandro. Good evening, everyone. Let me recap some of the key aspects of our financial performance, and we'll start with revenue. The group reports sales at EUR 2.6 billion for the first 9 months of 2025. It represents 0.7% decrease at constant exchange rate and perimeter as compared to last year, with volumes slightly down and prices holding well. You keep in mind the large perimeter effect, EUR 126 million, mainly due to the disposal of the assets serving paper in July '24. We have now an FX impact of minus EUR 47 million coming from a drop mostly of the USD versus euro from Q2 onwards. You can see in the chart, Imerys performance for the third quarter alone, quite similar trend for sales volume and prices and also a high FX impact. Perimeter effect is now positive, thanks to the good performance of Chemviron, the business acquired at the end of last year. If we look now into more details at our 3 business segments, beginning with Performance Minerals, the business generated EUR 1.547 billion since the beginning of '25, representing 60% of Imerys Group. Overall, the business shows a slightly negative organic growth as compared to last year due to a weak Q3, notably in America. Revenue in Q3 for Americas was down 5.7% at constant scope and exchange rate, reaching EUR 199 million. Sales were impacted by a weak residential market in the U.S. suffering from high interest rates, unsold housing inventory and also a soft filtration market. The prices held well. Revenue in Q3 for EMEA and APAC decreased by 3% like-for-like in the third quarter of '25 as compared to last year. Weak volumes, minus 4.1% were driven by low demand across main markets, where our sales to paints and automotive polymer slightly improved. I already mentioned the good performance of Chemviron's diatomite and perlite businesses integrated since January '25. Here as well, price grew in line with H1. Now looking at our solutions for Refractory, Abrasives and Construction business. We note a relative improvement of the business in Q3, posting organic growth in the quarter after a difficult H1. Business revenue reached EUR 278 million in Q3, an increase of 1.9% as compared to last year at constant scope and exchange rate. The recovery is primarily driven by stronger refractory activity, benefiting from positive momentum in the U.S. and China and some volume gains in Europe. In contrast, the construction business experienced a more mixed performance, impacted by soft end markets. In this business, prices as well held well. Now let's complete the segment review with the solutions for energy transition. Q3 revenues for graphite and carbon amounted to EUR 59 million, a 3.6% increase compared to last year at constant scope and exchange rate. Sales growth is still driven by robust end markets, primarily electric vehicles. The business also benefited from successful new product launches, in particular in polymer applications. A small note on the Quartz Corporation, our high-purity Quartz JV, 50% owned by Imerys and not consolidated, as you remember. The activity is showing some signs of normalization. However, these have yet to be confirmed as the solar value chain remains affected by persistent high inventories and the lack of significant reduction in production capacity. Now let's look at the group profitability. For the first 9 months, adjusted EBITDA reached EUR 421 million. It decreased by 21% as compared to last year, reflecting the impact of lower contribution of JVs, perimeter impact and an unfavorable exchange rate effect of minus EUR 11 million. Imerys achieved an adjusted EBITDA margin of 16.3% at the end of Q3 '25. This was supported by improved performance in graphite and carbon, resilient activity in Performance Minerals and a continuous cost management approach. Adjusted EBITDA Q3 '25 decreased by 6%, impacted by volume decrease and a EUR 10 million FX impact, which were partly offset by a positive price cost balance in this quarter again. Ongoing cost-saving initiatives allowed the group to keep fixed cost and overhead slightly lower than last year in absolute value, fully offsetting inflation. If we look now at the other elements of our income statement for the first 9 months of this year. Driven by the decrease of EBITDA in absolute value, current operating income reached EUR 216 million. With slightly higher interest expenses and lower income tax, current net income from continuing operation ended up at EUR 126 million at the end of September. You remember that last year, the group booked EUR 326 million in noncash expenses, mostly originating from the translation reserves associated with the assets serving the paper market that we divested in July '24. This year, in the first 9 months of '25, other operating expenses were limited to EUR 16 million. Year-to-date, net profit is, therefore, positive, reaching EUR 110 million at the end of September. I now hand over back to Alessandro for the outlook. Alessandro Dazza: Thank you, Sebastien. So let me conclude with some good news. First, we remain confident of achieving our guidance, which is not a given under current market circumstances. Second, I'd like to inform you that the date has been set by the relevant court to resume the confirmation hearing on our Chapter 11 case in the U.S. This is now planned to start on February 2 next year. Yes, we all wish it could be earlier, but this was the first available date provided by the court. What is important is having a date for this crucial hearing is a very important step towards the end of this process. Third, as you have seen at the beginning, we have signed, not done yet, but we have signed a new acquisition. It's a classic bolt-on. And as you can see with the recent one, Chemviron, it can be integrated rapidly, well, profitably with a lot of synergies. As you can see when you look specifically at Q3 performance, where the perimeter effect becomes only this acquisition. Then next, we indicated in the past that we were looking for a partner for the EMILI project. Well, I believe we are close to have found the first one. This will secure the financing of the next steps, giving precedence in our plans to the completion of the engineering studies for the DFS. Consequently, we will pause the investments in an industrial pilot plant and review this decision in due time and based on market conditions and capital allocation consideration. Last, you know that we relentlessly work on costs through careful management through our operational excellence program called I-Cube that you heard before. And I believe the EBITDA bridge Sebastien just showed you a few minutes ago confirms the good work done on costs. Nevertheless, we have to acknowledge that today, we do not see a significant rebound in or a market recovery in the nearby future. Therefore, we have to make a step up and the group is launching a comprehensive cost reduction and performance improvement program, aiming at achieving significant cost reduction via leaner, simplified organization and an adjusted industrial footprint with a clear target to improve profitability from 2026 onwards. More details on the program will be available at a later stage for obvious reasons. Thank you. And now I hand over to you for the Q&A session. Operator: [Operator Instructions] We will take our first question and the first question comes from the line of Ebrahim Homani from CIC. Ebrahim Homani: I have 3, if I may. The first one is about the Europe. You said that it is going better and better. Are the volumes already positive in the region? If not, do you expect that the volume will be positive in Q4? My second question is about your EMILI. Could you give us more flavor on the investor interest? Is it an industrial from the automotive industry and maybe more information on the term of this partnership? And my last question is on graphite and carbon. How do you explain the slowdown of the growth? I noticed that it is not a comparison basis effect as in Q3 2024, the branch was already declining. So the low growth, what's the explanation behind this lower growth compared to the H1? Alessandro Dazza: Thank you, Ebrahim. Well, volume in Europe, I remain prudent because we shall be prudent when I look at communications on Q3 coming in the market. I confirm that we believe the worst is behind. Construction in some areas is picking up. And I believe automotive will continue to decline in Q4, but most forecasts believe, again, that the bottom is reached and we should see a positive return of activity or at least a stabilization. Is it Q4? Is it the beginning of next year? We will see. What will definitely have a positive impact on our business in Europe in Q4 is, if you remember, there is an antidumping imposed temporarily, but valid on certain Chinese imports of minerals. And this will trigger a volume increase in Q4 for some businesses. If you look specifically at the RAC business, it was the -- except for graphite and carbon, the one posting organic growth because finally, volumes are starting to return with some gain of shares in Europe. So all in all, I am rather positive on Q4 volume development certainly into next year. On EMILI, as you can imagine, we are in the middle of discussions, by definition, confidential. So we'll be back to you when we can. And I believe it will be relatively short as we indicated in our press release and in our presentation. But bear with me at the moment, everything is covered by confidentiality. Graphite & Carbon, whilst the summer period is always a bit to be taken -- you have a small month normally in August. So you might see less deviation. Market remains solid. Growth remains solid. We have had some -- we have had 2 issues that have a little impact. For sure, we installed SAP in the two operations. And as always, there is some learning of the new system that you have to pay when you do these changes. By the way, we did the same in the U.S. this year. So for sure, this is causing a bit of disruptions. And secondly, when you ramp up at that speed, you need to run your plants. I cannot say flat out because we have capacity to follow growth for the next 3 years, but you don't turn the machine on and it goes along. We are recruiting people. We need to train the people, and frankly, we do have a bit of backlog of orders that we could not supply because we were not able to get all the material out of the door. So for me, is maybe the increase is less than Q2, but there is no negative news from the market that does not confirm the direction. Then of course, the more we grow, the more -- the higher the comparison basis will be coming from the past, but really no bad news in any form Ebrahim on G&C. Operator: Your next question comes from the line of Auguste Deryckx from KEC. Auguste Deryckx Lienart: My questions are on the Quartz JV. Given the weakness of the sector, do you see customers turning to a lower quality product, so a product with a lower purity? So in other words, are you losing market share? And the second question still on Quartz is still given the situation, do you think that you will be able to receive a dividend from the JV? And if so, what can be the level? And if not, how do you plan to crystallize the value of your stake in this JV? Alessandro Dazza: Thank you, Auguste, for the question. Specifically, listen, when you have free capacity in your operations, like it is the case in the value chain of especially solar in China today, of course, you try to save money and you try everything you can. Do we believe that we are or we will lose significant market shares in high purity? No. My view is no. At the moment, I think our customers have been trying to replace this product because of its high price and dependency really on two suppliers for many, many years, is nothing new. So I believe when the market will need to run production at strong level, a normal level to follow market growth. So once inventories are depleted, and last time we said it might be around mid next year, I think it will become again unavoidable to have the best quality because you will have the best productivity. So I remain of the opinion market share in normal conditions will remain for a high-purity top product. And on the same topic, clearly, the year is not as good as last year. Therefore, we have been more careful with the distribution of dividends. We will decide with our partners if and when is the right time. The company is making profit, good profits. You see only half of the net income in our numbers. But if you look really at what is the full potential of this business at EBITDA level, which you see in June and you will see in December, you see that it remains an incredible high-performing profitable business. And therefore, we will discuss openly with our partners what is the best for the business and for its shareholders. And based on that, we'll take the decision, which is not taken as of today, but it is part of the discussion we have as shareholders regularly. Operator: Your next question comes from the line of Sebastian Bray from Berenberg. Sebastian Bray: Can I start with one on the financing costs of the group, please. What is the underlying run rate that is a reasonable assumption for '26? And by when does the company expect to have refinancing in place for the bond that comes due roughly EUR 600 million? Is it towards the end of the year? Or would it expect to have something in the middle? Can I also ask about the review that the group is doing of its cost structure. The -- is this extending to a portfolio review as well? And are there any further assets that the group feels it could potentially divest as part of these considerations? Alessandro Dazza: I'll let Sebastien answer your -- first, Sebastian, welcome to this call. I think it's your first time. I'll let Sebastien answer on the financing side. Sébastien Rouge: Yes. I will probably not answer extremely precisely. This being said, I think you are -- you're asking the good question. We have a next big repayment very early in '27. So we pursue a very careful approach. So we will probably refinance that either late this year or in the first half of 2026 so that we are away from any timing risk, and we will not preannounce that, but I think we'll follow your advice, which is not to do that at the last minute, knowing that on top of that, bond markets are pretty good for corporates these days. Also, I think I think our careful approach on lithium is actually a good sign that will facilitate refinancing. As far as run rate is concerned, I would say it's a little bit mechanical. We have a very detailed of our financing in our annual report, obviously, and unfortunately, when we replace a new -- an old bond by a new bond, there is a little bit of extra interest rate, mechanical, but that, I would say, is true for us like the rest of the market. Alessandro Dazza: Thank you, Sebastien. And coming to your second question, Sebastien. At the moment, there is no plan to significantly review our portfolio. We have done it in the year '23 and '24. Yes, we might sell opportunistically one or the other site, especially if nonperforming or not up to our standards, but it will be very punctual and not really a big topic. On the contrary, as you have seen, we believe we are rather on the acquisition mode, bolt-on, easy, synergetic, profitable if opportunities arise. So cost is really an organizational matter. It's a matter of lean organization, simplification. We will review, as I said, our industrial footprint if it still fits the new markets. These tariffs are causing shifts in ore production with countries that are favored by more positive depositories, other that are paying a higher bill. So within our customer base, and that's what I referred to when I said limited direct impact for Imerys, but for our customer, yes. So there might be movements in where we supply our customers that could trigger, as you say, maybe a closure of a site or a divestiture of a site in a country maybe that has been penalized by lower activity. But we really want to work on costs. We are going to use AI to simplify our administrative processes, lean organization and probably give up some nice to haves that are not affordable when you have challenging market conditions. But the portfolio is a good one. And even the more -- let's say, the business is under more pressure like some businesses in Europe, especially after the energy crisis, if these antidumping measures will be confirmed, I do believe there will be market share gains and a return to a very reasonable profitability as expected. Operator: Your next question comes from the line of Sven Edelfelt from ODDO BHF. Sven Edelfelt: I would have two follow-up questions. Alessandro, you mentioned a first investor with regards to lithium. Does this suggest the participation will be limited to a 10-ish percentage point participation? And therefore, you expect maybe some other investor or maybe I misunderstood. And the second question, on the restructuring cost that you're announcing I don't understand why you are announcing a potential restructuring cost without giving us any number. On the second question related to this one is, does that mean that given what you have from your team on the ground, you don't expect a recovery before 2027 or 2028. What's the sense of doing it right now? That's my question. Alessandro Dazza: Thank you, Sven, for your questions. The first one is, again, I cannot enter more details as we are in the middle of the discussions. But I can definitely say that your interpretation is not the right one. A partner is a partner and every partner is important, and we expect the partner to play a significant role. What I'm saying is that if you look potentially to the end of this project is a very large project one day, if we go to the end. And typically, in mining -- large mining projects, you might have several players joining forces to sustain the CapEx to bring know-how and to develop jointly. So it's nothing to be interpreted other than this, partner important, every partner important. And going forward, we will consider interested party in this project if they bring value any time. On your second one, again, don't interpret that we do not expect any rebound. I expect a rebound in Europe next year. The magnitude to be seen. And when I say high is because all the studies -- economic studies we buy by big experts do foresee a recovery in Europe. They're a bit less optimistic on the recovery in the U.S. They believe the first months of next year, the U.S. might be under pressure because of all the turmoil, inflation uncertainty and uncertainty is the right word and then a recovery in the second half of next year. What I believe is that a significant strong rebound is not for the next 2, 3 quarters. Therefore, better be ready with a stronger company, leaner, more efficient. And when volumes come, that's with a 53%, 54%, 55% contribution margin, when volume comes, then we really see a significant improvement in profitability. So we are just doing an extra mile to be stronger, to be more efficient, to be leaner, waiting for a slow or a rapid recovery in the future. So not pushing back anywhere. I do believe '26 or at least forecast say '26 should be good again, but it's not there and waiting is not an option. We did not communicate more figures Sven because there are legal processes and constraints that are being discussed and no decision is taken. There are consultations ongoing, preparation. But latest by the next communication, we will give for sure all the details in due time when everything has been set, discussed, reviewed, negotiated, approved. So it give us the time just to be there. Operator: There are no further questions. I would like to hand back for closing remarks. Alessandro Dazza: Thank you very much, and thank you for all participants to listening to this evening's press release and presentation on Imerys. Thank you very much. Good evening. Sébastien Rouge: Good evening. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Novocure Third Quarter 2025 Earnings Call. [Operator Instructions] Please be advised, today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ingrid Goldberg. Please go ahead. Ingrid Goldberg: Good morning, and thank you for joining us to review Novocure's third quarter 2025 performance. I'm on the phone this morning with our Executive Chairman, Bill Doyle; CEO, Ashley Cordova; and CFO, Christoph Brackmann. Other members of our executive leadership team will be available for Q&A. For your reference, slides accompanying this earnings release can be found on our website, www.novocure.com, on the Investor Relations page under Quarterly Reports. Before we start, I would like to remind you that our discussions during this conference call will include forward-looking statements, and actual results could differ materially from those projected in these statements. These statements involve a number of risks and uncertainties, some of which are beyond our control and are described from time to time in our SEC filings. We do not intend to update publicly any forward-looking statements, except as required by law. Where appropriate, we will refer to the non-GAAP financial measures to evaluate our business, specifically adjusted EBITDA, a measure of earnings before interest, taxes, depreciation, amortization, and share-based compensation. We believe adjusted EBITDA is an important metric as it removes the impact of earnings attributable to our capital structure, tax rate, and material noncash items and best reflects the financial value generated by our business. Reconciliations of non-GAAP to GAAP financial measures are included in our press release, earnings slides and in our Form 10-Q filed with the SEC today. These materials can also be accessed on the Investor Relations page of our website. Following our prepared remarks today, we will open the line for your questions. I will now turn the call over to our Executive Chairman, Bill Doyle. William Doyle: Thank you, Ingrid, and good morning. At Novocure, our mission is to extend survival in some of the most aggressive forms of cancer. Through our early years, our efforts focused mostly on the treatment of patients with glioblastoma. Now with one launch ongoing and 2 additional launches planned for next year, the scope of our mission has expanded to reach more patients who can benefit from Tumor Treating Fields in multiple solid tumor cancers. As we evolve from a single indication company to a true platform therapy company, we are focused on 3 priorities: First, preparing to treat 4 cancer indications by year-end 2026. Second, reaching profitability. And third, making disciplined investments that strengthen our product portfolio in the near and the long-term. We will begin this morning with a review of our Q3 commercial results in glioblastoma and non-small cell lung cancer. We will discuss regulatory updates and preparation for anticipated launches in pancreatic cancer and brain metastases. And we will provide updates to our ongoing clinical and product development programs. We will conclude with a review of our quarterly financials and open the line for questions. Our GBM business remains solid and active patients have grown between 5% and 12% year-over-year for the last 9 consecutive quarters. We ended the third quarter with 4,277 GBM patients on therapy, our largest patient count to date. The largest contributors to active patient growth in this quarter were France, Japan, and Germany, which grew 27%, 8%, and 7%, respectively. We also expanded our international footprint. Last month, we received a positive national coverage decision from the Spanish Ministry of Health. At maturity, we expect Spain to deliver annual net revenue that is approximately half that of France. We expect full ramp-up to take a few years given the fragmented nature of the Spanish health care system. In the U.S., our GBM active patient count was flat compared to Q3 2024. While we are proud to be treating approximately 40% of GBM patients in the U.S., we recognize that many more patients could benefit from TTFields therapy. Unlike lung cancer and pancreatic cancer, where most patients seek treatment in community centers, virtually all GBM patients undergo brain surgery at high-volume academic centers after diagnosis. Oncologists at academic centers often prioritize enrollment in pharmaceutical clinical trials over new medical device-based therapies. This dynamic limits the number of patients offered Optune Gio in academic centers despite the established clinical benefits of TTFields therapy. Our commercial team continues to refine its approach within this complex environment, and we remain committed to ensuring that all eligible GBM patients are offered Optune Gio therapy. Turning to non-small cell lung cancer. We've acknowledged that our launch is behind expectations. And in Q3, we did not see a continuation of the linear growth we've seen in the prior 2 quarters. While we anticipated lung cancer would be our most challenging indication to launch, it has been harder than we expected. We finished Q3 with 100 lung cancer patients on therapy, 94 in the U.S. and 6 in Germany. What makes advanced lung cancer particularly challenging is the poor overall health status of these patients, the high level of competition from new targeted drug therapies, and the limited median duration of therapy, 4 months versus the 10 months for newly diagnosed GBM. We experienced similar launch challenges in 2011 with our initial launch in recurrent GBM when we introduced our device-based therapy to the neuro-oncology community in an advanced cancer setting. With GBM, we learned that consistent education and follow-on data generation drives prescriber and patient adoption over time. We are anticipating a similar path in lung. To delve deeper, lung cancer is a highly competitive space. The survival benefit demonstrated in the LUNAR Phase III trial remains among the best reported in the post-platinum setting. But the number of systemic drug therapies available across settings makes the transition to a novel device-based modality like Optune Lua seem like a heavier lift for both physicians and patients. Our sales team is tackling this by highlighting specific patient profiles to help physicians better understand where Optune Lua is likely to provide the best benefit. Our primary focus is on patients who have had a durable response to a checkpoint inhibitor plus a platinum doublet and have slow progression with a maintenance checkpoint inhibitor. There is also the challenge of introducing a device-based therapy to a medical oncology community that has limited device experience. As mentioned, we faced a similar hurdle when we introduced Optune Gio to recurrent GBM. And we know it takes time and hands-on experience for physicians to gain comfort with a device-based therapy. Simply put, a wearable device is novel in the oncology space. And as such, we are connecting experienced Optune Gio and Lua users who can share expertise and tips based upon real-world use with physicians new to the therapy to simplify the integration of Optune Lua into their practices. Looking to the near-term future, an important upcoming milestone for Optune Lua is our Japan launch. Last month, we received approval from Japanese regulators for the use of Optune Lua and checkpoint inhibitors in advanced or recurrent non-small cell lung cancer. Japan has been a consistently strong region for Novocure, and we are planning for strong physician adoption of Optune Lua. We believe a high prevalence of lung cancer, Japanese physicians' appreciation for device-based therapies, and a local standard of care, which frequently utilizes immune checkpoint inhibitors in the first and second lines, provides the conditions for a successful launch in Japan. We will be closely monitoring the dynamics of our Japan launch to inform future strategies. Longer term, we are working on 2 core programs to reach more non-small cell lung cancer patients, LUNAR-2 and product development. LUNAR-2 is our Phase III trial studying the use of Optune Lua plus checkpoint inhibitors and platinum-based chemo as a first-line treatment for newly diagnosed non-small cell lung cancer. Assuming success, LUNAR-2 will allow us to treat first-line lung cancer patients with Optune Lua and a checkpoint inhibitor, the drug device combination demonstrating the best efficacy across indications. Our product development efforts are focused on making the Optune device easier for patients to use through near-term improvements in support services, software and array design and longer-term efforts to design a transformative next-generation device. It is critical to underline, we believe our efforts in lung are worth it. The investments we are making for the lung cancer indication also paved the way for our anticipated launches in pancreatic cancer and brain metastases in the next 12 months. In summary, our core GBM business continues to grow, reaching more patients in more regions. Our lung cancer launch has been more difficult than anticipated, and we are learning and adapting our tactics. We have 2 additional launches in cancer indications with extremely high unmet needs anticipated in 2026, where minimal therapeutic options are currently available and that we can access with limited incremental investment as our lung cancer and GBM infrastructures will be leveraged. We are confident in our strategic direction, the strength of the clinical data supporting the use of TTFields therapy, and our plans to achieve profitability. With that, I'll turn to Ashley to provide an update on our regulatory and clinical progress. Ashley Cordova: Thank you, Bill. Earlier this year, we had an exciting presence at the ASCO Annual Meeting where data from PANOVA-3 were presented during the Saturday evening plenary with concurrent publication in the Journal of Clinical Oncology. In July, the PANOVA-3 results earned a second podium presentation at ESMO GI, where the quality-of-life data was described in greater detail. PANOVA-3 demonstrated Tumor Treating Fields' ability to extend survival and preserve quality of life in pancreatic cancer, yet another aggressive solid tumor where Tumor Treating Fields has shown a benefit. In August, we submitted our PANOVA-3 data in a PMA package to the FDA for the treatment of unresectable locally advanced pancreatic cancer. The filing was accepted, and we are currently in the substantive review phase with our FDA 100-day meeting scheduled for mid-December. The review is proceeding as anticipated and in line with our previous experience, we expect FDA approval mid next year. In September, we also initiated the PANOVA-3 filing process with European regulators and are currently preparing our filing in Japan. The pancreatic cancer treatment landscape is similar to GBM where effective therapeutic options are extremely limited. Feedback from leading pancreatic cancer physicians and advocacy groups on the PANOVA-3 data has been consistently positive, and we look forward to the opportunity to treat pancreatic cancer patients as soon as possible. Moving to brain metastases. We presented the final data from our Phase III METIS trial in the plenary session at the 2025 ASTRO Annual Meeting in September, and these data were concurrently published in The Red Journal, the leading publication of the radiation oncology community. ASTRO is an important conference for Novocure as it hosts the largest gathering of radiation oncologists annually, a group of physicians that historically have best appreciated the benefits of Tumor Treating Fields therapy. This year, the METIS presentation was 1 of only 5 plenary selections out of 2,500 submitted abstracts, underlying the community's interest in our METIS data. There is a palpable excitement among radiation oncologists in the potential of Tumor Treating Fields to better control brain metastases given their experience using Optune Gio to treat GBM. The first 2 modules of the brain metastases PMA have been submitted to the FDA. We received questions from the FDA regarding our second module, and we are working to close these questions out swiftly. We are prepared to file the third and final clinical module as soon as those questions are resolved. Our timeline for the full PMA submission is unchanged, and we continue to expect to complete the filing by year-end 2025. Like the pancreatic cancer filing, we expect a 9- to 12-month review once the clinical module is accepted by the FDA with the final decision anticipated in the second half 2026. As Bill discussed, the investments in our lung launch have established the infrastructure needed to launch both the pancreatic cancer and brain metastases indications upon regulatory approval. We expect to launch these 2 new indications by leveraging our existing sales forces. The team detailing GBM will detail brain metastases and the lung sales force will detail our pancreatic cancer indication. We also see significant opportunities to leverage our medical education efforts, creating synergies across tumor types that accelerate awareness and deepen engagement within the medical oncology community. We expect our existing infrastructure to provide a strong foundation for these new indication launches without the need for substantial additional investment. Turning to product development. An enduring reality of virtually all cancer therapies is a trade-off between extending survivals and the burdens and side effects of receiving cancer care. An overarching goal of our product engineering efforts is to minimize any potential burden of the Optune users' experience, either through improved devices or complementary offerings. We are pursuing projects to improve the therapy experience for cancer patients and physicians across all indications and expect to improve the Optune experience… [Technical Difficulty] Operator: Ladies and gentlemen, please standby, your call will resume momentarily. Once again, ladies and gentlemen, please standby, your conference call will resume momentarily. You're back online, you can resume. Ashley Cordova: All right. I am going to pick up at the product development conversation. Okay. Welcome back, everyone. Turning to product development. An enduring reality of virtually all cancer therapies is a trade-off between extending survivals and the burdens and side effects of receiving cancer care. An overarching goal of our product engineering efforts is to minimize any potential burden of the Optune users' experience, either through improved devices or complementary offerings. We are pursuing projects to improve the therapy experience for cancer patients and physicians across all indications and expect to improve the Optune experience in both the near and longer term. Earlier this year, we launched a new patient app in the U.S., which provides patients and caregivers a central location to track their Optune Gio usage, reorder new supplies, access FAQs and contact Novocure. Over 78% of U.S. GBM patients are users of the new app, and we are now preparing to launch in our international markets. On the physician front, we launched a new portal for GBM prescribers this year, which streamlines the prescription administration and ongoing care processes. Over 60% of our target sites are active on the portal and physicians and their care teams tell us that they are pleased with the simplified administrative processes. We also recently submitted our updated MAXPOINT GBM treatment planning software for use with the HFE arrays to the FDA and expect approval in upcoming months. As a reminder, the MAXPOINT algorithm uses patient MRI scans and physician inputs to create individualized optimized array placement maps as a function of the electrical properties of a patient's brain tissue. MAXPOINT received a Category III CPT code in July, and we plan to launch it as a product enhancement subsequent to FDA approval. On the array front, we have rolled out our HFE arrays in all material markets and expect to fully complete the global rollout by year-end. We are also in the process of bringing many of the HFE array design elements and materials components into our next-generation torso array, which we expect to submit to the FDA for approval next year. As a medtech company, we have the unique opportunity to increase adoption and advance patient outcomes from both product and clinical development. Of note, we have 2 clinical readouts expected in the first half of next year. The Phase II PANOVA-4 trial in metastatic pancreatic cancer should report out in late Q1 of next year. And the Phase III TRIDENT results in GBM will follow in Q2. PANOVA-4 will add to the existing pool of data exploring Tumor Treating Fields plus an immunotherapy chemo combination regimen, but for the first time in metastatic pancreatic cancer, which continues to be a devastating diagnosis for patients and their families. TRIDENT studies the benefit of starting Tumor Treating Fields concurrently with chemo radiation in newly diagnosed GBM rather than waiting until after a patient's chemo radiation cycle ends. The goal of TRIDENT is to improve Tumor Treating Fields' ability to enhance the cancer cell DNA damage mechanisms of radiation. If successful, TRIDENT could enable radiation oncologists to prescribe Tumor Treating Fields earlier in a GBM patient's therapy journey than a standard of care today, something we know to be important. Data from these trials will further elucidate how Tumor Treating Fields can best be harnessed to improve the lives of patients diagnosed with these deadly cancers, and we are excited to share these results with you early next year. As we look ahead to 2026, we are on the verge of becoming a true platform therapy company. With 4 indications expected in market by year-end 2026, our teams are excited about the opportunity to treat many more patients in need and continue our pursuit of profitability in the year to follow. I'll now turn the call over to Christoph to review our Q3 financial performance. Christoph Brackmann: Thank you, Ashley. We continued our positive momentum this quarter with net revenues of $167 million, an increase of 8% from the third quarter last year. This was primarily driven by year-over-year active patient growth of 5% in our GBM franchise, notably by strong performance in France, Germany, and Japan. We also had a foreign exchange rate tailwind this quarter of $3.3 million compared to the same period in 2024. We collected $3.1 million from Optune Lua claims in the quarter, including $1.6 million from non-small cell lung cancer collections in the period. As a reminder, reported revenues from non-small cell lung cancer reflect cash collections from approvals and positive outcomes from appeals in the quarter. Gross margin for the third quarter was 73%. The reduction in margin is reflective of the global rollout of HFE arrays, the ongoing launch in non-small cell lung cancer, where we are treating patients prior to establishing reimbursement and increased tariffs. In the quarter, we also recognized a $2.9 million expense related to an inventory obsolescence provision for Optune Lua arrays. Moving to operating expenses. Our research and development costs in the quarter were $54 million, an increase of 4% from the same period last year. We do not expect R&D expenses to increase materially this year as we ramp down spend on PANOVA-3 and METIS and reallocate those funds to KEYNOTE D58 and LUNAR-2. Sales and marketing expenses in the quarter were $59 million, a decrease of 2% from Q2 of last year. This decrease was driven by lower share-based compensation expenses. As disclosed in prior quarters, we expect to leverage our current sales force to launch our pancreatic cancer and brain metastases offerings in 2026, pending FDA approval. G&A expenses for the quarter were $46 million, an increase of 15% from Q3 of 2024. This increase was primarily driven by higher share-based compensation expenses and higher personnel and professional service expenses to support the greater company build-out, particularly in enterprise technology as we invest in our digital infrastructure to enable scale. Net loss for the quarter was $37 million with a loss per share of $0.33. Adjusted EBITDA in the quarter was negative $3 million. While still negative for now, adjusted EBITDA is currently ahead of our internal plans for the year, driven both by solid revenues from our GBM franchise as well as constant prioritization of investments. We are committed to breaking even sustainably on an adjusted EBITDA basis in 2027 with the revenue contribution from new indications. Our cash and investment balance at the end of Q3 was $1.034 billion. As a reminder, we have a $561 million in convertible notes that will come due in the coming days, which we will retire with cash from the balance sheet. We also closed on the second $100 million tranche of our credit facility this quarter. With the cash and short-term investments currently on the balance sheet and funds available through our credit facility, coupled with ongoing expense management, we continue to believe that we have the capital necessary to bridge to our next revenue streams in new indications. At Novocure, we are on the cusp of expanding the reach of Tumor Treating Fields to patients in multiple solid tumor cancers. The discerning investments we are making today establish an infrastructure capable of treating patients in multiple indications. We look forward to the future treating more commercial patients in established and new geographies, 2 important data releases in the first half of 2026, and pending approvals in additional indications with high unmet need. And importantly, we are confident in our ability to achieve profitability. We will now open the lines for questions. Operator? Operator: [Operator Instructions] Our first question comes from Jason Bednar with Piper Sandler. Jason Bednar: I wanted to start first here on lung. A few questions here. I'm just going to pack in. The launch in Germany and Japan, I know it's super early days, but any comparisons you can make relative to the launch trajectory you have here in the U.S. as we think about how those markets could scale relative to how the U.S. has performed? Anything that you can take with the slower ramp and adjust the go-to-market strategy outside the U.S.? And then I'm wondering if there are other factors outside of just physician education that might be helpful here in the U.S., such as securing reimbursement and/or inclusion in NCCN guidelines? Can you help me with where you stand on those fronts? Ashley Cordova: Great, Jason, this is Ashley. I'll start and talk a little about the global footprint, and then I'll ask Frank to jump in with the specifics in the U.S. I think really in Germany, what I would say is it's still very early days. We're just now entering into the beginning of our third quarter there and the summer periods in Europe are a thing. So as we look ahead, I would say, there is no new news coming out of Germany that we've seen that kind of differs from the dynamics we've seen in the U.S., both in the opportunities to continue to drive growth and in some of the challenges that may come in this education. But I would not point to anything specific in those early numbers and say it's early days, and our teams are there executing and building those relationships. When we look ahead to Japan, we do think that this is a very different market for Optune Lua. We have received approval for Optune Lua in Japan, but we have not yet received national reimbursement. That means our field teams are able to begin the physician education process, but the real launch dynamics will come to bear when we do have physician reimbursement, which we anticipate in upcoming quarters. But it is a market we believe will be different for us and an easier market to launch in for a couple of factors that Bill mentioned on the script. The first of which is that there is just a much higher prevalence of lung cancer in Japan. The second of which is the Japanese physicians are more comfortable using device-based therapies, I would say, across the board. The third of which is that we have a local standard of care, which is extremely comfortable using ICI across all settings, both first and second line. And on the top line growth format, because we have a single national payer, once we get reimbursement, we're able to see that active patient growth translate to bottom -- to top line and bottom line growth quite quickly. So we are preparing for that launch. And again, we're quite hopeful that it will be materially different than the trajectory we've seen in the U.S. and Germany. Frank Leonard: Hello, Jason, this is Frank. Thank you for the question. To pivot back to the U.S. and talk about learnings and tactics, I think one thing we would acknowledge is in the launch, we initially pursued large volume academic practices where you do see large populations of Stage IV non-small cell lung cancer being treated because, obviously, you're trying to go after the patient volumes that you can capture. And the challenge that we found in that setting is that, #1, they're just not comfortable with devices as a starting point. And so you're introducing a new workflow, a new modality into the practice. What we have found more effective as we pivot is in those larger volume practices, you can find the doctor who perhaps is seeing Stage III, but occasionally is consulted on Stage IV and is hyper interested in Tumor Treating Fields. And so we do have an example of one large academic practice where starting with somebody who is seeing 1 or 2 patients a month, they're now consistently prescribing 3 or 4 patients a month because they're pulling them in from the med on practice. And so we're trying to lean into that tactic right now of not necessarily finding the doctor with the highest volume, but finding the highest interest and their willingness to be an advocate within their practice to pull it in. So thank you, and happy to provide more color. Jason Bednar: Maybe just as a quick follow-up, anything on commercial reimbursement to get updated on and anything on NCCN guidelines that we should be monitoring? And then as a follow-up, and this has been pivoting hard, but in Spain, I know you referenced that as a market that has a different structure to it. It's going to take maybe a little bit longer than France to ramp up. I think probably maybe a bit more normal or comparable to Japan back in the day. But I guess with the trajectory of that adoption, is that something we should expect to be linear? Or is it more back-end loaded? How to think about that ramp-up when it starts happening? Ashley Cordova: Yes. So Jason, this is Ashley. On the NCCN guidelines, just as a reminder, we submitted at the end of last year. We know that the package and the application was reviewed in early July, and we would expect the updated guidelines to be published in the upcoming months. We really don't have any more insight on the progress there beyond that. I will note that in the commercial setting, which is where we're now able to submit for reimbursement and approval, we are seeing, honestly, approval rates above our internal expectations. So this is going well. In lung, the payers are responding to the strength of the data. We would expect that to continue to be the case in all scenarios. I think the real unlock on the reimbursement side for lung will be Medicare, of which the NCCN guidelines is a key input, but it's not the end of that journey. So I think commercial reimbursement going well. Medicare, a much longer journey, which we started and which NCCN guidelines will support. In Spain, I think it is a good reference to the Japan rollout of Optune Gio 7 years ago because we do have to contract hospital by hospital despite the national reimbursement. So it really is, I would say, in an administrative processing phase. Time will tell. What we said is that we think it won't flip on overnight, but it will ramp up over the course of a couple of years. And I think it will be a continuing driver of top line growth for us, both in the active patient numbers and in revenues over the next 2 years. Operator: Our next question comes from Vijay Kumar with Evercore ISI. Kevin Joaquin: This is Kevin on for Vijay. I have a few more questions on lung. You've talked about the launch being behind expectations. Are you able to share what your initial expectations or targets were for lung? And second, on LUNAR-4, would you say this termination is at all connected to your latest views on the lung cancer market broadly? And lastly, if you can share the year-to-date spend on that program before it was terminated? Ashley Cordova: Yes, Kevin, this is Ashley. Thanks for the question. Unfortunately, the answer to all of those is, I would say, no, meaning we're not able to share that level of detail, and we're not sharing the internal launch expectations. What I will say, though, what we can say is that we always knew that this would be a slower ramp than it would be if we were a little white pill. We know that across our device. Linear growth was what we anchored people to. And now what we're saying is we knew it would be hard. It's somewhat harder than we would expect it -- than we expected, but we do continue to look ahead to growth. And again, I would point both to ongoing trajectory in the U.S. and Germany and to hopefully a step function increase in that growth from Japan. So that's where we are with LUNAR overall. With LUNAR-4, the story there really is about actually the disciplined investments and what we were able to save by looking at the ability to gather that data from real-world evidence, which, in the U.S., I will remind you that approximately 90% of our patients on Optune Lua for non-small cell lung cancer have had prior ICI exposure. So we are able to look at the real-world evidence and the experience in the U.S. and publish over time that data to answer a very similar question than LUNAR-4 was asking. So we do know it is still a very relevant scientific question. We are committed to kind of exploring that question, but it is a far more cost-efficient way and for us to do that through real-world evidence. Christoph Brackmann: Yes. Vijay -- Kevin, sorry, this is Christoph. Just to add to what Ashley said, the savings that we expect is in the mid to high single-digit million. So it's actually a quite worth achievement. Operator: Our next question comes from Jessica Fye with JPMorgan. Tanmay Patwardhan: This is Tanmay on for Jess. My first question is we now know that active patients for non-small cell lung cancer grew to 100 in 3Q. But given the sequential decline in prescription, could you probably just expand on the underlying dynamics there? And second question would be if you could expand on the gross margin trajectory? And over what time horizon can we think about that recovering or maybe even exceeding historical levels? Frank Leonard: Sorry, could I just to clarify the first question around prescription and patient volumes? Didn't quite… Tanmay Patwardhan: Yes. So for the non-small cell lung cancer, we now have 100 patients in 3Q. However, we see a sequential decline in prescription volume. So could you maybe just expand on the underlying dynamics there? Frank Leonard: So thank you for the question. So yes, we -- what we do see is that we focus internally, our big focus is on active patients. There's always a bit of noise in prescription volumes because it's a question of some practices write prescriptions before they've really educated the patient. Some practices only write the prescription when they're ready for the patient to start. And I think we need a few more quarters in lung cancer before we really settle into what a fill rate would look like. So for right now, I would ignore the noise around prescriptions. Christoph Brackmann: I can take the question on gross margin. So we had -- maybe just to take a step back, in the quarter, we had a gross margin of 73%. At the beginning of the year, what we said is what we would expect during the year is the gross margin to come closer to lower 70s, driven by a couple of headwinds. One is the rollout of the HFE array. Two is -- basically was the lung cancer indication where we launched before getting reimbursement. And then there was another headwind that came to it, it was tariffs. So if you now look at it all together, we're actually pleased with the cost reduction journey that we have been able to accelerate on the HFE arrays. So as a result, for this year, we see the gross margin get closer to kind of the mid-70s as opposed to the lower 70s. Now when we look ahead, our gross margin will be impacted by the launches and the launch trajectories. And it really comes back to the fact that in order to get reimbursement, for us, it's a process. It doesn't come with approval. And we will be starting to treat patients in markets where we expect to be reimbursed before we have the actual reimbursement. So there will be a lead time -- there will be a gap between starting off patients and getting reimbursement, and that will impact our gross margin. And quite honestly, the more successful we are, the more it will impact the gross margin during this transition period. Now I think what's important is we are somewhat in control of this because we can accept the patients or not accept the patients if you don't get the reimbursement in the time line that we want. And so our gross margin, there will be a little bit of noise as we go through the launches. We expect it to come back to higher levels when we are through this period, which is in the higher 70s. Ashley Cordova: And I would just say, in all scenarios, when we look at profitability as defined by adjusted EBITDA, we remain committed to that path and can see getting there throughout those launches. Operator: Our next question comes from Jonathan Chang with Leerink Partners. Unknown Analyst: This is [ Evelyn ] on for Jonathan. So one more on the Optune Lua launch in lung. So you reported 84 unique prescribers. Can you provide some clarification on whether that's specific to Q3 or that's cumulative since the launch or something else? And then one follow-up, if I may, on profitability. Can you provide more color on what goes into your goal of breaking even in 2027? Ashley Cordova: So Eva, that stat is specific to Q3. So that's an easy answer. And I will point out the takeaway there that it's been consistent across quarters. And what we're seeing is that we're able to bring both new prescribers into the Optune Lua treatment journey, and we're retaining existing prescribers. So when we think about that mix between new and returning, we see about a 50% split there, which is a nice trend as we look ahead. And I will also remind everybody, when we look at the profile of patients we're getting, we are seeing that patients approaching 90% of them have prior ICI exposure. So we're also seeing it used in a combination that we know is relevant. Christoph Brackmann: Yes. And sorry, on the adjusted EBITDA, your line was a bit same. What exactly was your question? Unknown Analyst: Just more color on what goes into your goal of reaching the breakeven in 2027? Yes. Christoph Brackmann: Yes. Okay. So first, I'd say this is really no change in messaging. I mean this is very consistent with our commentary in the past. What we said is that we would expect to breakeven on an adjusted EBITDA level at a revenue of around $700 million to $750 million. And the range is really explained by 2 main items. And the one is the level of R&D expenses, which is driven by the pace of enrollment in Phase III trials in essence. And 2, the dynamics that I just talked through in terms of during launch years, we have an impact on gross margin. Both levers are in our control. And so again, we expect to breaking even on an adjusted EBITDA level at a revenue level of $700 million to $750 million, and we expect this to be during 2027, we'll be there on a sustainable basis, meaning up to then, we could be close as this quarter, we were very close, minus $3 million. And we believe we'll be sort of bouncing around this breakeven on adjusted EBITDA level. During 2027, we believe we will be on a sustainable level. Operator: Our next question comes from Emily Bodnar with H.C. Wainwright. Emily Bodnar: I guess on the lung side, I was curious with how the launch is going currently. Do you have any kind of internal changes to your expectations for what the opportunity could look like at peak and kind of more color on how we should be thinking about ramp maybe for next year? And also what learnings you've had from the launch so far that you can kind of use to make sure the pancreatic launch doesn't kind of fall into a similar pattern? Ashley Cordova: Emily, that's a great question. I'll start with a little bit of what our expectations are internally and then ask Frank to provide some of the learnings. But zooming out, lung is hard, but we do know it's worth it given the opportunity, both long term, but also across the entire portfolio. And the incremental cost for spinning is actually quite negligible when we look at the investment we would be making today versus the investments we need to be making for pancreatic and brain mets as we look ahead. So we have adjusted our internal expectations. We are making sure that we have motivated field teams that are focused on the right targets driving growth. But I will say when we look at investments, the investments we have made are investments in the platform, and they will establish that infrastructure that will treat the full portfolio over the next year. So while we're always looking at those discerning investments, I will say we really are now looking at the platform. And again, we're confident that those are the right ones as we look to this path to profitability with top line growth coming from 4 products on the market in the end of the year. But I'm going to ask Frank to provide specifics on pivots in the market. Frank Leonard: Yes. So thank you. So first, to go to the question around how do we view the long-term value. We still see the long-term value in helping non-small cell lung cancer patients. There's a tremendous unmet need in the second line. And as we look even further ahead to the LUNAR-2 trial, there's a huge opportunity within first-line treatment. And so for us, given the data set that we have, we believe we have a compelling reason to be in this market, helping the patients. In terms of learnings and pivots, I think Bill in his opening noted on the need for education and additional evidence as you work into a new community of doctors. And so on the education front, I think, one, we have the advantage that we are in market already. So physicians are hearing about our lung indication, but by extension, when we go into and have approval to actually market to panc, they won't be naive to the messages. #2 is to take a direct learning from lung in terms of the education that we need to do, I'd say we've learned that we need to educate not just the physician, but the practice, the nurses, the physicians' assistants and really everyone in the practice on the therapy because you don't know where the patient will direct their question, the first question about the device. And so I think that's in the real tactical side of things, but it's things that we now know we need to do to be successful in our next medical oncology launch. And then Bill also mentioned the need for continued evidence generation. I think one thing we've done for panc is ensure that at FDA launch, we're also in the process of closing out the PANOVA-4 data set. So trying to take those learnings and really lead towards an excellent launch in panc. Operator: And I'm not showing any further questions at this time. I'd like to turn the call back to Bill Doyle for any further remarks. William Doyle: Thank you, Kevin. I'd like to conclude the call where I began. Everyone in Novocure comes to work every day to help patients extend their survivals in these really aggressive cancers. We've been working very hard for years to help patients with GBM, and we are now excited and in the middle of our preparation to become a true platform company, serving, again, patients in 4 indications by the end of next year. Our pipeline is on track. We were very pleased with the clinical recognition we've received for PANOVA-3 and METIS. And on the financial front, again, we expect now 4 diversified revenue streams, and we're committed to marching forward toward profitability. So we have an exciting 15 months ahead, 6 major country-level launches, 2 important data readouts, and meaningful product improvements that we continue to focus on and we'll be rolling out. So with that, I want to thank the Novocure team for all their hard work and for your attention and support today. Thank you. Operator: Ladies and gentlemen, this does conclude today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.
Operator: Good morning, and welcome to Allegro MicroSystems Second Quarter Fiscal Year 2026 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Jalene Hoover, Vice President of Investor Relations and Corporate Communications. Jalene Hoover: Thank you, Kathy. Good morning, and thank you for joining us today to discuss Allegro's Fiscal Second Quarter 2026 results. I'm joined today by Allegro's President and Chief Executive Officer, Mike Doogue; and Allegro's Chief Financial Officer, Derek D'Antilio. They will provide highlights of our business, review our quarterly financial performance and share our third quarter outlook. We will follow our prepared remarks with a Q&A session. Our earnings release and prepared remarks include certain non-GAAP financial measures. The non-GAAP financial measures that are discussed today are not intended to replace or be a substitute for our GAAP financial results. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release, which is available in the Investor Relations page of our website at www.allegromicro.com. This call is also being webcast, and a replay will be available in the Events and Presentations section of our IR page shortly. During the course of this conference call, we will make projections and other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution that such statements are based on current expectations and assumptions as of today's date and as a result, are subject to risks and uncertainties that could cause actual results or events to differ materially from projections. Important factors that can affect our business, including factors that could cause actual results to differ from our forward-looking statements are described in detail in our earnings release for the second quarter of fiscal 2026 and in our most recent periodic and other filings with the Securities and Exchange Commission. Our estimates, expectations and other forward-looking statements may change, and the company assumes no obligation to update forward-looking statements to reflect actual results, changes to assumptions or other events that may occur except as required by law. It is now my pleasure to turn the call over to Allegro's President and CEO, Mike Doogue. Mike? Michael Doogue: Thank you very much, Jalene, and good morning, and thank you all for joining our second quarter earnings conference call. We remain encouraged by the positive momentum we continue to see across the business, achieving multiyear highs in second quarter bookings and backlog and delivering strong design win activity in our strategic focus areas, particularly in e-Mobility and data center. This momentum has enabled us to deliver strong second quarter results with sales, gross margin and EPS above the midpoint of our guidance ranges at $214 million, 49.6% and $0.13, respectively. In the second quarter, we saw broad strength in our automotive sales with growth in e-Mobility and other auto. Our automotive sensor business grew through increased adoption of our ICs and xEV powertrain systems and motor driver IC sales also grew in electronic power steering systems and ADAS and in applications and other auto. In our industrial and other end markets, sales growth was led by data center, establishing a new quarterly record. Data center momentum was fueled by a broad server power architecture upgrade supporting next-generation AI workloads as systems move toward higher voltage and power levels. As a result, the demand for our data center fan driver ICs continues to increase. And additionally, our market-leading high-speed current sensor ICs are ramping in data center power supply applications where they enable crucial efficiency and power density improvements. Looking ahead, we are building another growth vector in this market. Within the quarter, we sampled our new high-voltage gate drivers for silicon carbide with market leaders in the data center power supply space. Collectively, this strong market pull is reflected in our design win activity, where data center continued to lead Q2 industrial design wins with revenue for many of these wins ramping within the next year. Shifting to automotive design wins. E-Mobility continued to lead second quarter activity. We secured a multi-portfolio ADAS win for a steering system using our current sensors and motor drivers with the Chinese OEM. Additionally, our current sensors won multiple designs within onboard charger and high-voltage traction inverter systems with the North American xEV OEM. As I've said in the past, relentless innovation that drives performance leadership is a priority for Allegro. During the quarter, we released the industry's first 10 megahertz TMR current sensor, a disruptive IC that further extends our competitive advantage. We believe our 10-megahertz sensor, the highest bandwidth magnetic current sensor in the market by a significant margin will help accelerate our sales growth. These ultrafast sensors reduce the size of inductors and other components in high-voltage power systems. Within the quarter, I also traveled to China, where I spent time with our teams, our customers and our suppliers. This time on the road reinforced my excitement about our opportunity and positioning in this important geography. Our sales to China have grown every quarter since Q1 FY '25 when we launched a strategy to quickly correct an over-inventory situation. Today, China inventory levels are lean, design win activity remains strong, and we have no indication of any material pull-in activity from our customers in response to tariffs. We continue to navigate geopolitical challenges. Therefore, it was encouraging to see China lead our second quarter automotive design win activity for Allegro led by ADAS and xEV applications. While in China, I was also pleased to confirm new design-ins and wins for our sensor ICs in nascent quadruped and humanoid robotics programs. In summary, we continue to execute on our strategic priorities. We are seeing positive momentum across the business, especially in auto and data center markets, and recent design wins confirm our increasing dollar content opportunity in high-growth auto, data center and robotics applications. I'll now turn the call over to Derek to review the Q2 2026 financial results and provide our outlook for the third quarter. Derek D'Antilio: Thank you, Mike, and good morning, everyone. Starting with our second quarter results. Net sales were $214 million and non-GAAP earnings per share were $0.13. Gross margin was 49.6%, operating margin was 13.9% and adjusted EBITDA was 19% of sales. Total Q2 sales increased by 5% sequentially and 14% year-over-year. Sales to our automotive customers increased by 8% sequentially and 12% year-over-year, while e-mobility sales increased by 21% year-over-year. Industrial and other sales declined by 1% sequentially and grew 23% year-over-year. We saw continued strong performance in data center, offset by a decline in consumer and broad-based industrial, where we continue to see some remaining inventory burn. Distribution sales increased by 22% sequentially and 23% year-over-year. Sell-in was still below POS, which remained near the highest levels it's been in 6 quarters. From a product perspective, magnetic sensor sales increased by 1% sequentially and 2% year-over-year. Magnetic sensor sales increased by 13% in the first half of fiscal '26 compared to the second half of fiscal '25. And sales of our power products increased by 13% sequentially and 42% year-over-year. Sales by geography were as follows: 29% of sales in China, 24% in the rest of Asia, 17% in Japan, 17% in the Americas and 13% of sales in Europe. Sales grew in all geographies, except for Europe, where we saw seasonal declines. Now turning to Q2 profitability. Gross margin was 49.6%, an increase of another 140 basis points sequentially. Operating expenses were $76 million, approximately $3 million above our outlook due to an increase in variable compensation expense and a further weakening of the U.S. dollar. Operating margin was 13.9% of sales compared to 11.1% in Q1 and 11.7% a year ago. The effective tax rate for the quarter was 6%, driven lower by tax planning and elections made within the One Big Beautiful Bill. Second quarter interest expense was $5.1 million, and the second quarter diluted share count was 186 million shares. Net income was $24 million or $0.13 per diluted share. Non-GAAP EPS increased by 44% sequentially and 63% year-over-year, demonstrating the significant operating leverage in the business model. Moving to the balance sheet and cash flow. We ended Q2 with cash of $127 million. Cash flow from operations was $20 million, CapEx was $6 million and free cash flow was $14 million. From a working capital perspective, DSO was 45 days compared to 40 days in Q1 and inventory days were 135 days compared to 141 days exiting Q1. During the quarter, we made another voluntary debt repayment of $25 million, bringing our total debt balance to $285 million and net debt to $168 million. Finally, I'll now turn to our Q3 2026 outlook. We expect third quarter sales to be in the range of $215 million to $225 million. The midpoint of this range equates to a 24% year-over-year increase and above seasonal for the December quarter. Additionally, we expect all of the following on a non-GAAP basis. Gross margin to be between 49% and 51%. Interest expense is projected to be $5 million, reflecting a 25 basis point reduction in SOFR. We expect our tax rate for the quarter and full year FY '26 to now be 8%, a decline from prior estimates of 10%. We estimate that our weighted average diluted share count will be 186 million shares. And as a result, we expect our non-GAAP EPS to be between $0.12 and $0.16 per share. Now I'll turn the call back over to Jalene for your questions. Jalene Hoover: Thank you, Derek. This concludes management's prepared remarks. Before we open the call to your questions, I'd like to share our third fiscal quarter conference line up with you. We will attend Wells Fargo's Ninth Annual TMT Summit on November 19 in Rancho Palos Verdes, UBS' Global Technology Conference on December 2 and 3 in Scottsdale, Nasdaq's Investor Conference held in association with Morgan Stanley on December 10 in London; and Barclays' 23rd Annual Global Technology Conference on December 11 in San Francisco. And finally, we are excited to announce that we will be hosting our next Investor Day on February 3, 2026, in Boston. We'll send a save the date announcement soon, providing additional details. We will now open the call for your questions. Kathy, please review Q&A instructions. Operator: [Operator Instructions] Our first question comes from the line of Joe Quatrochi with Wells Fargo. Joseph Quatrochi: Congrats on the results. Maybe just kind of try to understand a little bit inside the automotive business. I think e-mobility was up a little bit sequentially, but non-e-Mobility was up a lot more. Any sort of color on just how do we think about what's driving that? Is it inventory replenishment? And what -- how do we think about that going forward? Michael Doogue: Joe, thanks. This is Mike. So yes, just to kind of reiterate some of the stats on auto, up 8% quarter-over-quarter and up 12% year-over-year, but e-mobility was up 21% year-over-year. So we are seeing growth in the e-mobility space as we would expect based on the strong activity we have through design wins in the e-mobility space. When we look at the overall growth of the auto business in this quarter that we're reporting on, we did have some growth in our motors business for what I would call more in-cabin and chassis-related applications. These are sort of the powertrain agnostic applications where there are an increasing number of motors, and we're getting an increasing number of design wins in that area. So we were actually quite pleased to see some of those wins flow through within the quarter. Joseph Quatrochi: And then as a follow-up, I think your slide deck has -- references an opportunity like $425 per rack of revenue for AI servers. Any help in just kind of understanding what you're capturing today and how you see that trending over the next couple of years? Michael Doogue: Yes, absolutely, and it's an exciting story. So what we're seeing is that as the data center or, let's say, new data centers start to pivot more towards an AI architecture, not only are the power levels consumed by the servers going up enormously, but on a commensurate basis, you need lots of cooling within those high-power data centers. They get hot. So we are seeing strong pull-through for our 3-phase fans that we've been selling into the data center market for many years now. What's happening, the fans are moving into new areas within the rack. Most notably, we're seeing the fans move over into the power supplies, which are now getting so hot that they need to be cooled directly. So that's one tailwind for us in the data center space. Another positive sign, which I talked about in my prepared remarks, our current sensors are now being adopted and ramping within the power supplies as well. Measuring current is essential to having efficient power management in those power supplies. We offer a smaller form factor solution that also has reduced heating or reduced ohmic losses to offer a greater efficiency in those power supplies. That business started to ramp roughly a year ago, and we're in the middle of the ramp now. We have differentiated ICs. Today, we talked about a 10 megahertz current sensor using our TMR technology. Within the last year, we released a 5 megahertz device. These higher speed current sensors help shrink the size and help optimize the control of those power supplies. So it is a new growth vector that is ramping right now within the data center as well. Operator: The next question comes from the line of Vivek Arya with Bank of America Securities. Vivek Arya: On the first one, just on the demand side, very near term, I was wondering if you are noticing any direct or indirect effects because of the Nexperia situation that is going on and is constraining output at some of the larger auto OEMs. And in general, Mike, how would you describe kind of the regional demand environment? I think you mentioned Europe is still a little bit below trend. But just in general, how would you describe what the kind of the broader regional demand situation is and where you see inventory kind of being on the better versus worse side? Michael Doogue: Yes. Thanks, Vivek. So on the first question, we read in the press the potential impact of the Nexperia situation. Personally, we have not seen any changes in demand from our end customers that can attribute to that situation. So I don't have much more to say on that situation. In terms of the regional trends that we see coming into this quarter, we were pleased to see an uptick in sales in the Americas. We also saw growth in all regions other than Europe. So we continue to see pockets of weakness and pockets of inventory within the European market. And there are still some pockets of inventory in the North American market, but that's why we were encouraged to see it grow a bit more in this quarter. Vivek Arya: Got it. And for my follow-up on just the sequential trends. So you are guiding to growth in the December quarter, right, which tends to be usually flat to down or so. So I'm curious what's driving that above seasonal growth? And for extra credit, if you could give us a sense for how should we think about seasonality going into March? Derek D'Antilio: Yes, Vivek, this is Derek. Typically, you're right, the December quarter over the course of almost 2 decades, we saw about a 5% decline in that quarter, usually led by industrial. Last year, we had a 5% decline in that quarter. Interestingly, it was auto in North America and other places. But in the years where there's been a cyclical upturn in those previous years where cyclical upturn has happened, we've performed above seasonal in the December quarter. So we're guiding up this December quarter, largely led by continuing strength in auto and in data center, the 2 areas we've seen a lot of strength in the past several quarters. I'm not going to guide for March, but we're typically not seen seasonality in the March quarter other than Chinese New Year shutdowns in China and other parts of Asia, which typically is a little bit lower for those. But that's the beauty of our business being pretty well geographically diversified, and that's a quarter we usually see a rebound in the Americas, Japan and Europe that's typically offset those things. Operator: The next question comes from the line of Gary Mobley with Loop Capital. Gary Mobley: Derek, I'm having a little bit of a difficult time reconciling the 60 basis points of gross margin upside you delivered for the quarter. Seemingly, there were some headwinds like foreign exchange. Also automotive was a higher percentage of mix. You delivered right on with that $0.75 of gross profit drop-through. So what drove that gross margin upside for the quarter? Derek D'Antilio: Yes. I would say, Gary, it came in as we expected, right? I expected to have about 75% drop-through and having the revenue at $214 million above the midpoint, that's the extra 60 basis points. You're absolutely right. There are certainly headwinds with the cost of some commodities continuing to go up. Foreign exchange, at least for the Philippine peso did moderate from a decline in the second quarter here, and we expect it to moderate going forward. So that's good. That's a tailwind. And we continue to do things in our factory to be far more efficient. So our target is to have that 60% to 65% drop-through. The guide for Q3 equates to exactly 65% at the midpoint of that guidance. So I feel like it came in as we expected, offsetting some of the headwinds with continuing to look at PPV from our vendors and also factory efficiencies. Gary Mobley: As my follow-up, I wanted to ask about the shipment into the channel is embedded in your third quarter revenue guide. That $220 million midpoint, does that assume that you're still under shipping to end demand? And maybe you can give us a sense, if so, by how much? Derek D'Antilio: So I'll give the statistics on Q3. In -- sorry, in Q2, we were still shipping below POS. Our sell-in was still a couple of percentage points below POS. We still did burn some inventory, came down by a couple of million dollars distributor inventory in the second quarter. I would describe it as the curve is slowing because we burned a lot of inventory last year. It's been going on for the better part of 5 quarters now. I would say we're in the late eighth inning right now. There may be some additional burn in the December quarter in the long tail of consumer and broad-based industrial in certain pockets. Operator: The next question comes from the line of Tom O'Malley with Barclays. Thomas O'Malley: Really nice results. The first is just on the mix of business in the quarter. It looks like your non-e-Mobility business was very strong. We've seen a bit of slowing on the e-mobility side. Could you just maybe give us the breakdown of what you expect between e-mobility and non-e-Mobility in your guidance for the third quarter? Michael Doogue: Yes. So thanks for the question. I mentioned earlier with e-mobility being up 5% quarter-over-quarter, but also let's remember that it's up 21% year-over-year. And I mentioned these motor driver design wins throughout the cabin or the chassis in the car. These are these powertrain-agnostic applications that we continue to pursue because that's where some of our motor driver technology shines. I've talked many times in the past that we are exceptionally skilled at spinning motors more quietly, more efficiently, et cetera. So we did take up some wins in those areas, and they're ramping within the quarter, and that added to the growth of the automotive market within the quarter. Obviously, again, the e-mobility up 5%, auto overall up 8%. These motor applications driving most of the delta between the 5% growth and the 8% growth. Derek D'Antilio: And Tom, some of this is geographical. For example, the Americas grew 11% in the quarter, while China grew 7.5%. And as you might imagine, it's more the traditional auto in the Americas. Thomas O'Malley: Anything on the guidance between those 2 just into the out quarter on what you're expecting between those 2 segments? Derek D'Antilio: No, we're not going to guide to that level of granularity. I will say that the growth in Q3 from a macro market standpoint will be led by automotive, Tom. Michael Doogue: And maybe the only other thing I'd add... Thomas O'Malley: Go ahead. Michael Doogue: I was going to say the only other thing I'd add is part of the reason we talk about our design wins being so strong in the e-mobility space is just to highlight the fact that most of the growth that we're seeing, most of the dollar content gains that we're seeing continue to be in the e-mobility space. Thomas O'Malley: Helpful. And then just as a follow-up, into the out year, I think more broadly, auto estimates for just market growth have come down a little bit, but you guys have shown an ability to grow really despite the broader market kind of slowing or really being kind of flattish. Can you remind us again -- is there a way or a framework to think about your growth versus what the broad market looks like into 2026? And any kind of puts and takes that we can kind of apply kind of your growth trajectory versus what we think is kind of more of a flattish market for next year? Michael Doogue: Yes. So there's a couple of different ways to answer that one. I'll first go back to the model that we've shared many times where we say that our total content opportunity in an internal combustion engine car is roughly $40. When you look at either hybrids or EVs, it doesn't matter which one, right? It's -- the dollar content is the same, roughly in hybrid and full EVs. That dollar content for Allegro today is at $60. And as we roll out some of our new products like our isolated gate drivers, that number goes up to $100. So you can see within those statistics, that is the dollar content story that underpins our ability to far outgrow the vehicle production market. Operator: The next question comes to the line of Chris Caso with Wolfe Research. Christopher Caso: The first question is related to gross margins as we go into next year. And in the past -- this past year, you've seen a seasonal decline in gross margins in the March quarter as annual price reductions kind of take hold. Should we expect similar this year? And then perhaps with that, could you talk a bit about what your pricing expectations are into next year? Are you still expecting a fairly normal pricing environment? Derek D'Antilio: Yes, Chris. What's interesting is that 60% to 65% gross margin drop-through has held pretty true since we've been public on an annual basis. But there are quarter-to-quarter perturbations, meaning that in that March quarter, typically, when pricing is negotiated with customers and they're down, the pricing is down, that hits that quarter immediately like it did this past year. And the cost cycle back into our P&L over the next 2 quarters, which it did here. So we have a better drop-through in those 2 quarters and then it normalizes out. 2 or 3 years ago, when prices were increasing, we had the opposite effect. We had higher gross margin in that March quarter. So it certainly depends on the pricing environment. What I did say this past year in March of 2025 quarter was the friction on the pricing was a bit more than it had been because we had price increases for the past several years. And that was also on a lower revenue number. So the amount of basis points is higher. And now our inventory days have gone from 185 days on balance sheet to 135. So the turns of the cost into the P&L will be quicker. So all else being equal, I expect the impact to be less. And maybe Mike could talk a little bit about the pricing environment. Michael Doogue: Yes. From a pricing perspective, there are competitors in the market right now that have been publicly stated as raising prices. I don't think there's a broad appetite from our customer base for price increases nor am I saying that's part of our strategy. But our expectation heading into the new calendar year is that we can hold pricing more favorably for Allegro than we might have been able to do in other periods. Christopher Caso: Got it. That's helpful. I guess going forward, you made some comments, Derek, this was sort of in the late eighth inning with regard to inventory reduction and such. Is that a comment for both the distribution channel as well as the direct customers? And if that's the case, how do we think about that with respect to revenue growth and seasonality as we get over the next few quarters? I mean, is it -- if we start to get some restocking, if demand stabilizes here, does that suggest above seasonal quarters once the inventory burn is complete? Derek D'Antilio: Yes. So I'll start, Chris. What we saw in Q2 was continued inventory burn, a small amount. Distributor inventory came down by about another $5 million. Our sell-in was mid-single digits below POS. POS remained pretty strong. I expect to see a little bit more -- and that's all on the distributor side where we get data from our distributors on a regular basis. I expect to see a little bit more inventory burn in the very long tail of consumer and broad-based industrial here in the December quarter. So I feel like we're getting to the end of that in the distributor side. On the automotive side, it's a little harder to see the actual inventory with our customers, but we're getting more in-quarter lead time orders. So that tells us that, that, coupled with forecast tells us that, that's also getting near the end of the inventory burn as well. Michael Doogue: Yes. And I could just add to that, that I mentioned I was in China within the quarter. One nice piece of learning within that trip, our internal teams did a nice job pulling our Tier 1s in the China market for their inventory levels of Allegro products. And we were seeing very healthy, if not in some cases, slightly low levels of inventory in the China market space. I bring that up for a couple of reasons. Number one, we're getting the obvious and insightful questions being asked, do you see any evidence of stocking in China? We weren't seeing that, but it also shows that we could be poised for growing to end demand in China in the coming quarters. Derek D'Antilio: And Chris, to answer the second part of your question, as we've laid out in our financial model, we expect that end demand for us is growing at low double digits going forward. If there was a restocking cycle, which we don't really see evidence of that right now, that could be above that number. Operator: The next question comes from Blayne Curtis with Jefferies. Blayne Curtis: Nice results. I had 2 questions. I just wanted to ask, obviously, data center has been all over the news. And I'm just kind of curious how you've seen the outlook for data center improve over the last quarter. And then I don't know if you're able to kind of frame how big it is within industrial. I'd also be curious just commentary as to -- obviously, there's a 3x increase in content to AI, but how much is AI today versus general purpose servers? Michael Doogue: Yes. Thanks, Blayne. I'll talk generically. You can poke at the answer some more if I didn't answer your questions. But as I mentioned earlier, what we're seeing is just the incredible levels of power that are being consumed in these newer data center architectures. We're starting to see transition to 48-volt discussion of 800 volt. And if I could summarize that at the highest level, all those trends align very nicely with some of the competitive advantages of our products that would include our motor or fan drivers, our current sensors. And increasingly, we're getting some uptick in activity in the data center landscape from our isolated gate drivers. Everything we're seeing is related to the higher power levels getting the heat out of these power supplies, getting the heat out of the cabinet or the rack itself is becoming more important. And we have numerous technologies now that help achieve these higher levels of cooling and higher levels of performance in the data center. We are not experts in data center or server architectures, although we're putting more time and energy into studying trends for the future. We do see trends that should increase the number of fans for Allegro in a rack within an AI data center should increase the numbers of current sensors and eventually the isolated gate drivers, and that's an encouraging sign. Blayne Curtis: Got you. And then I wanted to ask -- I guess, if I did the math right, the disti sales were up 22% sequentially. So I think that's a high number versus historically. I guess I'm just curious you just described that you said inventories are down in that channel. I guess, why the jump? And is it more end market related? If you could just provide any color, it would be great. Derek D'Antilio: Yes, Blayne, that's exactly right. So distributor sales for us sell-in was up 22%. We continue to see -- we continue to ship below POS by about mid-single digits, and we also burned about $5 million in inventory in the distribution channel. So distributor -- our sales into the distributors have been pretty low for the past 6 quarters. So it's back to what it was about 6 quarters ago. And really, I think we're going to continue to see that increase. The way our distributor sales work is all of our industrial products go through distribution, and then we have fulfillment done through distribution for both auto and industrial in places like Japan and most of China as well. Operator: The next question comes from the line of Quinn Bolton with Needham & Company. Quinn Bolton: Nice job on the results and outlook. I guess I just wanted to come back. I think last quarter, you had sort of put consumption at the end of '24, somewhere in the level of $220 million to $230 million. And I think you sort of felt that, that was probably a good level to think about through this year given some of the annual price declines. Just one, wanted to make sure you guys hadn't changed your outlook for where you think sort of end consumption is. And then looking forward, when do you think you get back to that sort of low double-digit growth rate in that TAM? Do you think that's something you're looking for in 2026? Derek D'Antilio: Yes, Quinn, that's exactly right. We talked about getting to about $225 million. And in the fourth quarter of 2024, that $225 million number was the number I gave of end consumption at that point. That number has continued to grow organically just from the markets that we serve, offset by some of the price declines that have happened in the market over 2 years. So we still think that number is in that range. It may have moved up a little bit from there. Now that pricing has largely stabilized, that number should continue to move up at the rate of our content opportunity in the market, so call that the 10% per year. So that number will continue to increase. And as I mentioned, as we get through here Q3, I think we're in the late innings of this inventory burn for us. I don't expect to continue to see material inventory burns. And beyond that, as a call previously asked, if there is a restocking cycle, we could even see growth above that content opportunity growth. Quinn Bolton: Great. And then I wanted to follow up, Mike, you sort of addressed some of the applications in the data center. But I was wondering if you could specifically talk about 800-volt given a number of the hyperscalers and OCP talking about moving to 800-volt rack power distribution rails in next-generation racks, I think you've kind of gone through where you play in 48-volt, but do you have specific applications at that 800-volt rail on top of what you've kind of previously highlighted on the 48-volt rail? Michael Doogue: Yes. Great question, Quinn. And we have a great 800-volt story. And part of the reason is that a lot of the technologies we developed for the EV space were all developed around 800-volt batteries and EVs. So whether you look at our current sensors or our isolated gate drivers, they were all designed specifically to offer efficiency gains, power density gains, size benefits in 800-volt systems. So we are actually excited about the coming transition to an 800-volt architecture in data center. Operator: The next question comes from Joshua Buchalter with TD Cowen. Joshua Buchalter: Congrats on the results and guide. I'm sensing a lot of optimism on the current sensing side. It really seems like it's been building all year. Is this because of the TMR portfolio maturing and potentially being applicable and ready for autos? Maybe you could just speak to how much of the current sensing piece is current and ready on TMR across your applications. Michael Doogue: Yes. Thanks, Josh. It's Mike. So we're excited about current sensors for lots of reasons. One of them is just the growth potential that current sensors offer both in electrified vehicles and really in the electrification of everything, which would include the data center. So the team has done a really nice job increasing the number of package offerings that we deliver to customers that help them solve some of the size problems they have, some of the power density problems that they have. And the packaging technologies create a great platform for then what becomes circuit innovations. I talked about this new 10 megahertz TMR current sensor, and this is a great example of us taking market-leading TMR tech, combining it with our market-leading packages and creating a product that is highly sought after, both in the EV space, like in the onboard charger part of the EV world, but also in these data center power supplies. And once again, these faster current sensors help protect against short circuit conditions with gallium nitride and silicon carbide, but when you switch these power supplies faster, not only can you make them more efficient, but you can also shrink the size of some expensive inductors and other components in the power supply. So TMR is helping out quite a bit in the world of current sensors and in our sensor business as a whole. Joshua Buchalter: As my follow-up, it sounds like you have incremental confidence in the pricing environment. I was maybe -- I was hoping you could expand on what's changed in the market that's driving that confidence. And then also, when you talked about being able to hold pricing better into 1Q or I think you said stable, are you expecting flat pricing into 2026? Or is that just relative to the step down that happened at the beginning of this year that it's more stable? Michael Doogue: Yes, it won't be flat pricing. It will just be more stable. I think what we're seeing is that some of the larger players in the market who had been very aggressive on pricing to try to fill factories, they're starting to take their foot off the gas. Some of them are even talking about price increases, and we just think it creates a more stable environment for pricing, but we're not saying pricing will be flat entering next year. Operator: The next question comes from the line of Vijay Rakesh with Mizuho. Vijay Rakesh: Mike and Derek, just a quick clarification on the e-Mobility and magnetic sensor side. I saw e-Mobility growing 21% year-on-year and the magnetic sensor was growing only 2% year-on-year. Is that because a lot of the traction is on the motor driver side here? And do you see a pull-through for the magnetic sensors with the motor drives like the position speed or trend sensing alongside those motor drives as you look out? Michael Doogue: Thanks, Vijay. I'm actually glad you asked this question. So as Derek stated in his prepared remarks, in the first half of fiscal year '26, mag sensors were up 13% relative to the second half of FY '25. And what you're seeing in the stats in the second quarter of last year of FY '25, there was a bit of an anomalous spike up in revenues for magnetic sensors, which are making the numbers this quarter on a year-over-year basis just a bit anomalous based on some lumpiness within the quarters. We feel great about our magnetic sensor performance, very strong wins in the EV space and the ADAS space. As I mentioned, we're ramping the current sensors in data center. We're seeing robotics wins. We actually had a record quarter for TMR sales within this quarter. So there's a little bit of a timing dynamic in the numbers in terms of year-over-year growth, but the story for magnetic sensors remains quite strong. Vijay Rakesh: Got it. And then, Derek, on the longer-term 58% gross margin target, just wondering how we should look at that, the progression to that, whether it's product mix or foundry or loading pricing, et cetera, if you can just walk us through that. Derek D'Antilio: Yes. So 58% is our long-term target. We're taking it sort of piece by piece, right? The first goal is to get back to 50%. The guide for our midpoint in the December quarter is 50% coming off some troughs kind of at the 46% range. So we continue to grind our way back to 50%. And the biggest piece of that continues to be leverage. We have a significant amount of capacity, both at our wafer suppliers and in our back-end facility in the Philippines, where we've invested heavily over the last 4 years. So we get a lot of leverage. That's that 60% to 65% drop-through. And that's really the biggest piece of it. Aside from that, mix will certainly help some of these newer products that Mike talks about with the TMR, the high-voltage gate drivers, this 10 megahertz current sensor we released, those inherently have more value to our customers and higher gross margins as they begin to ramp. And we continue to do a lot of good things with efficiencies in our factory, which does 2 things, improves gross margin and allows us really to temper our CapEx. This quarter, our CapEx was $6 million or 3% of sales. I expect that to remain below 5% of sales, our target model. So those are really the things that will drive gross margin. On the variable contribution margin side, I don't expect that to change considerably because we'll be continuing to have cost downs with our vendors, of course, and those hopefully will exceed the price downs we have with our customers. And that's kind of the netting that happens there. Operator: The next question comes from the line of Joe Moore with Morgan Stanley. Joseph Moore: I wanted to come back to the data center business. I think I want to make sure I have the right sizing that it's kind of mid-single-digit percentage of revenues. And can you kind of help us with how much of that currently is cooling versus power? Michael Doogue: Yes Joe, this is Mike. So we have said publicly in the past that data center had hit 7% of sales for Allegro. And in the -- here in Q2, the number was only slightly higher than that, but did set a record. And we are still seeing the majority of our revenue coming from cooling, but we're seeing a faster ramp on the power supply side of things. So I think the future is bright on both the cooling and the power supply side of the business. Joseph Moore: Okay. That's helpful. And then with regards to the comment you made a few minutes ago that the rack content is quite a bit different. Can you expand on that a little bit just because the market right now, there's a combination of kind of racks of gateway servers versus full rack scale. What's the difference in content for you guys? Michael Doogue: Yes, Joe, I am no expert on all the permutations of the configurations out there. But in our investor deck on our website, we talk about $150 of potential content in a more conventional high compute server going up to $425 for Allegro in more of a Gen A type server configuration that's not tied to any one hyper-specific server configuration. It's more related to the conversations we're having with our customers about the transition over to magnetic current sensors in the power supplies being a general trend and then also the need to have more fans in the server architectures. We are seeing significant numbers of fans in certain architectures that rely on liquid cooling heavily as well. So I think there's some positive news in at least some of the architectures we've seen that even though there's liquid cooling, there tends to be quite a few fans. And then as we look ahead, it becomes even more exciting when we can put high-voltage gate drivers into the power supplies. And as I said in my prepared remarks, we're working with customers on that right now. Operator: The next question comes from the line of Timothy Arcuri with UBS. Timothy Arcuri: I wanted to go back to this question on distribution. It was up 22%. It sounds like it's just shy of $120 million. But then you said that they burned $5 million worth of your parts. So it sounds like sell-through was like $5 million, even higher than that, yet the direct sales were down 10%. So it kind of seems like end customers are building inventory and they're pulling from the disti. So I know that you don't have as much visibility as to what's kind of happening at the end customer. But does that make you a little concerned that maybe they are building inventory just out of disti? Derek D'Antilio: That's not what we're seeing right now. We don't have visibility further down the line, but a lot of that is geographical for us as well. We use distributors for both demand generation for the industrial side of the business, but also for fulfillment in auto in Japan and China. So disti could be up to the extent that China is up, Japan was up. Industrial in certain markets like data center we served through distributors. So that really will drive some of that. Timothy Arcuri: Okay. And then it sounds like based on the answer to a prior question, it sounds like data center, you're kind of a mid- to high single-digit share of this $900 million TAM that you put in the deck. So how -- like how big do you think your share can get there? Is it -- I know that the story really is one that, that TAM is growing versus your share, but are you also going to gain share in that TAM? And kind of where do you think that your share can get to? Michael Doogue: Yes. So I'll take that one. This is Mike. I won't comment on absolute share numbers, but I would say the best trend that we want to make sure it's crystal clear is that we had, had a data center business that was largely built on fan drivers. We're now happily seeing current sensors ramp in the power supply and then the third wave will be these isolated gate drivers that we talked about. As we bring in current sensor and isolated gate driver technology, we're starting from a low base. So it inherently implies market share gains for Allegro. And I think in aggregate, it creates a strong story of growth in the data center. There's really so much going on in terms of the architectures of the data centers. When is it 800 volts or not? It's tough to give any tangible numbers regarding the future, but I'm confident in saying that we have a strong story in data center. Operator: Our last question comes from the line of Mark Lipacis with Evercore ISI. Mark Lipacis: Derek, you had mentioned that some -- you're seeing some of your customers trying to order within lead times. So I'm hoping you could just review some of the cycle signals. Are you seeing expedites? Are you seeing pull-ins or any of these things changing quarter-to-quarter? And is any -- what's going on with your own company lead times or any changes there or lead times from your suppliers? And then I have a follow-up. Derek D'Antilio: Yes, Mark. We continue to see book-to-bill be above 1. We haven't given the absolute numbers. That continues to be pervasively above 1 all of calendar '25 year. So that's good. Our backlog continues to build. We are seeing orders within lead time, and we're having a typical sort of up cycle constraint in the sense that we're also building some delinquency, meaning we're having challenges building product and getting it through our back-end factory. We're putting more capacity online to service things like data center in the future as we move forward. So I would say those are the types of metrics you usually see when you come into this environment after a prolonged inventory clearing period. Mark Lipacis: Got you. Very helpful. And then a follow-up. There's in the news concerns around rare earth metals. Do you guys use those? And if so, what's your strategy for building inventories there? Michael Doogue: Yes. Thanks, Mark. This is Mike. So rare earth is used throughout so many industries, as you know. I would say the first signs we saw in terms of rare earth tightness were from some of our customers that were putting rare earth materials into things like motors. They've done a bunch of work starting in the spring and seem to have been navigating that carefully. Additionally, we're looking at a vendor that we used to buy some magnets from. We spoke to them a few months ago, and they assured us they had multiple years' worth of supply of rare earth materials, and we continue to work with them. And then finally, obviously, today was a big day for announcements about potential U.S.-China relations and the lifting of some potential restrictions. Net-net, I think lots of companies have their head on a swivel and are doing all the right things to make sure they have continuity of supply and people have been navigating that successfully, at least from our seat to date. Operator: At this time, I'm showing no further questions in the queue. I would now like to hand it back to Jalene for closing remarks. Jalene Hoover: Thank you, Kathy, and thank you all online for taking the time to join us. This concludes this morning's conference call. Operator: Again, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.
Operator: Greetings, and welcome to Haverty's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tiffany Hinkle, Assistant Vice President, Financial Reporting and Investor Relations. Thank you. You may begin. Tiffany Hinkle: Thank you, operator. Good morning, and thank you for joining us for our third quarter earnings call. I'm here today with our President and CEO, Steven Burdette; and Executive Vice President and CFO, Richard Hare. Before we begin, I'd like to remind everyone that today's conference call may contain forward-looking statements, which are subject to risks and uncertainties. Actual results may differ materially from those made or implied in such statements, which speak only as of the date they are made and which we undertake no obligation to publicly update or revise. Factors that could cause actual results to differ include economic and competitive conditions and other uncertainties detailed in the company's reports filed with the SEC. A replay of this call will be available on our Investor Relations website this afternoon. For commentary about our business, I will now turn the call over to Steve. Steven Burdette: Good morning. Thank you for joining our 2025 third quarter conference call. We are excited to report an increase in both written and delivered comp sales for Q3. Our sales for Q3 were $194.5 million, which was up 10.6% with comps up 7.1%. Total written sales were up 10% with comps up 8%. Our steady growth in written and delivered sales over the past 4 quarters reflects improvements across marketing, merchandise assortments, promotions, supply chain, distribution, home delivery, service and store execution. While this quarter's results are positive, we remain focused on the significant opportunities in front of us that will allow our return to a $1 billion-plus company with no additional investments needed in our distribution infrastructure. Gross margins continue to be strong, coming in at 60.3% compared to 60.2% in Q3 2024. Our pretax profits for the quarter were $6.4 million or 3.3% operating margin compared with $6.9 million or 3.9% operating margin in Q3 2024. Our EPS for the quarter came in at $0.28 compared to $0.29. Richard will provide additional details regarding the increase in SG&A expenses and LIFO impact for the quarter. During the quarter, our Labor Day event was the company's largest event of the year and was key to our success in the quarter. We had a terrific written 4-day increase of 13.6% over last year with strong metrics. Traffic was positive in the mid-single digits. Average ticket grew to over $4,000 with design average ticket over $8,000. And conversion rates showed a slight -- although conversion rates did slow a slight decrease compared to last year. The industry faces ongoing challenges. High interest rates and rising home prices continue hurting the housing market. Tariffs remain an issue, geopolitical tensions persist, consumer confidence is falling and the government shutdown is now heading into week 5. Recent and planned interest rate cuts have yet to lower mortgage rates or boost the housing sector. Despite these pressures, our customers with household incomes over $150,000 are still spending, giving us confidence for the rest of 2025 and into 2026. Traffic for the quarter stayed positive with growth in the mid-single digits compared to last year. The average ticket increased 6.1%, reaching $3,668 and the designers average ticket rose 11.9% to $7,986. Our design business remained robust, accounting for 34.2% of sales, driven by a 7.1% increase in upholstery special orders. Conversion rates for the quarter showed continued improvement over Q2, finishing the quarter down slightly in the low single digits. Our merchandising and supply chain teams have done a great job moving much of our production out of China during the quarter, so we could resume our special order business. The announcements of potential new tariffs on furniture by the administration in late August was disappointing. Ultimately, these new tariffs were finalized at 25% on all upholstered wood products out of Mexico, along with Vietnam, Cambodia, Thailand and Indonesia beginning October 14, but will be moving to 30% beginning January 1, 2026. Our merchandising and supply chain teams have worked with our vendors to secure pricing to not disrupt any shipments. As with previous price increases, we will adjust retail prices strategically to maintain our values and margins. We appreciate our vendors' collaboration in helping us deliver strong values to our customers. The positive out of these new tariffs is that they are not stackable on the existing reciprocal tariffs put in place back in the summer. We are monitoring the administration's current trip to Asia and the upcoming Supreme Court decision to see what the impact will be on tariffs going forward. The new merchandising team has now been in place for a full year, and we are starting to see their impact on our product assortments. We just brought our store management team from the field to Atlanta for a 3-day leadership event at the end of September to celebrate our 140th anniversary and to show them in person the new products arriving over the next 6 to 9 months. The merchandising team did a fabulous job presenting the new products, creating lots of excitement for our store management to take back to their teams. From a category performance, all categories showed nice increases during the quarter. Bedroom and bedding outperformed all categories with increases in the low to mid-double digits, followed by upholstery and occasional in the high single digits and dining room and decor in the mid-single digits. Our inventories have remained basically flat in Q3 compared to Q2 this year. We anticipate that inventories will increase slightly in Q4 due to the additional tariffs implemented in October. Our marketing creative and media plans continue to resonate with our customers through broadcast, connected TV and digital marketing channels. Our expanded use of AI and data has improved our targeting and personalization, making our marketing investments more efficient. And we saw web traffic, including organic and site engagement increased by double digits as our written e-commerce sales grew 13.6% for the quarter. We invested an additional $2.8 million this quarter in marketing, including our first direct mail campaign in several years. The direct mail piece proved to be very successful in attracting new customers to Haverty with a 12-page layout that showcased our product offerings and design capabilities. We continue offering 60-month no interest financing to remain competitive, and our credit costs continue to remain in line with last year. We completed the closing of the Waco store at the end of September. However, we are pleased to announce the opening of our third store in the Houston market in mid-October. The new store is in New Caney, which is in the northeast part of Houston. This will bring our store count back to 129, which is where we will end the year. We will return to our store growth goals of 5 per year in 2026. As stated on our last call, we have finalized 4 additional leases for 2026 openings in St. Louis, Nashville and 2 more in Houston. We have 1 new market and 1 relocation in the LOI process now, but are unable to announce. We will make investments in our stores throughout 2026 in the bedding departments and design centers to maintain our focus on improving the customer experience. Our distribution, home delivery and customer service teams continue to do a fantastic job controlling expenses while furnishing happiness to our customers. The management teams are great at balancing the number of team members with the workflow demand needed due to natural turnover. We continue to believe that due to Haverty's controlling the final mile delivery with Haverty team members, it is a huge advantage to our success in providing our customers with unwavering service. Thank you to all our Haverty team members for your dedication to our customers and the company's success. Our people define us, and I am proud to be a part of this great team. With a debt-free balance sheet, operational consistency, integrity, consumer focus, in-home design services and our regret-free experience, Haverty's offers confidence to our customers to furnish their homes with the Haverty brand. I will now turn the call over to Richard. Richard Hare: Thank you, Steve, and good morning. In the third quarter of 2025, net sales were $194.5 million, a 10.6% increase over the prior year quarter. Comparable store sales were up 7.1% over the prior year period. Our gross profit margin increased 10 basis points to 60.3% from 60.2%. Excluding the impact of the $624,000 LIFO expense in the third quarter of 2025, our gross profit margin would have been $0.606. The overall increase in margins was due to product selection and merchandising, pricing and mix. Selling, general and administrative expenses increased $11.4 million or 11.3% to $112.3 million. As a percentage of sales, these costs approximated 57.8% of sales, up from 57.4% in the prior year's quarter. We experienced increased advertising, selling, occupancy and administrative costs during the quarter. Other income expense in the third quarter of 2025 was $348,000 and interest income was approximately $1.1 million during the third quarter of 2025. Income before income taxes decreased $400,000 to $6.4 million. Our tax expense was $1.7 million for the third quarter of 2025, which resulted in an effective tax rate of 26.4% compared to an effective tax rate of 28.3% in the prior year period. Net income for the third quarter of 2025 was $4.7 million or $0.28 per diluted share of our common stock compared to net income of $4.9 million or $0.29 per share in the comparable quarter last year. Now turning to our balance sheet. At the end of the third quarter, our inventories were $92.4 million, which was up $9 million from the December 31, 2024 balance and up $3.7 million versus the Q3 2024 balance. At the end of the third quarter, our customer deposits were $43.9 million, which was up $3.1 million from the December 31, 2024 balance and flat with Q3 of 2024. We ended the quarter with $130.5 million of cash and cash equivalents, and we had no funded debt on the balance sheet at the end of the third quarter of 2025. Looking at some of our cash flow usage. CapEx was $3.6 million for Q3 2025, and we also paid out $5.2 million of our regular dividend in the quarter. We did not purchase any common shares of stock of our share repurchase program during the third quarter of 2025, and we have approximately $6.1 million of existing authorization in our buyback program. Our earnings release list out several additional forward-looking statements indicating our future expectations of certain financial metrics. I'll highlight a few, but please refer to our press release for additional commentary. Our 2025 guidance includes tariffs currently in effect as of October 29, 2025, and does not include the effect of additional proposed tariffs that have not been finalized by the Trump administration. We expect our gross margins for 2025 to be between 60.4% and 60.7%. We anticipate gross profit margins will be impacted by our current estimates of product, freight and LIFO expenses. Our fixed and discretionary type SG&A expenses for 2025 are expected to be in the $296 million to $298 million range, an increase from our previous guidance due to higher anticipated advertising and admin costs. The variable type costs within SG&A for 2025 are expected to be in the range of 18.6% to 18.8% based on our expected level of selling costs for the remainder of the year. Our planned CapEx for 2025 remains at $24 million. Anticipated new or replacement stores, remodels and expansions account for $19.6 million. Investments in our distribution network are expected to be $1.8 million and investments in our information technology are expected to be approximately $2.6 million. Our anticipated effective tax rate in 2025 is expected to be 26.5%. This projection excludes the impact from vesting of stock awards and any potential new tax legislation. This completes my financial commentary on the third quarter financial results. Operator, we would like to open the call up for any questions. Operator: [Operator Instructions] Our first question comes from Anthony Lebiedzinski with Sidoti & Co. Anthony Lebiedzinski: So very nice to see the return to positive same-store sales here in the quarter. I know you highlighted the strong Labor Day. Just -- can you comment also just on the monthly trends that you saw in the third quarter and whether or not you saw any notable regional differences in your markets? Richard Hare: Sure, Anthony. This is Richard. Our written business trends in the third quarter in July, we were up on a same-day week basis, a little -- about 10.6% in July, 10.9% in August and a little over 8% in September. Deliveries were fairly consistent, 11.6% in July, 7% in August and 13.1% in September. I don't believe there are much, if any, regional differences. But Steve, I don't know if you got anything else you want to add. Steven Burdette: No. Anthony, there was not much difference there. We certainly had probably more strength in the Midwest, Georgia, Central and Florida were -- and Texas were really good. The East was a little lighter, but everybody was positive. All districts were positive across the board. Anthony Lebiedzinski: That's good to hear, certainly. And then as far as tariffs, is there any way you guys could quantify or like give a sense as to the impact of tariffs that had on the quarter? Steven Burdette: Anthony, we don't -- a dollar impact, no, because we adjusted in our pricing. I mean, we've been very clear from the beginning. We make strategic price changes immediately once we know the tariffs. And we feel like our positioning on that, even going back to COVID when we were doing all price increases, we know how to handle this and know how to move forward with it. So I don't think we had it. But the impact would come on LIFO, and I'll let Richard talk to that specifically. Richard Hare: Yes. Thanks. I did mention in my remarks about the impact of LIFO expense on our gross margins. So we are seeing as the tariffs -- as that material comes in, in the third quarter, and it will continue to come in the fourth quarter, you'll see our LIFO expense go up. So I believe last year, we had a LIFO benefit of around $800,000 for the year. So far this year, we have LIFO expense for the first 3 quarters of about $750,000. So I would expect to continue to see some more LIFO expense roll through the P&L throughout this year and probably into next year. Steven Burdette: But Anthony, I don't -- we don't see that as an impact. We've been able to grow sales, and we've changed the prices and maintain our margin. So we feel good about where we're going in the direction we're taking with it, how we're handling it. Anthony Lebiedzinski: Understood. Okay. Got you. Okay. And then just in terms of your expense guidance, I know you talked about higher advertising and administrative costs. How should we think about those for next year? Do you think that trend will continue? Or just overall, just wondering if you could comment on what you're seeing in terms of cost of running the business? Richard Hare: Yes. I'd say for this year, we went up maybe about $5 million band on our non-variable costs from the last quarter to this quarter for the year. About 3/5 of that was advertising cost. The rest is on the administrative cost is more incentive compensation. This year, we are hitting our annual targets in our incentive plans. Last year, we were not. So it's kind of a tough comparison. We have not developed our full budget for next year, but I would expect basically normal inflationary type increases, nothing significant to note in the non-variable side of the business. Steven Burdette: Anthony, let me speak to the marketing specifically. In '24, we basically pulled back too hard. We were experiencing some double-digit decreases in written. We're trying to manage the business. We had an election going on. And we basically -- if you remember from Q2, we increased our marketing expense. I think it was about $1 million. We upped that -- in the third quarter as well. We felt to levels that it needed to be. And I might want to remind you of that $2.8 million. About half of it is due to the Houston market is now new to us, and we're investing more advertising as we led to that -- our third store opening there. And then obviously, we also returned to direct mail, which we think is a key part of our direction going forward. So we have one event now that's out in the fourth quarter as well right now. So -- but I don't see marketing. I think we've gotten it back to levels that we can sustain. And I think for 2026, we'll be fairly flat with where we are in '25. Operator: Our next question comes from Cristina Fernández with Telsey Advisory Group. Cristina Fernandez: Congratulations also on the positive comp. I wanted to see if you can talk more about the composition of that comp. It definitely seemed like ticket was the bigger driver. So I wanted to understand, is that mostly due to the price increases? Or are you seeing consumers kind of trade up on the price points or navigate to some of those bigger ticket items? Steven Burdette: Certainly, average ticket is driving that. One thing that we do look at is we have been able to drive our design tickets up by selling -- we're selling basically more pieces to the consumer. We measure that. And so that's helped drive it. But obviously, price increases are having an impact on that as well. I don't have a direct breakdown between the two, Cristina, but there's certainly both of those. And I will also add conversion rates, while we're not above last year, we are getting, as I commented in my notes, we're basically low single digits, and we were running mid-single digits at Q2 when I reported. So we're seeing continual improvement there, and that's obviously still a focus for us and where we think we still have significant opportunities moving forward. Cristina Fernandez: And then on the price increases to offset the newer Section 232 tariffs, what's the timing of that? Have you already taken some or that's something that's going to take place here in the fourth quarter? Steven Burdette: It has already taken place in early October. We got -- as soon as we knew and got to it, as I said, our merchandising and supply chain teams were working with our factories to get everything solidified and price changes were made early to mid-October. So they are already in place now as we go forward. Cristina Fernandez: And then I also -- my last question is on the, I guess, bigger picture, how should we think about the level of sales where you can leverage SG&A expenses? I mean you had a great growth rate this quarter, 10%, but expenses grew faster than that. So should we think about a growth rate or more an absolute number of sales that will allow you to leverage those expenses and start to see operating margin expansion year-over-year as your sales grow? Richard Hare: Yes, Cristina, if you look historically, when we get particularly above $800 million and -- $800 million to mid-$800 millions, you really start seeing some expansion there. And then as you saw during the COVID years when we blew $1 billion, you really saw it fall. So I would definitely, in my mind, over $800 million, you really see it falling significantly to the bottom line. Steven Burdette: Yes. And as I commented on the marketing, Cristina, we're going to keep that. We think it will be fairly flat in '26 to '25. So that will be an opportunity to leverage as well. We can continue to get the growth. Operator: There are no further questions at this time. And I would now like to turn the floor back over to Tiffany for closing comments. Tiffany Hinkle: Thank you for your participation in today's call. We look forward to talking with you in the future when we release our fourth quarter results. Have a great day. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Hello, and welcome, everyone, to the Advance Auto Parts Third Quarter 2025 Earnings Conference Call. I would now like to turn it over to Lavesh Hemnani, Vice President, Investor Relations. Lavesh Hemnani: Good morning, and thank you for participating in today's call. I'm joined by Shane O’'Kelly, President and Chief Executive Officer; and Ryan Grimsland, Executive Vice President and Chief Financial Officer. During today's call, we will be referencing slides, which have been posted to our Investor Relations website. Before we begin, please be advised that management's remarks today will contain forward-looking statements. All statements other than statements of historical fact are forward-looking statements, including, but not limited to, statements regarding initiatives, plans, projections, guidance and expectations for the future. Actual results could differ materially from those projected or implied by the forward-looking statements. Additional information can be found under forward-looking statements in our earnings release and risk factors in our most recent Form 10-K and subsequent filings made with the SEC. Shane will begin today's call with an update on the business and our strategic priorities. Later, Ryan will discuss results for the third quarter and provide an update on full year guidance. Following management's prepared remarks, we will open the line for questions. Now let me turn the call over to our CEO, Shane O'Kelly. Shane? Shane OKelly: Thank you, Lavesh, and good morning, everyone. I want to take a moment to acknowledge and thank the team for their hard work and dedication. Their unwavering focus on delivering exceptional customer service and advancing our strategic priorities helped us achieve our strongest quarter in over 2 years. For the third quarter, we reported comparable sales growth of 3% with both Pro and DIY channels delivering growth. Adjusted operating margin expanded by 370 basis points year-over-year to 4.4%, demonstrating progress on the execution of our strategic plan. During the quarter, we also strengthened our balance sheet by proactively reorganizing our debt capital structure. We raised nearly $2 billion in cash, which provides enhanced liquidity for the business as well as a path to return to an investment-grade credit rating in the future. As anticipated, tariff-related price increases have accelerated in the auto aftermarket. And in our view, the industry has been responding rationally by adjusting prices in response to rising product costs. We saw some variability in performance as prices moved higher during the quarter, although on a 2-year basis, both transaction and unit trends were relatively stable. As we look to the balance of the year, we believe there is potential for temporary volatility in sales trends as consumers manage household budgets in an inflationary backdrop. Our teams are prepared to navigate in this dynamic environment and provide consistent high-quality service to our customers. The long-term fundamental drivers of the industry remain healthy. More than 90% of our sales are driven by maintenance and break/fix repair, which gives us confidence for the long term. Based on our performance to date and expectations for the remainder of Q4, we have updated our full year guidance. We have reaffirmed the midpoint of our prior comparable sales growth and adjusted operating margin guidance, which implies approximately 200 basis points of margin expansion for the year. I want to recognize the team for their tremendous effort in delivering operational stability and maintaining focus on our turnaround priorities. We still have considerable work ahead of us as the initiatives underlying our strategic pillars continue to build through 2026. We remain committed to the steady execution of our plan to expand margins and create long-term value for shareholders. The Advance team is prioritizing actions to successfully execute the basics of selling auto parts while strategically utilizing innovative technological assets to position the company for the future. Our technology team has designed a multiyear road map to support the effective execution of our plan. These include using generative AI content and deploying AI-based applications in routine processes and providing sharp analytical data for our teams to improve service levels. Some of the areas where we are leveraging these applications include processes within merchandising to power our SKU placement decisions and within our supply chain to determine optimum demand forecasting for millions of SKU combinations in our network. These are just a couple of examples, among other projects, where we believe we will collectively establish a foundation for stronger execution across fundamental retail operations. Next, let's turn to an update of our strategic plan. To recap, our turnaround goals are built on 3 pillars, each supported by targeted initiatives that we believe will position us to deliver profitable growth. I will share updates on the progress we have made within each pillar, and then Ryan will discuss our financial performance. Let's begin with merchandising. Throughout the year, we have taken deliberate and strategic actions to position Advance as a trusted long-term growth partner for our vendors. With a sense of urgency, we have streamlined legacy processes, reduced complexities in order management, restructured our distribution center footprint and prioritized operational excellence to enhance the overall vendor experience. Our vendor community is reacting positively to the bold decisive actions we've made such as exiting underperforming markets and investing in new stores and market hubs. They are actively engaged in strategic business planning, exploring supply consolidation opportunities and collaborating on joint marketing efforts to support our transformation. This alignment has already begun to deliver improved product margins, and we expect additional cost benefits in the future. I am proud of the team's progress, especially given the added complexities of navigating a new tariff environment. Another key priority for the company has been enhancing the availability of hard parts. We are pleased to report the successful completion of the rollout of our new assortment framework across our top 50 DMAs, which cover approximately 70% of our sales. We achieved this ahead of schedule by leveraging proprietary assortment planning tools that have significantly improved our ability to make data-driven decisions and quickly adapt SKU requirements to meet specific market needs. We expect this initiative to deliver incremental growth over and above the initial 50 basis point uplift as these markets mature over the next 12 to 18 months. Along with refreshing our store assortment, we have also improved DC stocking programs to drive greater effectiveness in store replenishment processes for each market. These activities have enabled us to achieve our store availability target and ensure improved depth of hard parts in stores and distribution centers. With this major milestone accomplished, we are now focused on improving the speed at which we bring new parts to market to expand our breadth of coverage. We have already introduced tens of thousands of new SKUs into our network this year, and our work has uncovered additional opportunities to enhance our responsiveness to market demand signals. Increasing the breadth of hard parts coverage will enable us to further improve service levels for our Pro customers. Moving to pricing and promotion management. As a company, our goal is to offer competitive pricing supplemented with seasonally relevant promotions to engage customers and drive repeat purchases. We are in the initial stages of testing a new AI-powered pricing matrix to inform pricing decisions for SKUs within the DIY and Pro channels. Separately, we have also built guidelines for field discounting programs to take advantage of select market growth opportunities. In this regard, we are adopting a fundamental retail approach by installing a centralized price management system for segmenting categories, markets, SKUs and customer channels. Consistent with prior expectations, we expect this initiative to deliver a larger benefit in 2026 and beyond. Turning to supply chain. Our U.S. distribution center consolidation plan is progressing on schedule, and we expect to end the year with 16 DCs in the U.S., which is a significant reduction from 38 DCs just 2 years ago. We will enter the next phase of consolidation in 2026. And as part of our planning process, we are evaluating our operational capabilities across the network. DC productivity measured through product lines per hour has improved in the mid-single-digit percentage range compared to last year, and our team is putting incremental focus on execution of key functions in our DCs. These include product picking, packing and routing to drive additional productivity. We believe our current DC network is well positioned to support strong service levels and the continued growth of our multi-echelon network. A key element of this growth is opening new market hubs. Approximately 75% of our stores are in markets where we have the #1 or #2 position based on store density. Our team has made great strides in accelerating market hub openings, which is enabling us to capitalize in markets of strength. During Q3, we opened 6 locations and concluded the quarter with 28 market hubs. We now expect to open a total of 14 market hubs this year, including 10 conversions and 4 greenfield locations. With these openings, we expect to end the year with 33 locations. A market hub typically carries between 75,000 to 85,000 SKUs, expanding same-day parts availability for a service area of about 60 to 90 stores. Thus far in Q4, we have opened 1 greenfield location in the Atlanta area. Built from the ground up, this facility is poised to serve as a model for future hub development. We are particularly enthusiastic about the opportunities presented by greenfield openings as these facilities enable us to establish new points of distribution within designated market areas. This strategic expansion not only enhances our ability to provide additional hard parts coverage in previously underserved regions, but it also creates incremental opportunities to gain market share. We will continue to open new market hubs in 2026 and stay on the path to opening 60 market hubs by mid-2027. Moving to store operations. As we've previously communicated throughout the year, we have been testing a refreshed store operating model designed to enhance productivity and ensure the delivery of consistent high-quality service to our customers. I would like to thank our frontline team for their collaboration and adaptability during the testing phase as we work to identify a more effective path forward. We are now prepared to launch this model in Q4 as part of the first phase of the rollout with full implementation anticipated during the first half of 2026. This updated operating model enables us to improve driver and store team labor hours along with vehicle allocations, aligning them more effectively with demand patterns to better serve our customers. We expect this model to provide 3 key benefits. First, it will enable us to instill greater confidence in our Pro customers while strengthening our reputation as a trusted and reliable parts provider in the aftermarket. Second, it strengthens the collaboration between our customer-facing outside sales team and our internal store teams who play a critical role in efficiently procuring and delivering parts. And third, from an economic standpoint, this model should support greater transaction velocity, improve labor utilization and enable us to compete more effectively. The introduction of this new operating model, combined with the expansion of new store locations and our delivery commitment of 30 to 40 minutes naturally positions us to accelerate growth in each Pro account. Our team is putting added emphasis on strengthening relationships with Main Street and regional accounts. The Main Street customer group represents our single largest opportunity for higher-margin market share in the Pro channel. To further boost our sales within this cohort, we are providing our account managers with enhanced visibility on customer data and additional training resources to increase our transaction volumes. For our national accounts, we are actively collaborating with them to optimize parts availability in specific categories by market, which will enable us to improve service levels. Shifting to DIY. As we refocus on the core fundamentals of selling auto parts and work to execute each initiative, we have asked our store team members to embrace significant changes. The fact that our team members are committed to supporting our customers and the sequential improvement in DIY transactions on both a 1-year and 2-year basis is a testament to their customer-focused mindset. As a management team, we have launched a renewed effort to simplify store tasks and streamline communication to the stores to improve the experience for our team. This initiative is being managed through a centralized execution team, which oversees weekly communications and provides organizational visibility into the tasks being assigned to the stores. By prioritizing only the most critical activities, we expect to drive further operational efficiency. We believe this new level of operational discipline will create additional capacity within our stores, allowing teams to dedicate more time to training and customer service. Separately, to monitor the performance in our stores, we have also launched a new Net Promoter Score, or NPS metric that is collected through customer transactions. In addition to providing visibility into the impact of strategic actions being executed by the stores, the data is used by store and district managers to drive targeted service improvements. We expect to focus on operational discipline, along with our ongoing effort to upgrade store infrastructure to enhance the overall experience for team members and for our customers. We continue to upgrade HVAC systems, roofing, parking lots and signage in our stores as part of a multiyear asset management plan. Year-to-date, we have invested about $50 million in store upgrades, which is more than double the total CapEx allocated to these projects last year. To date, we have updated more than 1,400 stores compared to 440 stores upgraded in all of 2024. In addition to these critical store upgrades, we are also building a pipeline of new store openings for the future and continue to target at least 100 new store openings over the next 2 years. To wrap up my section, I want to once again recognize the team for their hard work and for the progress achieved thus far. We remain focused on prioritizing actions to deliver sustained improvement in our turnaround. I'll now hand the call over to Ryan to discuss our financials. Ryan? Ryan Grimsland: Thank you, Shane, and good morning, everyone. I want to begin by thanking our frontline associates for their commitment to serving our customers and delivering strong Q3 results. For the third quarter, net sales from continuing operations were $2 billion, which declined 5% compared to last year. This decline was mainly attributable to the store optimization activity that was completed during Q1. Comparable sales grew 3% during the quarter with positive weekly performance throughout the quarter. Sales trends were strongest during the first 4 weeks, followed by a moderation during the last 8 weeks. From a category perspective, brakes, undercar components and engine management led performance. We have made significant progress in improving our coverage and availability of hard parts, which is helping us deliver better service to customers. For the quarter, ticket was positive and largely driven by tariff-related price adjustments that expanded throughout the quarter. Our industry has been reacting rationally to rising product costs, and we have been adjusting prices in response to market dynamics. In aggregate, same SKU inflation was about 3% in Q3 compared to about 2% last quarter. Transactions were down but improved sequentially as we cycled through discrete events from last year. On a 2-year basis, transactions and unit productivity were relatively stable to last quarter, reflecting the team's continued focus on delivering consistent high-quality service. Now let's look at channel performance. Pro comps grew by just over 4% as we cycled through the softness from last year. On a 2-year basis, the Pro channel recorded its fifth consecutive quarter of positive performance and relatively consistent 2-year trends in each month. Our DIY channel delivered positive low single-digit comps in the quarter and improved sequentially on a 2-year basis. Moving to margins. Adjusted gross profit from continuing operations was $913 million or 44.8% of net sales, resulting in gross margin expansion of about 260 basis points compared to last year. The year-over-year margin expansion was driven by savings associated with our footprint optimization activity completed in March and reduction in product costs driven by our strategic sourcing initiatives. I want to recognize the merchandising team for their solid execution this year. They have been able to secure competitive product costs while managing prices in a higher tariff environment to offset incremental cost pressures, which is yielding stronger merchandise margins. During the quarter, we cycled through approximately 70 basis points of atypical margin headwinds from last year. We also experienced a benefit of approximately 50 basis points related to capitalized inventory costs driven by our strategic decision to carry more inventory through the year. Regarding product costs, as previously anticipated, we expected LIFO expenses to move higher due to cost inflation. This resulted in total LIFO expenses of $33 million for Q3. Shifting to operating expenses. Adjusted SG&A from continuing operations was $823 million or 40.4% of net sales and was consistent with our expectations. The year-over-year reduction in SG&A expense is primarily related to operating fewer stores compared to last year. As a result, adjusted operating income from continuing operations was $90 million or 4.4% of net sales, resulting in about 370 basis points of year-over-year operating margin expansion, our strongest operating margin in over 2 years. Adjusted diluted earnings per share from continuing operations was $0.92 compared with a loss of $0.05 last year. Year-to-date, free cash flow is negative $277 million, largely driven by payments for inventory purchased in Q3 last year, which is in line with our typical cadence for managing payables. Also, during the quarter, we spent an additional $20 million on cash costs related to our store optimization activity for a total of approximately $130 million incurred through the year. Looking at year-to-date free cash flow more closely, we have only seen a modest change in operating cash flow between Q2 and Q3, which shows the stability of our operational execution, while we continue to allocate higher CapEx to strategic investments. Turning to an update on full year guidance. Starting with net sales. We expect net sales of $8.55 billion to $8.6 billion, including comparable sales growth between 0.7% to 1.3%. Q4 is typically our most volatile quarter of the year, and our guidance includes trends through the first 3 weeks, which have started off soft. While the Pro channel continues to track positive, the DIY channel is seeing pressure with more week-to-week variability in transactions. We believe this is being driven primarily by adjustments in consumer purchasing habits in response to rising prices. Same SKU inflation is expected to move higher compared to Q3, and we remain cautious in our planning assumptions based on recent trends. In addition, I want to highlight 2 sales-related items that are unique to Q4. First, last year in Q4, we generated $74 million in nonrecurring liquidation sales related to our store optimization activity. And second, we expect between $100 million to $120 million in sales from the 53rd week. As a reminder, neither of these items impact comparable sales growth. Moving to margins. We expect adjusted operating income margin between 2.4% to 2.6%, reaffirming the midpoint of our prior guidance range. Given the typical seasonality of the business through the end of the year, we expect Q4 gross margin to moderate compared to Q3. We are planning for Q4 gross margin slightly below 44%, which includes the benefit of higher capitalized inventory costs continuing through the end of the year as inventory levels are expected to be higher than previously planned. Strong coverage of parts across our network is critical for our long-term success, and we are working to ensure we provide our customers access to the right depth and breadth of parts. However, this inventory benefit is expected to be offset by higher than previously planned LIFO expenses, that is driving 80 to 100 basis points of added pressure. We currently estimate total fourth quarter LIFO expense of approximately $70 million based on cost trends through Q3. For SG&A, we expect Q4 expense dollars to decline in the high single-digit range compared to last year, which is in line with prior expectations. As a reminder, we are also lapping approximately 280 basis points of atypical margin headwinds, which will drive favorability in the year-over-year operating margin expansion. Moving to the other items in our guidance. We have updated our adjusted EPS guidance to a range of $1.75 and $1.85, which includes slightly higher interest income compared to prior expectations. For Q4, our interest expense is expected to move higher due to a full quarter impact of the debt refinancing transaction that was completed in Q3. For capital expenditures, we have revised our target to approximately $250 million for the year compared to the prior expectations of approximately $300 million. About half of the change is associated with the allocation of spend between PP&E and other assets on our balance sheet, which is a net neutral from a free cash flow perspective. The balance of the CapEx reduction is related to a shift in timing of projected spend from Q4 into next year as we continue to execute initiatives across our 3 strategic pillars. Regarding free cash flow, we have revised our expectations to a range of negative $90 million to $80 million for the year. As I indicated earlier, we expect to carry higher than previously planned inventory through the end of the year. This is being driven by our strategic decision to improve the depth and breadth of assortment across our network and to support new store growth. Despite the higher inventory, we expect positive working capital contribution in the fourth quarter, which is in line with our planning assumption at the start of the year. We continue to expect full year cash expenses of approximately $150 million related to our store optimization activity. Adjusting for this spend, our core free cash flow would have been positive for the year, which gives us confidence in our ability to deliver positive free cash flow in 2026 and beyond. In summary, we are pleased with our year-to-date financial performance and remain on track to end the year with solid margin expansion after 2 consecutive years of decline. We have enhanced our liquidity position to fuel our turnaround, and the team is doing a commendable job by staying nimble in a dynamic macro backdrop. Before moving to your questions, I want to address a recent industry concern stemming from the bankruptcy proceedings of a supplier. In our view, this is an isolated situation and not a broader concern regarding the health of the aftermarket industry. Over the last 12 to 18 months, our merchant team has worked to diversify our vendor base, including consolidation of product lines, and we currently source less than 2% of our cost of goods from this supplier. Given the risk associated with the bankruptcy proceedings, we have recorded a noncash charge of $28 million to cost of sales in the third quarter. This charge reflects an estimate for future credit losses on certain other receivables due from the supplier and is recorded in our GAAP income statement. It does not impact adjusted results and full year guidance. Following this charge, we have reserved against the risk associated with potential credit losses. We are maintaining a positive dialogue with the vendor and continue to work with them. We also source products from hundreds of other suppliers and maintain alternate sources of supply to minimize any disruption to our operations. Separately, we have also heard market concerns related to our supply chain finance program and the aftermath of financial issues related to the supplier. We do not believe these concerns are applicable to us. I want to emphasize, Advance's suppliers continue to receive early payments on their confirmed invoices through our network of large reputable banks. As a reminder, earlier this summer, we raised nearly $2 billion in cash to support the operations of our supply chain finance program and asset-backed lending facility. Following the execution of the facility, our vendor programs continue to operate smoothly. We have a strong balance sheet and more than ample liquidity with over $3 billion in cash and have access to $1 billion revolving credit facility that is currently undrawn. In closing, I want to recognize the team once again for delivering our strongest financial results in over 2 years. This quarter was also our third straight quarter of delivering results in line with expectations. As we look ahead to next year, we expect to build on our recent performance to drive further progress across the business. I will now hand the call back to Shane. Shane OKelly: Thank you, Ryan. We believe we have the right strategy centered on core retail fundamentals, along with a talented team driving execution of our strategic initiatives. We appreciate your interest in Advance Auto Parts and look forward to reconnecting in the new year. Thank you. Operator, we can now open the line for questions. Operator: [Operator Instructions] Our first question today comes from Simeon Gutman from Morgan Stanley. Simeon Gutman: I want to ask first about elasticity of demand, the health of the consumer and then maybe even throwing something about weather. Can you put all together because it sounds like your quarter started off strong and then deceled and now it sounds a little soft. And it makes sense given price has come up, not just in this category, but across the board. But how much also is weather a factor? And then can you talk about the things you're doing, the internal initiatives, how you can see and measure progress in those outside of these variables? Shane OKelly: Simeon, thanks for the question. I'll start, and let me start with the consumer because I think it's important. In general, we're keeping an eye on the overall health of the low end -- low to mid-end consumer where -- that's where our customer base is. Broadly, you see some data points that suggest that they may be depressing their spend in aggregate across general merchandise and think about that as the subprime auto market, the general consumer sentiment, where discretionary spend is going, credit cards. And so that impacts how they spend. The good news about our industry is that the car is the linchpin of how they get to work and their social activities and much of what we sell is break fix and nondiscretionary. So I think that's important. But I do think consumers are adjusting their budgets in response to the inflationary environment. And I think the cost of some routine jobs has moved up a bit, which may make them reconsider some of their intervals in which they do maintenance with us. But I would describe it as a noisy situation for them. But long term, feel good about what's going on in our industry and what we're doing. So to the second part of your question, then turn it over to Ryan for sort of the elasticity specifically. We've got a lot going on as it relates to what we're doing in our stores to create an environment that's positive for DIY. And what we found is we were over tasking our stores with a lot of tasks that took them away from being attentive to customers as they come in. And I got a great note actually last night from a customer said, "Hey, I came in your store, I was greeted right away." Our team member took the time to diagnose what their situation was, spend an additional 20 minutes going through what the options and then ultimately selling a part. And so we need to be there for our customers. And so freeing up their time so that each visit results in a more likely conversion to a transaction, that's what we're doing. Ryan, on the specifics? Ryan Grimsland: Yes. On the elasticity piece, it's still early for us to gauge exactly what the impact is on the consumer. But more broadly, we see the consumer impacted across retail. And more recently, we've heard from other retailers, how much of that is the government shutdown and that impact? How much of that is price inflation that you see in the industry. We're still trying to understand that. I think the industry is still trying to understand that, but we're watching it closely. The one thing you did ask was how do we measure our initiatives in the midst of this stuff going on around us. And the way we do that is we take a very measured approach to that by looking at test versus control. So when we go out and roll out whether that's the assortment work or looking at our market hubs, we look at how these perform versus like stores that performed similarly in the past. And we're able to gauge the success of those and the traction of that and get learnings from that before we roll out. So we do test and control here around our initiatives before we start rolling things out more broadly, and that helps us better understand whether it's working, what is working, what's not working as we roll those things out. So that helps a little bit because the pricing piece is more macro across our store fleet, and we're able to isolate the discrete initiatives that we're putting in place. Simeon Gutman: And my quick follow-up is on inventory. Shane, can you talk about where you are versus where you want to be? It sounds like you pivoted a little bit in '25. You bought more than I think you were expecting. You can clarify if that's the case. And why wouldn't that make sense to do in '26? I know you talked about driving free cash flow, but why wouldn't it make sense to invest more in inventory to drive the business? Shane OKelly: Well, just as a reminder, we're doing our assortment rollout. So there's a lot of activities going on here. And we're pleased that we've got all 50 DMAs that we originally planned to do done. And if you think about that, there are hundreds of SKUs coming in and out of stores. And so we want to make sure that we've got the right amount of product going into those stores. Keep in mind also that in the tariff environment, we bought ahead. We wanted to make sure that we had the inventory we needed perfectly at the price pre-moves so that we could be in good position. So we're focusing on having the part for our customer, which means investing to get it in our system, both at the DC and the store level. Ryan Grimsland: Yes. And I'll just add, we're really focused on the breadth. I think the depth is one that we've been really hitting on and getting the right depth. But now it's the number of SKUs and making sure that we've got the right assortment at the different levels within the supply chain echelon. So I think that inventory can come down and then some inventory investment will be needed, but that's more of a mix as we get the right depth and breadth for the consumer. So not a big investment needed going into next year. We've already made some pretty big investments. Now it's managing through that. We'll have some sell-through with that earlier buys that we made and the assortment work we've done, and that will afford us the ability to invest in the other areas of breadth that we need. Operator: The next question comes from Chris Horvers from JPMorgan. Christopher Horvers: So my first question is on the inflation front. So can you talk about what did the exit look like on inflation in the quarter? Is it still your expectation we get to the higher end of the mid-single digits in the fourth quarter? And there's a big debate out there amongst investors when that inflation -- year-over-year inflation benefit peaks. One of your peers is saying it's in the fourth quarter. Another one of your peers are saying, "Hey, we don't we turn inventory every 10 months." So it wouldn't be until the spring. So could you help us out with that mystery as well? Ryan Grimsland: Yes. Absolutely, Chris. Thanks, it's Ryan. On the inflationary front, we finished Q3 just under 3%, so close to 3%. Q4, we expect it to be around 4% but going into, say, Q1 of next year, we expect that to increase slightly, but not at the same rate of increase. And then by that point in time, I think we'll be getting more to a normalized state. Obviously, there's a lot that can play out. I mean we just had a China deal overnight that we still have to think through. So this thing is ever evolving. But for the most part, we are substantially done with the negotiations with our vendors around that, a few left. So substantially done. And as those have gone into the system, the prices are going into the system. So I would expect there's some balance between what our peers are saying and somewhere in between there is probably where we reached the peak. But obviously, it's an evolving landscape. But we're thinking 4% in Q4 and then a slight increase in Q1 of next year. Christopher Horvers: Got it. That is super helpful. And then as we think about the path to the 7% operating margin, can you help us maybe on the linearity of that? And as a part of the question, it's always hard to put a LIFO question into the call, but what is sort of the net LIFO headwind in '25 between LIFO and the capitalized inventory costs? And how do you think about the recapture of that next year and then more broadly that the linearity of the path to 7% by '27? Shane OKelly: Yes. Just quickly, Chris, on the strategy, we think we've got the right strategy for the company. We've got the right focus areas. And our goal is unchanged for 2027. Having said that, there's a lot of space between now and then. And you use the word linear. I would say turnarounds are nonlinear in terms of how things go. There's puts and takes. Some initiatives go faster, some go slower, market receptivity. So we view '25 and '26 as building block years. And if you look at what's happened this year, I mean just think about it, 2 quarters ago, we were closing stores, exiting California. We were going through the Worldpac TSA transitions, doing our assortment. This year, we'll go from 28 to 16 DCs. I mean these are huge muscle mover activities and '26 will feature a lot of building block tough things that we're doing to continue forward. So we're really pleased with the progress, really pleased with the team, and we're focused on closing 2025 strong. But as we go forward, 2026 is a building block year, and I would emphasize the nonlinear nature of turnarounds. As for LIFO, I'm going to go over to Ryan for that. Ryan Grimsland: Chris, yes, so just to give you net of the warehouse capitalization costs, obviously, that netted out some of it. LIFO was still a headwind. It's roughly 60 to 80 basis points. We expect it to be by the end of the year, 60 to 80 basis points of headwind in 2025. I hope that's helpful for you. Operator: The next question comes from Bret Jordan from Jefferies. Bret Jordan: One quick question on the working capital programs, it doesn't sound from channel checks like there's any contraction in availability. But have you seen any increase in risk spreads in the short term related to that particular supplier issue? Ryan Grimsland: No. Actually, we haven't seen any change in the risk spreads there. Our supply chain finance program, if you're talking about the supply chain finance program rates they're getting, obviously, that's a decision between the banks and the vendor, but the work we did this summer created a lot of stability within that program, and it's been a very positive movement. We've had positive discussions with the banks around rates, not ready to provide any further information around that, but we haven't seen the spreads increase. We've had positive discussions around probably the other side of that. Given the stability of this program now with the structure that we put in place, we're supporting that program with the cash and assets on our balance sheet, which provides a risk or downward risk pressure for the banks for that program, kind of unique relative to the other programs in the industry right now as we're bridging ourselves back to investment grade. Shane OKelly: Just to add in that, as Ryan said, we're really pleased with how we've got supply chain financing set up with the capital raise we did with the cash support we provide for it. But as it relates to that vendor in particular, because I do think it's a one-off situation. First, merchandising excellence is a key pillar for us. Bruce Starnes and his team, they've introduced the PLR process and real rigor as it relates to how we develop plans and partnerships with vendors. And so they had engaged with this vendor long before these current circumstances. And as a result of that, had started to move certain product categories away to other vendors. And so COGS exposure, pretty small, 2%, maybe a little under 2%. Now we're still in active dialogue with them. And so -- and we'll continue the relationship and wish them well. And if they come through, then I think there'll be continued relationships there. But in general, across merchandising and that emphasis we have alternative sources of supply is also a key tenant. So for anything we buy, we look to say, "Hey, where else would we buy it? Where else should we buy it?" And that would apply with this vendor as well. Bret Jordan: Great. And then a quick question on the Atlanta hub greenfield. Could you give us color sort of as to the performance of stores in that market? I mean, as you build the perfect hub, what's the outcome? And sort of what's the timing on developing further greenfield hubs like that one? Shane OKelly: Yes. So great question. So it's open. So -- and by the way, our market hubs open with a store nested inside. As a reminder, 75,000 to 85,000 SKUs. In aggregate, we view it as a 100 basis point lift play for the supported stores. And then the Market Hub typically in and of itself drives as a store just because you have literally all that inventory sitting on site. So we really like what we're doing with the market hubs. We originally planned for 29 this year, the idea that we said this is a good thing. We want to keep accelerating. So we'll get to 33. We're now moving past the phase of where we were doing -- we did some smaller DC conversions. We're moving past that phase to where we're now greenfielding, and we've got 4 greenfield market hubs. You'll start to see that be more prominent in the opening paradigm. And there's a lot of excitement around that because instead of repurposing something, we can now specifically pick where we need it to best support the stores and our real estate team has been digging in to start identifying those sites, so it doesn't create a slower trajectory. So 100 basis points is what we see as the network. We'll keep you apprised as to if that goes up or down and then more greenfields going forward and real estate looking to keep that tempo moving. 60 in mid-'27 is where we want to be, and we'll keep you updated on that as well. Operator: The next question comes from Steven Forbes from Guggenheim. Steven Forbes: Just a follow-up question on gross margin. I think it was Chris' question. I think if you back out the LIFO charge in the quarter, you guys are sort of exceeding that mid-40% range that underpins the long-term guide here. So curious just if there is a takeaway for us today on some of the structural gains that you're capturing on the back of your initiatives or if that sort of mid-40-ish level is still where you guys see the business trending to over the next couple of years here? Ryan Grimsland: Yes, it's a good question. Yes, in Q3 tends to be a little bit better rate as well, just seasonality-wise. We'll see that come down a little bit in Q4. Our goals are still the same long term. We still like that spot long term, and we're making good progress. The merchant team has done an excellent job this year making progress towards that. We still are on a journey. '25 and '26 are build years as we're building against that. So I wouldn't say it's perfectly linear. You can see that in our Q4. We're going to have some LIFO expense that's going to have an impact on it. But net-net, we are happy with the progress we're making, still committed to that goal. We think that's a good strategic long-term play for us and where we want to be from a gross margin perspective. Steven Forbes: And then just another follow-up on really sort of the comp message this morning. So we think about like-for-like inflation, same SKU inflation going to 4%, maybe 4.5% in the first quarter of next year. The guidance for the fourth quarter, the implied comp guide is 1% to 3%. And so what is the sort of takeaway today around transactions? Are you guys seeing weakness in Pro transaction? Or is sort of the spread and moderation expected between same SKU inflation and the consolidated comp really just DIY related? Any sort of color on sort of comp complexion and message around that for the fourth quarter specifically? Ryan Grimsland: Yes. I think in Q4, moderating both of them, both Pro and DIY, but we are seeing a little bit more on the DIY side. We kind of talked about some pressure we think the consumer is feeling right now and still trying to understand is this short term in nature? What could be some of the drivers? Is it price elasticity? I think we've heard from -- in the industry, there's some questions around that as well, but more on the DIY side, but we're seeing moderation in both of them going into Q4. Also, Q4 is the most volatile quarter of the year. You've got a lot of weather that impacts that quarter. We see it every year from a seasonality standpoint. And when it's colder out there, people are less have to do their oil change, just natural of the seasonality. So we expect it to be a little volatile. We've seen a little softness. We've seen both moderate, but more pressure on the DIY side in the quarter. But still, all those scenarios play out within the guidance we just provided. Operator: The next question comes from Michael Lasser from UBS. Michael Lasser: To what extent did the decision to trade some margin for sales or vice versa impact the quarter, meaning you've foregone some lower-margin business that could have negatively impacted your sales but boosted your gross margin. If you could quantify any of those actions in the third quarter and to the degree to which it might impact your fourth quarter, that would be super helpful. Ryan Grimsland: Yes, Mike, I appreciate the question. So what we're doing from just a pricing standpoint, I just want to talk about our strategy around pricing. We are going to remain a competitively priced business here. We're not trying to be low in the market. We're not trying to be higher in the market. So we're not trying to find ways to get margin out of that. So we're staying competitively priced. We like our pricing position. We think we are a fast follower in the market. So not trying to harvest margin not in an appropriate way. We're sticking to that strategy going forward. So we're not doing that. There are some areas of our business that we will look to make more profitable and look at certain accounts, et cetera, that we're working through. And I'll let Shane talk a little bit more about that. But we're going to stick to our strategy, which is we're going to be competitively priced in the market. We're a fast follower, and that's what we're continuing to do. Shane OKelly: Michael, just touching on the Pro side, we think our biggest opportunity is with Main Street. So those are smaller accounts. Typically, the margin is a little bit higher. We certainly appreciate our national account and larger customers, and we're working closely with them, and we've got a series of initiatives. But we don't want that to come at the expense of seeing the small 2 or 3 bay garage at the end of Main Street. And so we're making sure that our outside sales team members aren't skipping by those accounts, and we're making sure that as we interact with them, they understand the breadth of capabilities that we offer to include things like our TechNet services. And so as we do that, we're gaining traction. So that's something we will look to do going forward and as a current emphasis as well. Michael Lasser: My follow-up question is, Shane, you consistently and repeatedly used the term nonlinear to describe the path forward for Advanced Auto Parts. How should we interpret that from a numbers perspective? Does that mean there'll be some quarters maybe when it's hot on the East Coast and there's outperformance in those markets that Advance can rip off a 3 comp and report several hundred basis points of gross margin expansion and then vice versa. The next quarter, it might be a flat to 1 and far less gross margin expansion. How would you characterize that nonlinearity that you would use to describe how the path forward might look over the next couple of years? Shane OKelly: Yes. I think -- if you're okay, Michael, I'm going to talk about sort of tangible activities. So think about if you close a DC and you'd say, okay, if I'm going to combine this DC with that DC, there ought to be x dollars of value that comes from it. But when we start to do that process, we anticipate what the closure expenses will be. But we might take several hundred stores of replenishment from the old DC to the new DC. And there's cost there. There's friction in terms of getting the routing set up. Maybe there's particular products that the closing DC had that would need to get sourced. And so it's lumpy. It's not something where we say, okay, we could take the cost of the $100, we'll say it's $20 a month over the next 5 months. We may have more costs sooner. We may have costs that emerge at the end. Similarly, the benefits may not endure at the tempo that we've indicated. So there's a sort of micro example. Now imagine you're undertaking big moves like that across everything we do. Maybe there's a big software implementation that we want to do as part of routing. And so that might take months to implement and then months past that. As we do the assortment, we like the lift we've got. But reminder, we're changing out hard parts across the network. And so some of these are slower-term products. It takes time for it to infuse. We're going to Main Street customers. But the first time you walk in, if they're working with another supplier, they may be happy to see us, but maybe it takes 4 visits, 5 visits, 10 visits before they say, "Hey, we'll give you a try." So discrete predictability on exactly what the cost will be and when the benefit comes is hard. And so we end up with fits and starts. There are periods where we've got benefit that comes at a quicker tempo. There are situations where we have costs that are less or more. And so that's why I emphasize the nonlinear part of it. What we are pleased with, though, is when you look back over periods of time, you can see clear progress on those 3 strategic pillars. We think we've got the right pillars. We think we have the right subset of activities, and we're setting against it. And if you know the strategy is right, if you know you've got the large muscle mover activities and if you know the industry backdrop is a good one, then we're going to keep at it. Ryan Grimsland: And Mike, I'll just add just tangible ones that have happened this year, big initiatives. We accelerated the assortment work as we saw [indiscernible]. So that's acceleration. But then on the store operating model, we paused to test longer and further to learn more than what we really -- so we knew when we roll it out, we've got the right operating model. Now that didn't go with our plan. And the stores and the teams had to overcome the challenges in productivity that we would have likewise had seen if we would have rolled it out earlier with the right model. So it's not perfectly linear because we're testing our way into things, and some are going to be delayed, and we're purposely delaying them for the right reasons. And some of them will accelerate when we can. And so that's some of the nuance that we're talking about. less about weather, more about the initiatives, the rollout of those and to Shane's point, when do we move up the call list with the Pro. Operator: The next question comes from Michael Baker from D.A. Davidson & Co. Michael Baker: Maybe following up on Mike Lasser's question. You used the language a couple of times of 2025 and 2026 being build years. What does build years mean? Does that mean in a way, obviously, margins are expanding already, but are you still investing more? And then the idea is that it really -- the margin expansion really kicks in more in 2027. Is that the right way to interpret build year? Shane OKelly: Yes. So by build year, it means we're still doing large-scale activities to set the company up for success. So let's do an example. So Market Hubs we didn't have any. And so we'll end the year with 33, but that's half of what we envision having by mid-2027. So there's going to be a ton of activity in the real estate team around making that happen. So that's a good example. On our DC consolidation, we're continuing now as we move to the smaller network, how do we optimize that? How do we optimize our routing? How do we optimize our lines per hour? On our new store opening, we put out 30 NSOs, but we want to continue to amplify the number that we do for that. And so by the way, if you want to open a single store, you got to go prospect 10 sites. So there's huge activity going on in each of the pillars to get to more of what that run rate will be longer term, and that's really what creates that nonlinear dimension. Ryan Grimsland: Yes. I think it's the initiatives that we've laid out, the 3 pillars we've laid out was not a 2025 and done and then see the benefit. It is a 3-year plan that we've laid out. That strategy unchanged, and we're going to continue to execute against that. I think of -- we just talked about the operating model being one in our stores that we're going to start rolling out in Q4, which will roll out into next year. And that's getting our assets right, the trucks in the right place, the hours to meet the demand in our stores. There's technology build. We're building different technology capabilities. Think of our pricing tools that are coming later this year and into next year. We're partnering with Palantir as part of some of the AI work that we're implementing. A lot of that technology takes time to build, and that will start building into next year as well. So the build over the next 2 years is as we ramp up our strategy in these 3 pillars, it's not a 12 months and done, It's going to be a 2-year plan to really start to see the fruits of it. Michael Baker: Okay. That makes sense. And if I could ask one more follow-up and maybe not a fair question for you guys. So if not, feel free to pass. But for whatever it's worth, the consensus estimates aren't even close to a 7% margin in 2027. In all your conversations with investors or analysts, what do you think people are missing relative to your plan? Ryan Grimsland: Well, I'll start, and I'll let Shane jump in. I'll just say the first thing is our strategy is unchanged. It's still our goal, but it is early. We're 2 quarters away from when we closed our stores. So we're still early in this turn. And so I think there's a need to see proof points, and that's why we are giving more metrics and data around what we're seeing as we're going through this process. And to be 2 quarters past closing all of our stores and the decisions that we've made around accelerating the assortments work, accelerating market hubs, we brought in -- we're opening more market hubs this year. We're trying to give proof points of how things are working. Now we have to show it in our numbers, and it's still, to me, early, but you'll have to ask everyone else why they don't believe in that goal. But I think to us, this is a build. Shane OKelly: Yes. And again, I don't know what goes into any analysts specific assessment. But as leaders and as a company, we have to build a track record. We have to demonstrate what the say-do ratio is. And so early on, our pledge is we're focusing on auto parts. We're an auto parts retailer. Second is we're trying to create a clear strategy that fits that and that's understandable externally. More importantly, it's understandable internally and by our customer. Third, we're being decisive in our approach in getting there. And we'll make tough decisions, and we'll do those things again, what would an auto parts retailer do to be successful in a particular situation. And then lastly, we'll be transparent. We'll share with you what our progress is. You guys have to then take all of that and say, "Hey, to what degree do I think that that's going to occur or not" and then put it in the long-term perspective. But we'll be out here doing that each and every day and notably in our footprint, now where we're 1 or 2 in terms of store density, getting our stores better. That's really -- we're operating under the mantra of an inverted pyramid, which our customers come first and then, by the way, everything runs through the front line. And so we'll keep doing that and focusing on auto parts with decisive activities. And hopefully, there'll be some closure in terms of what you guys think and what we're saying, and we look forward to sharing that along the way. Operator: Thank you. That does conclude our Q&A session for today. So I'll hand back over to the CEO, Shane O'Kelly, for closing remarks. Shane OKelly: We want to thank everybody. In particular, thank the men and women of Advance Auto Parts for what they're doing as we complete this turnaround journey, and we'll look forward to sharing additional updates on both the closeout of the year and what we see for 2026 in our end of year call in February. So we appreciate you joining us today. Thanks very much. Take care. Bye-bye. Operator: Thank you. This does conclude today's call. Thank you for joining. You may now disconnect your lines.
Operator: Ladies and gentlemen, thank you for standing by. My name is Colby, and I'll be your conference operator today. At this time, I'd like to welcome you to the Utz Brands, Inc. Third Quarter 2025 Earnings Conference Call, question-and-answer session. [Operator Instructions] I will now turn the call over to Trevor Martin, Senior President of Investor Relations. Trevor Martin: Thank you, operator, and good morning, everyone. Thank you for joining us today for our live Q&A session on our third quarter 2025 results. With me on today's call are Howard Friedman, CEO; and BK Kelly, CFO. I hope everyone has had a chance to read our prepared remarks and view our presentation, all of which are available on our Investor Relations website. Before we begin our Q&A session, I just have a few administrative items to review. Please note that some of our comments today will contain forward-looking statements based on our current view of the business and actual future results may differ materially. Please see our recent SEC filings, which identify the principal risks and uncertainties that could affect future performance. Today, we will discuss certain adjusted or non-GAAP financial measures, which are described in more detail in this morning's earnings materials. Reconciliations of non-GAAP financial measures and other associated disclosures are contained in our earnings materials and posted on our website. Now operator, we are ready to open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Andrew Lazar from Barclays. Andrew Lazar: Maybe to start off, at your Investor Day a couple of years ago, I know you laid out a 3-year financial plan. And obviously, the sales and consumer environment has changed dramatically since then with us though continuing to obviously outperform the category pretty meaningfully. And the company has maintained its expectation for EBITDA margins of around 16% in '26 or about 100 basis points of expansion each year. You've delivered that the last 2 years. In the prepared remarks, I know you made some comments around maybe some incremental investments in '26, particularly to support the California expansion for the acquisition announced today, which is exciting. I'm just curious like in terms of thinking through expectations for next year, if perhaps that EBITDA margin expansion could be a bit less significant just in an effort to maintain the strong top line momentum that you've been able to deliver over the last couple of quarters. Howard Friedman: Yes. Andrew, I'll start, and I'll hand it over to BK to continue. Look, I think if you went back to Investor Day, there were a few things that we had laid out. One obviously was that we had a meaningful top line, bottom line and gross margin opportunity that we wanted to progressively address, that we believe that we could drive accelerated top line growth above the category as we were able to hold our core geographies and expand eventually getting coast to coast and funding that through a productivity program that would deliver meaningful gross margin expansion and obviously fall through to EBITDA. I think as you look at over the last couple of years, we're pretty pleased with our progress around all of those objectives. And one of the things that I think that has been important in our story has been the ability for us to drive expansion market top line growth and enter into new geographies, which we have, at this point, a pretty solid proven playbook. And as you look at something like Florida, where we had entered a couple of years ago and you were actually able to see progression where we made incremental investments to build out that business and start to accelerate our top line, we look at that as a good example of kind of what we are looking at in California, although obviously, California is a much greater scale. So as you look at our building blocks in '25 turning into '26, I think we feel very good about the top line momentum that we have and the opportunity to further accelerate it as we get into California in a more meaningful way in 2026. We've said 200 to 300 basis points ahead of the category and obviously, by entering into California and making some incremental investments there, we believe we should be at the higher end of that range. I'll hand it over to BK for the rest of the question. William Kelley: Thanks, Howard. Good morning, everyone. The first thing I would say is there's nothing structural preventing us from getting to 16% EBITDA during the period. I think the building blocks that Howard talks about underlying our financials strong productivity, the ability to have good revenue growth management tools in place, those all are really, really strong. In '26, as I said in the script, we will have -- continue to have best-in-class productivity activity coming through as our supply chain transformation that has been a heavy lift with potential CapEx, it kind of steps down. So when I start talking about free cash flow, that's intended to be incremental and additive to our story. We are doing the things you would expect us to do at this point in time, having come off our peak CapEx and our key transformation cost elements. And so now the focus has started to -- not only are we able to expand margins and grow our top line, we can also drive free cash flow. Andrew Lazar: Great. And then I would like to dig in a little bit more on the California route acquisition, which is exciting. I guess maybe you can get into a little more detail, Howard, on how sort of previous deals like this in other regions sort of have enabled us to sort of step change the market penetration that we can look forward to in California, or, in other words, I guess, have allowed you to continue to sort of drive share in these expansion markets even after the initial launch into these markets, meaning in years 2, 3 and beyond? Howard Friedman: Yes. I appreciate the -- obviously, probably the most -- the easiest example for us to give you is something like Florida, where it is a geography where we actually entered and then we have bought routes over time. Obviously, we bought a route system last year back with our national acquisition. But if you were to go all the way back to, say, like 2020 in Florida, we were about a 2.5% market share. And the first couple of years was really about getting into the market in a more focused way and sort of starting to mature it. And then really in 2022 was when we actually saw a meaningful -- first meaningful step change, which is about a 70 basis point improvement relative to that 2020 range. And we've been able to add market share growth from there. So call it from a 2.5% to a 3.2% and latest 52 weeks in Florida, we're at about 4.2%. And I think it's important to realize that this actually does, to your point, grow gradually over time as we get into the market and get our execution up and running and actually make sure that our playbook is working the way we'd expect it to. But where we go, we stay, and we have a high degree of confidence that this is the next step in continuing our accelerated top line growth. Operator: Your next question comes from the line of Michael Lavery from Piper Sandler. Michael Lavery: I wanted to unpack California maybe a little bit more. Can you give us a sense of does the acquired network cover the entire state? What are those routes carrying now? How easily do you have room on the trucks for your products? Is there a swap out? And maybe a little sense of -- you mentioned it's included in guidance, I assume that means costs. What are some of the costs that are associated with it other than the acquisition price? Howard Friedman: Yes. So let me start. Obviously, it's early days on the integration work that we have to do. I think what the route network allows us to do is to actually look at the portfolio of products with an existing network and infrastructure and customer relationships and begin to introduce our products onto those routes, call it, in early 2026. So there is going to be some work there to make sure that we have the right assortment and that we're working with our IO partners and the retailers to make sure that we're getting the distribution that we're expecting. So a little early on the puts and takes of what will be there, but yes, we're confident that we can bring our products into those systems and start to drive the growth that we expect that we can get. I mean, for context, remember, we're only about a 1.9% share of market in California, and it's about 10% of the salty category in the total U.S. So there's a big opportunity. In terms of the size of the market, obviously, this is an entry and so, they're about the same size as the national route system was. There's some routes in the upper Midwest that we also got as part of this transaction where we already carry some of our product. But we'll be making some -- we'll make continued investments to fully mature that market with our hybrid distribution model over time. Michael Lavery: Okay. And just on the volume price mix split, very strong volume gains, obviously. You have very slightly negative price. It would seem like that's probably helped or driven at least a bit by expansion markets where I think you tend to promote a bit more to drive trial. Can you unpack a little bit maybe just how to think about the runway there? Is price at the right level? Is it mostly trial related? Obviously, you've got the strong volume momentum. Would you expect price to be positive going forward or is it sort of similar to the split in this quarter here? William Kelley: Sure. Let me answer that. On the pricing piece, what you saw in the quarter was about a 1% drag, 1% drag is what we talked about and it played out how we anticipated. To your point, we are price followers, but we also have very good revenue management and our ability to compete in the best interest of both the consumers and the category. So there are many variety of ways for us to price. We think we will always choose the one that makes most sense for us. And our surgical approach to pricing but we also manage it through trade, through promotion and to your point, expansion markets. And our goal is to continue to be more effective more quickly and bringing those expansion markets in line. Howard Friedman: Yes. I'll just add, Mike, what we said in Q3 or in Q2 was that we expected a 1-point drag in Q3 and Q4. And so the year is largely the way we would have expected to. And I think as you go into next year, we'll kind of see where we are. But to BK's point, feel very good about what we're doing on the rev man side of things. And I think the quarter generally came in the way we would have envisioned when we started this. Operator: Your next question comes from the line of Peter Galbo with Bank of America. Peter Galbo: Howard, I just wanted to ask maybe a few, I don't know, more technical questions about the California expansion. It's been 2.5 years, I guess, since the last kind of acquired, and that was Kings Mountain, so even going further back on routes. But I mean, should we expect that this -- like are these independent operators? Are they company-owned? Are we going to have to go through an IO conversion cycle again? Should we be looking at things like pruning of that portfolio the way you would have on an RW Garcia? Like I just want to understand some of the more technical components of what kind of will be factored in now the deal is kind of consummated? Howard Friedman: Yes. Fair question. So a couple of things. First of all, I would offer you, we bought a similar-sized business or a similar sized route network in national last year in Florida. And I'd say that generally, the IO conversion discussion that we've had has not been driven by routes that we acquire because you think about it as we were already paying a commission in some cases or we didn't have a relationship and it was new business. And so, generally, when we bought back our distribution, it was actually a benefit of less commission to a mass distributor and but a commission to an independent operator. Where the IO conversion a couple of years ago was different as we were actually transitioning from, we own the entire relationship on the revenue line to suddenly we had this commission that we were paying. So we don't anticipate mechanically that being a topic of conversation next year. I do feel like you're getting the greatest hits of my first year when we talked about private label SKU rationalization. We're also not anticipating that to be a significant part of the story. If you think about where we've been on partner brands over time, all of these -- all of the things that are on this route would fall into the partner brand line within the P&L, and we would expect that, that will continue to decline modestly or continue to improve. The decline that we will get will lessen, but it will still continue over some period of time as we actually continue to expand our business. So I'm not sure -- I don't think you should expect a whole lot of historical mechanics to actually have to come back into the story. Peter Galbo: Okay. Cool. Helpful. And then I don't know, free served to either Howard or Bill on this one. But I think part of the stock reaction today, both is in response to maybe the commentary around the '26 margin, and it seems like maybe there is a bit of backing off on that 16%. But also in the quarter itself, I think the EBITDA margins were okay, but the gross margins were a bit light. There was some discussion around a worse potato crop, I think, that may be influenced. And I know you buy from the East Coast, but there was like a record potato crop through most of the U.S. this year. So just trying to understand like what happened? And how quickly can you pivot and there should be a lot of cheap potatoes floating around. So just how quickly can you kind of recover that gross margin piece? William Kelley: I'll start on potatoes and then Howard can expand on it. Just to give a few facts, about 1/4 of our raw material basket is potatoes, and we source what we call chipping potatoes that are mostly from the Midwest and East Coast. This is very different than the crop that is used by folks that manufacture or make them sell and deliver French fries as an example but the areas that we source from are very close to our primary facilities. And what we saw in the quarter was some weather-related crop issues. Obviously, we had a very cold wet spring in the East and then followed by a very dry, dry summer. So what happens is that we build it and potatoes not meeting the quality specs and it required more potatoes for the same throughput. So that was very different than a year ago. I think the good news is that, that was -- that ended in the quarter. That's not something that is progressing. We've seen that the crowd come back and the tables are in good shape. So we don't think we have a systemic issue here at all. We think it happened in the quarter, and it did have pressure to gross profit, but it is essentially behind us in isolated. Howard Friedman: Yes. And the only thing I'll add is, obviously, as you think about the overall gross margin, while some of the input costs were obviously a little bit higher, you also saw us address that with productivity in the distribution line. So you saw distribution costs go down year-over-year, which doesn't show up in gross margin for us. So I think if you look at the total cost basket and kind of how we work as operators to make sure that we're keeping those things in balance, I think that the journey through the P&L is a little bit different, but I think we address cost with cost. Operator: Your next question comes from the line of Scott Marks with Jefferies. Scott Marks: First thing I wanted to ask about is you called out in the prepared remarks some softness with On The Border and talked about how you've kind of isolated the issues and are actively addressing them. Just wondering if you can share some incremental color on what you're seeing with that brand and how you're thinking about those steps to correct the brand. Howard Friedman: Yes. I think so the first thing I would say -- and I appreciate the question. First thing I would say is, look, we don't believe that we have any sort of a structural issue with On The Border. I think it's a great brand for us. It's a business that we've been growing over time, and we have a great deal of confidence that the issues that we're having are relatively short term in nature. And it's a couple of things. One is, obviously, regionally, we're seeing some greater consumer value seeking behavior both up and down the price ladder. And so, we have some regional brands that have showed up that we are addressing -- that we're addressing in the near term. And then we had a short-term issue that I don't really want to go too far into that we were able to identify early in Q3 that we had to -- that we needed to address, and we are actively addressing an isolated issue, and you should see correction beginning in Q4 and into next year. But I think overall, we feel very good about the tortilla chip business and just some short-term noise. Scott Marks: Understood. Next question from me would be just on Boulder Canyon. It sounds like it was another strong quarter, and I think you noted some shelf space being awarded for 2026. Wondering if you can kind of help us understand, is that kind of in expansion geographies? Is that in core geographies with incremental products or categories? Just trying to get a better sense of how those wins are coming about. Howard Friedman: Yes. So I appreciate the question, we feel very good about the momentum on Boulder Canyon. And obviously, it will -- it continues to drive a lot of growth for us. And it's really driven by, obviously, the consumers looking for better-for-you credentials and great tasting products. And over the last year-to-date, we are -- it is the #1 potato chip brand in the natural channel. And we actually have the #1 SKU in the channel over all time periods for 13, 26 and 52 weeks. So that business is growing really nicely, and I expect it to continue. If you look at the quarter, it is being driven by both velocity and distribution gains. Velocity in the natural channel about 35% in the conventional channel up almost 200%. And you -- but you can also see the ACV where we are today is really only around 50%, 52% versus, say, a brand like us at a little over 80%. So as you look into next year, we expect to continue to enjoy broader-based distribution gains across channels and geographies. We have a great deal of confidence and visibility into those opportunities. It will be predominantly getting our actual assortment correct broadly and actually driving data chips into those markets. And then innovation, which we'll share a little bit more with you in February, will also follow because I think one of the things we're most pleased with is our partners in both natural and conventional are supporting this brand, and we're able to continue to sustain the momentum in both sides, which is obviously a little bit unusual, but an area that we take very seriously and making sure we're investing in growth. Operator: Your next question comes from the line of Robert Moskow from TD Cowen. Robert Moskow: I wanted to ask, Howard, about how you viewed your biggest competitors' lineup of new products for next year. They're adding a new sub-brand that's natural colors. They're adding a protein chip line and a package redesign. Do you see this having an impact on the category next year? Is it a positive? And do you think in the fight for shelf space, does it influence what you're able to get in any way? Howard Friedman: Yes. So look, a couple of things. I think that, broadly speaking, any time the category leader is active in trying to grow the category, it's a net positive for all of us. I think that what you look at this brand -- this category over time, it is an innovation and communication that has really kind of driven consumer interest and appeal. So I think that regardless of who the competitor is, if they are able to bring more shoppers down the aisle, that is a net positive for us and for the category. I think as you look at what does that mean for us, I think there are a few things that retailers like about our business. One is that we are generally incremental. Two is that we actually bring investment and support through a hybrid model that can get it through DSD or DTW. And third is that we all can see the same data sets now of what our products are doing in their stores. And so I'm not concerned that we can't get the distribution gains that we have. We certainly have not heard from any retailers that, that has been an issue because I think that they are -- that our core offering and our partnership continues to grow and mature. And I think that, that will -- that should continue to yield the types of gains that we have been expecting that's allowed us to grow 200 to 300 basis points faster than the category. So I think overall, I would view it as a net positive thing. Obviously, communication and innovation are always uncertain, and we'll see how the consumer responds to all of the offerings across all the category participants next year. Robert Moskow: Okay. And I know you got asked this last quarter, but protein chips, there's clearly a significant pocket of demand for that type of product. And I want to know if your thinking on that subcategory has evolved in any way and maybe just discuss that. Howard Friedman: Yes. I mean, look, I think that if you were to look at sort of the consumer trends right now that are out there, protein, non-seed oil, portion control, substantial snacking are all areas that we continue to understand the consumer is looking for and are seeking to try to address. I think when we get to February, we can show you how we think about addressing all of those subcategories as we talk about our innovation lineup. But certainly, as a consumer marketing guy, I want to sell the products to consumers that they are most interested in and be able to sort of drive the trend, which is kind of what you're seeing right now in non-seat with Boulder. So more to come on innovation, but it is certainly an area that we are paying attention to. Operator: Your next question comes from John Baumgartner from Mizuho. John Baumgartner: I'd like to ask about next-generation productivity. I guess as savings migrate down to more normalized levels as a percent of COGS, maybe the dollar amount of savings moderates. But how should we think about the ROI from new productivity initiatives elsewhere, whether it's on sales growth, volumes, in-store execution? I mean I'm guessing there's benefits outside of pure dollar savings from new technology. So I'm curious your thoughts, your view on implications for the top line. Howard Friedman: Yes. So I mean, I can start and then offer to BK. Look, I think a lot of what we've done on the productivity line, to your point, has been really around getting the supply chain consolidation and modernization investments done. I think we still continue to have opportunities in our ways of working and equipping our independent operator partners with better information on how to execute sales and make our assortment and our display activity further impactful. I think it winds up -- it should be a top line enabler over time. And I would anticipate that, that's going to be part of the way that you'll see us continue to outperform the market as we continue, call it, a couple of hundred basis points better than the category. I think in the near term, what I would offer you is that we have a lot of work that we are completing, and you'll start to see that productivity step down to at or above world-class levels, still at that 3% to 4% and the rest will kind of communicate as we understand it. BK, anything? William Kelley: Thanks, Howard. That's a great point for us, and I'll just build on Howard's points. It's what we kind of call our second wave of value capture. If you think about kind of within the supply chain and outside the rest of the company, there are still areas that we continue to grow. On the supply chain side, obviously, we have opportunities in the indirect procurement that we've done in direct procurement. We have opportunities in working capital and inventory management. If you think about the DSD network that we have and continue to optimize our transportation and logistics, that's helpful to us. And then within the 4 walls of manufacturing plant, I think the team will take the next step on OEE improvement, predictive maintenance, et cetera. And then as you kind of expand outside the supply chain, parts of the business that others of us drive, you can think about automation and data leverage, whether it's RPAs and analytics and bots, the advanced demand thinking tools that are out there, self-serve analytics, digital twin modeling, I can go on and on, but there is a [ plethora ] of opportunities for us to continue to drive productivity at very high levels. Operator: Your next question comes from the line of Jim Salera from Stephens. James Salera: Howard, I wanted to dig in a little bit on some of the market share dynamics because I've been impressed by the continued gain, obviously, in expansion, but maybe even more so in core where you guys have a lot more visibility and awareness. Can you just kind of walk through where you're seeing that incremental market share pickup in the core market? And is there maybe an opportunity as we think about retailers really fine-tuning what they have on shelf to make sure they're capitalizing on any pockets of growth. Is there maybe opportunity to continue to see sustained share gains in the core market? Howard Friedman: Yes. I mean -- so a couple of things. I think, as you know, our strategy has been to hold the core and then grow through expansion markets. And obviously, to your point, we are pleased with that we're actually taking share in our core markets as well. Not surprisingly, when you look at our original strategy, we had said that really our core market is most significantly in Utz market and that the opportunity was to continue to expand our assortment of our Power Four Brands into the core geography. And as you look at kind of this year, obviously, Boulder Canyon is a significant contributor to the core, along with Utz pretzels and cheese, I think also continue to be areas where we're seeing some better performance. So I think what you're seeing is just our portfolio shifting in the core a little bit and that the benefit of Utz, the breadth of our portfolio is actually coming through in that market share performance. I think the other thing that is helping us is that the convenience store channel continues to improve, we're by no means where we need to be yet. But as that becomes less negative, it actually also continues to help us as we look at overall market share. I think longer term, it is the one geography where we are most linked to the category. It's kind of really the only one. And so, I think what you'll expect to see us do is what will drive our share is innovation, communication and assortment to drive it further. But I think we like the notion of over the long term, if we can hold there and get our expansion markets growing faster, that you'll continue to see the performance that we're getting. James Salera: Great. And then maybe as a follow-up, you guys called out Florida, Illinois, I think Colorado and Missouri as expansion markets that are above 4%. We talked a little bit about Florida already, but maybe if you can just highlight, are there any kind of idiosyncratic, whether it's brands or consumer kind of consumption patterns in those states that drive that share 100 basis points ahead of kind of the average expansion market share? Howard Friedman: Actually, not really. I mean, generally speaking, they tend to -- those 4 markets obviously are some of our fastest growing. They're averaging about 6%, 6.4% growth across them. And what we wanted to highlight is that we're getting -- after we get distribution gains in some of our older vintage expansion markets that we are continuing to show and sustain growth. I do think in those markets, what is true is we do have very strong relationships with the national retailers and our IOs in those markets. And so we continue to see very good execution there. And I think that the nature of our relationship with those retailers is actually what you continue to see. They continue to reward us with space, and we continue to invest and make sure that we're participating in their category growth, and it's kind of working for everyone. Operator: Your next question comes from the line of Rupesh Parikh from Oppenheimer. Rupesh Parikh: So I guess just going back to the salty snacks category. I know it's obviously still a challenge out there. But as you guys look forward, are there any green shoots or anything that gives you optimism as you look out in the coming quarters? Howard Friedman: Yes, look, I think I continue to believe and have been a salty bowl. I think that it's a great category, and I think it's probably the best in food. And I continue to look at household penetration as the first place that I would look at is, are consumers coming and participating in this category more this year than they did the year before and the year before that? And I think the answer to that continues to be yes. It's not immune to the dynamics of the market and the consumer environment. But on average, when consumers are choosing how to invest their money into an affordable indulgence, they continue to choose salty more than they did the year before. So I think in that regard, I remain very optimistic about where the category is. I think second is, as you look at the category progressing, we did say that we thought that the category would get better, would progress through the course of the year and become less negative. Obviously, we thought we'd be more flattish in the year, so we're a little off of that. But you do see that the category has been improving through the course of the year, which I also think is a net positive. And then the last thing I'll say is that if you look at category participants, we have always been an innovation and communication brand-led category, and that continues to be the case. The pricing environment remains rational. You're not seeing things that are -- that don't make sense. And I think you're seeing some of the drivers that have always driven this category coming back more to the front. So overall, I feel pretty good about where the category is going. Obviously, it's been an uneven category for the last couple of years, but I continue to be very, very optimistic about the future of this portfolio -- this category and this portfolio. Rupesh Parikh: Great. And then maybe just one follow-up question. You guys also talked about some of your marketing efforts and also noted that I think you plan to increase your investments in retail media. So just curious what you're seeing there in terms of effectiveness and returns on your efforts with retail media? Howard Friedman: Yes. So a couple of things. Obviously, we committed at Investor Day to 40% marketing investment year-over-year-over-year. Last year, we delivered 68%. This year, year-to-date, we're right around 30%. And that is really being driven by the consumer pressure. Our strategy has always been that we'll build the business overnight and our brands over time, and that we'll be flexible about where we make those investments in any given quarter. And so a, we looked at this quarter and we look at some of the distribution gains we had and some of the opportunities that we had to invest in retail media, they were the place that we prioritized. We, by no means, have a lack of investment -- high ROI investment opportunities that we can make but we'll always be choiceful in what we're doing first. And this quarter, it made more -- it made a lot of sense for us to invest in the retail pressure that we could get as consumers are in-store and making choices. So you'll continue to see us making investments in consumer media, and you'll continue to see that 40% kind of progressing into 2026. Operator: Your next question comes from the line of Peter Grom with UBS. Peter Grom: I wanted to ask maybe 2 related questions on the category. One more from an innovation perspective and maybe more just how you're seeing it going forward. So more just kind of a follow-up to Rob's question, which I thought was a good one. You talked about this a little bit in your prepared remarks around highlighting fewer ingredients, removing artificial dyes and kind of the protein dynamic that you alluded to earlier. I guess my question is, do you think this innovation can actually move the needle and drive an improvement in category growth as we look out to '26? And then just related, you touched on kind of the sequential improvement, albeit maybe at a slower pace than you anticipated. Do you have any preliminary views on the category or industry as we look out to '26? Howard Friedman: Yes. So look, I think I'll start with the innovation question first. The short answer is yes, I do actually think that innovation can help move the category. I mean it's -- I think that what you really -- when you look at innovation, what you're really trying to do is to drive consumer engagement in the category. And so a consumer may buy a new product and then pick up a normal bag of whatever their typical repertoire is and they haven't been down the aisle in a little while. I think that, that always helps with consumer interest in keeping the assortment fresh and keeping news coming through. So I do think that it can help drive the category. Obviously, the category is large, and it has a lot of traditional portfolio of offerings and those offerings also need to be healthy and growing. And part of that is, I think, what you're talking about in terms of ingredient simplification, artificial flavors and colors. Those are frankly the need not only addressing what consumer interests are in, but also making sure that this category overall and obviously, our products remain on trend and allow consumers engagement in potentially a modestly different way. I mean, a reminder, 80% of our portfolio already exists as no artificial flavors or colors. And so, we'll continue to highlight those credentials as we go forward across our range. I think as you look at our future innovation path, there are opportunities to get new consumers into the portfolio potentially weren't there before. As we're entering into new geographies, I think innovation is a piece of the story, but our core assortment and its trial and repeat rates are very strong. And so, getting those products in front of the consumer also will be critically important to our top line growth. So yes, I think it can help. I think the whole portfolio story has to continue in order for the category to grow significantly over time. And I feel pretty good that that's where we are taking steps to do. Operator: [Operator Instructions] And with no further questions in queue, this is going to conclude our conference call. You may now disconnect.
Operator: Welcome to the Invitation Homes Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I would like to turn the conference over to Scott McLaughlin, Senior Vice President of Investor Relations. Please go ahead. Scott McLaughlin: Thank you, operator, and good morning. Joining me today from Invitation Homes are Dallas Tanner, our President and Chief Executive Officer; Tim Lobner, our Chief Operating Officer; Jon Olsen, our Chief Financial Officer; and Scott Eisen, our Chief Investment Officer. Following our prepared remarks, we'll open the line for questions from our covering sell-side analysts. During today's call, we may reference our third quarter 2025 earnings release and supplemental information. We issued this document yesterday afternoon after the market closed, and it is available on the Investor Relations section of our website at www.invh.com. Certain statements we make during our call may include forward-looking statements relating to the future performance of our business, financial results, liquidity and capital resources and other nonhistorical statements that are subject to risks and uncertainties that could cause actual outcomes or results to differ materially from those indicated. We describe some of these risks and uncertainties in our 2024 Annual Report on Form 10-K and other filings we make with the SEC from time to time. Except to the extent otherwise required by law, we do not update forward-looking statements and expressly disclaim any obligation to do so. We may also discuss certain non-GAAP financial measures during the call. You can find additional information regarding these non-GAAP measures, including reconciliations to the most comparable GAAP measures in yesterday's earnings release. With that, I'll now turn the call over to Dallas Tanner. Go ahead, Dallas. Dallas Tanner: Thank you, Scott, and good morning, everyone. I'll start by recognizing our exceptional teams across the country. Their dedication to our residents and to operational excellence continues to drive performance and reinforces our leadership in single-family rental housing. Stepping back, our business is built on a simple but powerful value proposition: choice, flexibility and high-quality single-family living without the long-term financial and maintenance commitment of homeownership. That value proposition is resonating broadly from families seeking space and schools to professionals who value mobility. Today's housing dynamics continue to support steady demand for SFR. Even as mortgage rates move around, overall affordability remains stretched and transaction activity has been muted, partly because 70% of homeowners are still locked in at mortgage rates below 5%. For many households, the all-in monthly cost of owning a home, including mortgage, tax, insurance and maintenance remain more expensive than leasing a comparable home. Based on the latest John Burns data weighted to our markets, those who choose to lease, save an average of almost $900 per month compared to owning. Against that backdrop, our third quarter results reflect the strength and the resilience of our platform. Demand remains consistent. And while new lease growth continues to be an opportunity, our renewal performance is outstanding. During the third quarter, we delivered same-store renewal rate growth of 4.5% or 30 basis points higher than our third quarter result last year. At the same time, our average resident tenure further increased to 41 months, among the best in the industry. These outcomes speak to the stability, quality and location of our portfolio, the professional service we provide and the value our customers place on staying with Invitation Homes. That stability gives us the confidence and flexibility to invest for the future, and it underpins our disciplined approach to growth. Today, we're pursuing channel-agnostic, location-specific growth focused on long-term total returns, primarily through the following 4 channels: First, our homebuilder partnerships that cultivate reliable and predictable forward purchases of full and partial new communities. Second, homebuilder month-end inventory or a list of homes shared by regional and national builders that we've carefully screened to identify those that meet our location and pricing criteria. Third, our construction lending program, which is gaining traction as a strategic way for us to deepen our relationships with smaller developers and facilitate delivery of much needed new housing supply. And fourth, our third-party management business, which represents a capital-light way to leverage our platform and grow our scale and earnings. In the meantime, our capital allocation framework remains unchanged to fund organic growth, invest where long-term total returns are most compelling and maintain a strong balance sheet, so we're able to capitalize on opportunities when they arise. Naturally, we'll weigh the relative attractiveness of external growth, internal investment and now share repurchases with a clear focus on long-term value creation. In summary, we remain confident in the durability of demand for well-located single-family rentals in our ability to operate efficiently at scale and in our capacity to grow prudently. Our markets continue to benefit from strong long-term fundamentals supported by healthy demographics and sustained desirability. Even if lower mortgage rates become more prevalent, we believe that will be a strong positive for our business as greater liquidity and transaction volumes should benefit the housing market broadly, and we're well positioned to perform and capture opportunity across these cycles. Before I hand it over to Tim, one last note. We'll be hosting our Investor Day and Analyst Day on November 17. This event will provide a deeper look into our strategy, growth initiatives and our long-term outlook. Look for the live stream webcast details to be shared on our website about a week or so prior to the event. With that, I'll pass the call over to Tim Lobner, our Chief Operating Officer. Tim Lobner: Thank you, Dallas, and good morning, everyone. I'm pleased to walk through our third quarter operating results, including our same-store renewal and leasing performance as well as our controllable expense management. But before I do that, I want to recognize the strength of our portfolio, the exceptional execution of our associates across every market we serve and most importantly, the trust and loyalty of our residents. Their confidence in Invitation Homes is what allows us to deliver on our mission every day. Together, these relationships and efforts form the foundation of our success. Since this is my first earnings call speaking with you directly, I'd also like to share a few thoughts on the road ahead. The current landscape brings both opportunities and challenges, which I see as a proving ground for our team and the vision I have for leading it. That vision is rooted in relentless execution, operational excellence and a customer-centric mindset. We will pursue every opportunity, engage every prospect and deliver service that sets the standard in our industry. Through disciplined oversight, accountability and a culture of hard work, we'll continue to drive strong results, and I look forward to sharing more on that at our Investor Day on November 17. The commitment I just mentioned is already beginning to show in our performance. In a dynamic operating environment, our teams continue to deliver solid same-store results. This included third quarter average occupancy of 96.5%, consistent with our expectations. In addition, our renewal business, which accounts for over 75% of our book, continue to be a reliable source of strength, demonstrating both the durability of our model and the value residents place on the product and service we provide. We achieved renewal rent growth of 4.5% in the third quarter, underscoring our pricing power with existing residents and reinforcing the quality and appeal of our homes. Shifting to the new lease side of our business. As expected, third quarter new lease rent growth was slightly negative, driven by elevated supply in select markets that is amplifying typical seasonal patterns. Taken together, blended rent growth for the quarter was 3%. Looking more broadly at the components of same-store core revenue growth, we saw solid contributions across key areas. Other property income grew 7.7%, driven by continued adoption of value-add services that our residents desire, such as our Internet bundle, our Smart Home features and other resident offerings. In addition, bad debt improved by 20 basis points year-over-year, reflecting the quality of our resident base and the sustained rigor of our screening and collection processes. Together, these factors contributed to core revenue growth of 2.3% for the quarter. On the expense side, our teams continue to manage cost effectively, while maintaining high service standards. Same-store core expenses increased 4.9% year-over-year, with fixed expense growth showing some welcome moderation this year compared to recent years. The overall result was same-store NOI growth of 1.1% for the third quarter, which is typically our most modest growth period due to elevated seasonal turnover and other transitory factors. Turning to October. Our preliminary same-store results were generally in line with expectations. New lease rates were down 2.9% year-over-year, reflecting the impact of targeted specials we ran to drive traffic and strengthen occupancy, which averaged approximately 96% in October. Importantly, October renewal spreads remained strong at 4.3%, supporting blended rent growth of 2.3% for the month. That represents a notable acceleration in blended lease spreads of 20 basis points compared to this time last year. To close, I want to once again thank our associates for their continued focus and commitment. Their efforts have helped to enable our growth while ensuring that our residents feel safe, supported and at home. We have the right team in place to finish the year strong and continue executing on our strategic priorities. With that, I'll turn the call over to Jon Olsen, our Chief Financial Officer. Jonathan Olsen: Thanks, Tim. Today, I'll provide an update on our strong balance sheet position, recent capital markets activities and third quarter financial performance. I'll then wrap up with an update on our full year guidance revisions outlined in yesterday's earnings release. We ended the quarter with total available liquidity of $1.9 billion, which combines unrestricted cash on hand with the undrawn capacity on our revolving credit facility. This substantial liquidity position provides us with the financial capacity and flexibility to pursue growth opportunities, manage operations and navigate market volatility with confidence. In addition, our debt structure continues to reflect the high-quality investment-grade profile we've worked diligently to build. As we've discussed in the past, over 83% of our debt is unsecured, over 95% of our debt is either fixed rate or swapped to fixed rate and approximately 90% of our wholly owned homes are unencumbered. We have a well-laddered maturity profile with no debt reaching final maturity prior to 2027, and our net debt-to-EBITDA ratio was 5.2x at quarter end. Combined, these attributes provide meaningful cushion for both operational flexibility and future growth investments. A highlight of our third quarter capital markets activity was the successful completion of a $600 million bond offering in August. The unsecured notes mature in January 2033 and have a coupon of 4.95%, which represents an attractive long-term cost of funds. The deal also extends our maturity profile and frees up capacity on our revolving credit facility. The offering received a strong reception from investors, reflecting the market's confidence in our credit quality and business fundamentals. Also included in yesterday's earnings release was our announcement that our Board of Directors has authorized a share repurchase program of up to $500 million. We view this as a tool that is part of our disciplined capital allocation plan and an ordinary course approach to enhancing shareholder value. Turning now to our third quarter financial results. For the third quarter of 2025, we delivered core FFO per share of $0.47 and AFFO per share of $0.38. Tim already covered our third quarter same-store results, but I want to provide a bit more detail on 2 items. First, property taxes were up 6.3% year-over-year in the quarter, largely due to the benefit we realized this time last year from favorable developments in Florida and Georgia. This year, bills from those 2 states, which together represent more than half of our property tax expense, have so far come in slightly better than expected. Second, we received a favorable premium adjustment related to what is effectively a rebate structure built into our insurance program. This contributed to a 21.1% decrease in insurance expense year-over-year. As a result of our year-to-date performance, we are raising our full year 2025 guidance. We have increased the midpoints for core FFO and AFFO by $0.01 each to $1.92 per share and $1.62 per share, respectively. Additionally, we have raised our same-store NOI growth expectations by 25 basis points at the midpoint, now 2.25%. This was comprised of narrowed core revenue growth guidance in the range of 2% to 3% and improved core expense growth guidance in the range of 2% to 3.5%. Further details of our revised guidance are included in yesterday's earnings release. As we near the end of the year, I want to acknowledge the great progress we've made in the first 10 months. These achievements are a testament to the hard work and discipline of our associates, and I'm thankful for what we've accomplished in a dynamic operating environment. That said, we know we need to remain focused and agile as we approach the remainder of the year, and I have every confidence we'll deliver on that front. This concludes our prepared remarks. Operator, please open the line for questions. Operator: [Operator Instructions] Your first question comes from Jana Galan with Bank of America. Jana Galan: Congrats on a great quarter. I was wondering if you could spend a little time talking about your supply outlook for 2026 with both kind of the BTR deliveries that are expected to deliver next year relative to this year? And then also how you kind of think about that more shadow supply of whether it's an owner-occupied household or becomes a renter household. Dallas Tanner: Thanks, Jana, for the question. This is Dallas. It's been interesting. As we sort of looked at the supply backdrop, it sort of fits into a few categories, right? First is, and we called this out sort of last fall in our third quarter call, this BTR delivery that we were starting to see show up in our markets create a little bit of noise on the supply side. The second piece of it is also -- and it's a fairly small percentage, but some of the for-sale product that maybe isn't moving in the market that may convert to single-family rental from a listing perspective. And then lastly, as we kind of follow and cover some of the professional operators, it's the amount of supply and scale that we see even in those books of businesses that compete in some of our similar markets. Generally speaking, it's nuanced by market. What we've seen so far is that through the most of this year, it's gone pretty much as we expected and what we laid out at the beginning part of the year. We expected new lease to sort of tick up and get a bit better as we kind of went through peak leasing season and into the summer. But we expected that towards the end of summer, things would likely be a little softer just given the lack of homeowner velocity buying and selling and also just some of that shadow supply that we had called out last year. The good news is there are certainly markets like Florida and Atlanta, where we're seeing some of that supply and delivery schedule now kind of get over the hump and come into our favor. The unknowns are still what's going to happen sort of in the one-off kind of single-family rental market. And so we'll continue to monitor supply as it comes through. We're actually pretty encouraged by some of the signs we've seen both in the starts that we're hearing from some of the builder partners and things like that. But ultimately, we've probably got a couple more quarters of supply, specifically in some of these Sunbelt markets where there will be a bit more supply as we've called out for the last couple of quarters. Operator: Your next question comes from Eric Wolfe with Citi Group. Eric Wolfe: I think you said in your remarks that October was like 96% occupancy, which I think is kind of like down sort of 50 basis points from the third quarter. And then you gave the new lease down, I think, 2.9% and renewals 4.3%. I guess what I'm sort of putting that all together, I guess it's a little bit tough for me to get to that sort of fourth quarter number that you need to hit guidance. And so I didn't know if there's something in the fourth quarter like lower bad debt or improving fees or something that gets you to that sort of positive sequential growth to hit the midpoint. And apologies if I'm just missing something on those numbers. Those are just what I've heard from the remarks. Tim Lobner: This is Tim. Thanks for the question. Look, the occupancy dip that you referenced down in the 96.5% range, that was expected. If you recall, going back to the beginning of the year, we talked about that we'd be taking a more measured approach. We anticipated that occupancy would come in a bit as the year progressed, get to a healthy level in the mid-96% range, which it has. We also anticipated that the new supply would create some pressure on new lease growth, which it also has. The good news is, as you look at the fourth quarter, our renewal book of business, which accounts for about 75% of the book is super healthy. Our Q3 renewal rates grew to 4.5% year-over-year, about 30 basis points higher than the same period in 2024. October, as you pointed out, renewal rate was 4.3%. That's an important part of the Invitation Homes story. Our customer is very healthy from a financial standpoint, pleased with the Invitation Homes leasing experience. They're staying for 41 months. I think that's the most important thing to point out as we head into Q4. Remember, Q4, you don't see a lot of people leaving. Turnover tends to be low. And so we feel like we're in a really healthy spot, and the year is progressing as expected. Operator: Your next question comes from Michael Goldsmith with UBS. Ami Probandt: This is Ami, on with Michael. I was wondering, do tenants tend to look to negotiate more on renewals and assets in BTR communities where they can see competitive pricing on units and really have a market comparison? Tim Lobner: Look, I think -- this is Tim. Thanks for the question. Look, the consumer does negotiate on renewal. They do see the open market. And we do negotiate as needed to maintain the occupancy targets that we're looking for. So yes, we don't see a difference between build-to-rent and our same-store scattered site portfolio. Consumers tend to behave similarly across asset types within the portfolio. Operator: Your next question comes from Steve Sakwa with Evercore. Steve Sakwa: Dallas, there's been a lot of rhetoric out of Washington between the Trump administration, Bill Pulte, just about trying to bring down house prices and make things more affordable. I'm just curious, what are you hearing in your discussions with the homebuilders? How do you think this might impact your business, either good or bad? Dallas Tanner: Interesting question, Steve, and it's one that we've had in kind of a couple of different ways. Let me just take a step back. Speaking broadly to the homebuilders, and we've obviously paid attention to some of their calls over the last week or 2, they're certainly seeing a little bit of softening demand, it sounds like. Now it sounds like they're managing inventory a little bit better as well. Yet some of these guys have done a really nice job of leaning out and trying to put more production into the market in 2025 specifically. And they've talked about that as they put that production out, they've actually had a lower pricing because the bid-ask spread had been a little wide. In our one-on-ones, which I always want to protect and be careful about talking about what anybody says, it feels like they're hearing the message that from a federal perspective, they'd like to see a bit more production. I think that being said, if we're being fair, there's plenty of supply in the marketplace right now. I think for-sale listings are up over 1 million units this year. The challenge is on an annualized basis, we're only seeing something like 4 million to 4.5 million sales nationally. And that just doesn't work. Like we need to get back to a place where we're seeing 5 million to 5.5 million sales a year in this country. And I think a lot of that has to do more with the liquidity around mortgage and mortgage rate. There's still something like 70% of mortgage holders in the U.S. are at 5% or better. 80% are at 6% or better. So that spread back to our earlier comments around the total cost to own versus the total cost to lease is still really wide. I think that's why we're seeing the pickup in our renewals business is one example of why in a year where maybe there is actually more product on the market, we're actually renewing at a higher rental rate than we were at the same time last year. And I think it's indicative of the fact that if you have location already solved, you're not looking to absorb future costs right now. And so I think I would expect that the builders are probably weighing that out as well. And we've certainly seen that, and Scott can talk more about this later in some of the opportunities we've seen over the last couple of quarters. There's been some really good opportunities on newer product because inventory is sitting. Operator: Your next question comes from Haendel St. Juste with Mizuho. Haendel St. Juste: Dallas, I wanted to ask a question on capital allocation. I guess, first, maybe can you talk about the increase in the acquisition guide? I'm assuming that's coming from your builder relationships and some of the dynamics you're talking about earlier. But I'm also curious on the yields you're seeing there and how that compares to stock buybacks. I think a lot of us were hoping or maybe expecting to see you act on buying back the stock a bit sooner. Dallas Tanner: Thanks, Haendel, for the question. First and foremost, on our capital allocation through, call it, the first half of this year, we've had many things in flight from a delivery perspective that were part of our BTR programming that are just ordinary course and they're kind of built into our thinking. There's been a little bit of more opportunistic buying. Scott can give some color on this when I finish here around things that we've seen in the last 1.5 quarters or so in some of these end of month, end of quarter, end-of-cycle opportunities with some of our both regional and national builders. In terms of stock buyback, look, this is something we started to think about this summer going into our fall Board meeting, and it was one of the items that we put together to talk about with our Board that we wanted to be in a position that if the volatility was going to exist in the stock price that if or when appropriate and on a measured kind of basis, as we think about how to use our capital, capital allocation, disposition proceeds, we certainly want to have this be one of the tools in our tool belt if stock price is going to kind of stay in these ranges for some period of time. So we'll obviously look for opportunities to use it. We just hadn't had the plan in place. We never set one up. So we're in a good spot now. We feel like it's an added tool to the tool belt, and we'll use it appropriately and in discussion with our Board. Scott Eisen: Scott, anything to add on deliveries? No. I think the only other thing I would address, Haendel, is that when you look at our acquisitions for the quarter, probably about 70% of it was, as Dallas said, forward purchase deliveries where we're sort of on the back half of community deliveries that we started in last year, and we're getting towards the tail end of that. And about 30% or so of what we did this quarter was really opportunistically buying homes on a one-off basis from the homebuilders off their tapes. I think it's been widely reported that the homebuilders have had a lot of inventory, and they've been trying to sell homes, have deliveries in 30 days. And so I think for us, it's been a great opportunistic way for us not only to pick up homes at 20-plus percent discounts to market value, but also get a home for almost immediate delivery that we can put into the market and hopefully get leased within 60, 90 days. So I think we feel good about what we've done, and we've been smart and opportunistic, I think, about where we've allocated. Operator: Your next question comes from Austin Wurschmidt with KeyBanc Capital Markets. Austin Wurschmidt: Just going back to an earlier question, you guys affirmed the same-store revenue guidance, but you did keep a wider range late in the year. So I guess despite kind of, Tim, your comments on trends being largely as expected, why not tighten the range this late in the year? And then also curious, are you continuing to offer similar concessions that you referenced in October to hold that occupancy at 96%? Jonathan Olsen: Thanks for the question. It's Jon. I'll chat briefly about the revenue range. Just to be clear, we did tighten that range. I think if it strikes you as particularly wide late in the year, I would just point out that this is sort of a dynamic environment, and we want to be mindful of that. We continue to feel good about the way the year is shaping up. And I would remind folks that really from the first part of the year, we've been talking about rate and occupancy in terms of our overall expectations for 2025. In the first part of the year, I think repeatedly, we said we were running a little bit ahead of where we expected to be. And I think what we're seeing is that results are sort of aligning around what our full year expectations were. And so still feel very good about our full year occupancy guide. I think with respect to some of the other items, time will tell. We feel good about where we're coming in from a tax perspective. Recall, our original range was 5% to 6%. We expect we'll be around the bottom end of that range and hopefully do a little bit better than we anticipated with respect to insurance expense and some of the controllables. But I think from a revenue perspective, we want to be mindful of the fact that this is an environment where we have to be nimble, and we have to really pursue every lead, every opportunity because it's just a little bit softer than it's been. Dallas Tanner: Anything you want to... Tim Lobner: Yes. Thanks, Jon. Yes, I can touch on the specials. Look, on the specials that we're offering, we typically run targeted specials in October and November. It's a great tool in the toolbox. Our goal when we present these to the market is to boost traffic and generate leasing momentum ahead of the holiday season when the market tends to slow down a little bit. We're pleased with the results we're seeing, and we'll continue to evaluate the need to keep those in place. Operator: Your next question comes from Brad Heffern with RBC Capital Markets. Brad Heffern: Another one on the repurchase. Do you see that as an attractive use of capital as we sit here today? And then can you talk through what the governor on that activity is? I would think using dispositions to fund it might get complicated just because homes have appreciated so much, but is that an issue? And is there anything else you would call out on the philosophy there? Dallas Tanner: Look, the one governor, just to remind everyone is that we're subject to the same blackout periods that we traditionally have. In terms of it being an interesting price in the spot, there certainly are times where if we have excess capital or an ability to deploy accretively and a share buyback could fit into that category, it's something we consider. I hate to say what we are going to do or not going to do. And just remember, there's always sort of a spread between where -- what the market thinks you can do at any given time as you balance out sort of deliveries and cost of capital and things that are going on in the business. So we'll use it judiciously. We'll be smart about it. We'll do it in concert with our Board investments and Finance Committee. And that's how we're going to approach it going into the end of the year. Operator: Your next question comes from Jamie Feldman with Wells Fargo. James Feldman: Great. I guess kind of sticking with some policy questions here. What do you think the impacts have been on immigration policy changes in your markets, whether it's on construction costs with labor or overall demand? And are you seeing any difference across different regions or markets? Dallas Tanner: Look, I'll handle the first part on the immigration. We've asked the same question of homebuilders, and we paid attention to some of the commentary. I mean look, it has to have some effect, right? I mean we're not seeing anything from an occupancy perspective. We're sort of in the sweet spot of our range, as Jon and Tim mentioned. Our expectations going into the year were that we had run kind of in the low to mid-97s as an average occupancy in '24. We just knew that wasn't sustainable. It was going to kind of come into the kind of the mid-96s. We're not seeing anything in terms of lead volume or customer profile. In fact, our FICO scores are basically in the same range they've been for several quarters in a row. As far as what we're seeing with labor costs and land costs and input costs, Scott, do you want to provide a little color there? Scott Eisen: Yes. I mean for a broader question, Jamie, I think as it relates to what we're seeing on construction costs with the homebuilders, I think so far, so good. I think finished lot prices have kind of slowed down their rising pricing. And I think there's been a decline in lot buying by the builders. I think construction costs have moderated and are generally under control. I think the data we've seen says that maybe there's a little bit of a labor cost rising in terms of the total production for homes. But I think in general, like in terms of the purchase prices that we're seeing and the construction costs that the homebuilders are passing on us, I think we're seeing it kind of in line with what we expected and in a pretty decent place. Operator: Your next question comes from Jesse Lederman with Zelman & Associates. Jesse Lederman: Curious what you're seeing from a front-end demand perspective that gives you confidence that the headwind from a pricing power perspective is supply related and not demand related. Maybe some commentary surrounding the reception to the new move-in specials or any other way that you quantify demand would be great. Tim Lobner: Yes. Great question. This is Tim here. Look, on the demand side, we are continuing to see a healthy demand for single-family homes. Our website traffic remains very consistent. Obviously, there's more product out on the market, as Dallas talked about earlier, the couple of different channels that has produced that supply. So that demand is being spread across more homes on the market. But look, we like our position. The Invitation Homes promise is a good one. We try to differentiate our brand through our ProCare, through our value-add services. So we think we're going to still capture our fair share of the marketplace. So obviously, heading into the fourth quarter, demand does go down a little bit, but that's a seasonal component, but we like our position as we head into the end of the year. Operator: Your next question comes from Juan Sanabria with BMO Capital Markets. Juan Sanabria: Just a question on the loss to lease. Where do you see that presently? And then kind of a Part B turnover, it seems to finally be kind of inching up. Do you think we've kind of bottomed out there? And do you expect to see more turnover going forward given some of the competing factors both on the supply and demand side? Jonathan Olsen: Juan, it's Jon. Thanks for the question. With respect to loss to lease, I would say that's kind of low to mid-single digits. I think it's important to remember with respect to loss to lease that, that is not consistent across every home and every market, right? You can create cohorts of homes that have varying degrees of loss to lease. And so over time and distance as our expectation would be that 70%, 75% of those are going to renew, you're going to extract what you can, but recognize that, that loss to lease number relative to what we actually achieve sort of depends on a number of variables. I think overall -- sorry, remind me the second part of your question, Juan? Juan Sanabria: Turnover and how you guys think about that going forward? Jonathan Olsen: Yes. Thank you. I mean, I think turnover obviously, is certainly seasonal. We expect to see turnover pick up in the second and third quarters and then moderate in the first and fourth. Do expect that turnover will return to something closer to a long-term average, kind of closer to 25% than the 22% that we were seeing. But we continue to see a high propensity to renew. We continue to see the affordability gap really drive demand for single-family rental product. and feel good that even at a somewhat higher level of turnover going forward, this is a really, really sticky customer. They appreciate the product and the service that we deliver, and they continue to stay with us longer and longer. So we feel really good about the setup and think that single-family rentals, in particular, are well positioned in the residential market. Operator: Your next question comes from Adam Kramer with Morgan Stanley. Adam Kramer: Maybe a little bit of a higher level, bigger picture one. I think our view has been that the apartments have underperformed of late. I think a lot of that has been driven by sort of slowing job growth and concerns around the job growth from here. I think our view has been that SFR should be a little bit more insulated from that, right, given, I think, some demographic reasons. Wondering sort of when you guys think about your own business, how you sort of think about the demand drivers? Obviously, there's the housing market and sort of what's happening there on the for-sale side. But when you think about job growth and sort of the path forward there, how much do you think that sort of matters or doesn't matter for your business? And as we look to next year, I guess, sort of how would you think about demand next year maybe versus what you've had this year? Dallas Tanner: It's hard to tell the weather perfectly when it's that far out. But I would just say our setup coming into this year, we felt very confident that we could renew sort of in that 75% to 77% of the time with our current customer that we don't see anything that suggests that changes going into next year. So it feels like the renewals from that perspective have kind of done what we thought. I want to be careful on any guide. Jon will get frustrated with me if I say anything prior to our February call. But look, we're not seeing any degradation of our customer. Tim talked about leads and leads coming in. It's still pretty healthy. Our actual conversion efforts on leads is a bit higher than what we've typically seen, and our collections have been actually quite better than what we've seen historically. So there's nothing in the customer profile in our current customer base that suggests big changes are on the horizon. I think it has more to do -- the only kind of variable that we keep working through is this new lease supply issue. It's really the only thing in our business that we feel like is something that is sort of hard to forecast perfectly. And a lot of that has to do with what the housing market does generally, to your point. We'd like to see more -- candidly, we'd like to see more homes selling on the market. That transaction volume is a good proxy for home price appreciation, obviously, but also a good proxy for rent growth going forward. And so we'll continue to just keep our back door as efficiently close as we have. Jon talked about that. We're not seeing anything there. Our FICO scores look great from our customers coming in, our collections and our bad debt are exactly where we wanted to be. So just keep grinding on the opportunity set that's in front of us from a new lease and a supply perspective. Outside of that, the business is doing pretty much what we thought it would do. Operator: Your next question comes from John Pawlowski with Green Street. John Pawlowski: Just a quick question on -- essentially, I'm trying to get around or get at the performance in the non-same-store pool. So can you help frame like the '23 vintages of acquisitions and '24 vintages of acquisitions, how NOI has performed relative to your underwriting to date? Dallas Tanner: Yes, Jon, I'm probably going to have to come back to you with more of that detail as a follow-up. But I would say that homes that we bought in kind of the '22, '23 time frame were basically sort of when the market had the most froth and when underwriting was arguably more likely to anticipate continued strong rent growth. So I think that vintage of homes probably has a little more wood to chop to get itself in line from a margin perspective. But we feel really good about the product we have bought. We feel really good about the way we are approaching investing in this marketplace. I think right now, it's just a function, as Dallas said, of getting this new supply absorbed and hopefully seeing the resale market get to a healthier, more liquid place. Operator: Your next question comes from Julien Blouin With Goldman Sachs. Julien Blouin: Dallas, I wonder what you make of the current public versus private market valuation disconnect reflected in your stock today? And maybe to an earlier question on capital allocation. Do you feel like just executing your strategy and starting to be aggressive on the share repurchase front can sort of help narrow that? Or at some point, are there sort of additional strategic options you and the Board sort of start to look at to drive shareholder value? Dallas Tanner: Thanks for the question. On the strategic side of it, obviously, we're going to sort of keep that in-house in terms of the things we think about. But I would -- I feel comfortable saying that our disposition strategy where we can continue to sell homes between a 4% and a 4.5% cap and accretively reinvest either in share buyback or new acquisitions that are in the, call it, 6 cap range with really good revenue growth profiles in front of them will continue to be accretive way to create shareholder value. We've been obviously as frustrated as probably most of our residential peers have been in terms of the dislocation between public values and private values. It's hard when REIT outflows are moving in the way that they have and where 80% of the S&P has sort of been lifted by AI or anything tech-induced. It's just an interesting environment for real estate businesses at the moment in the public sector. We're certainly seeing private transactions trade at much lower implied cap rates. than where public market valuations sit today. But we're also -- we've been in this business long enough and in and around real estate long enough to know that there are cycles to it. And sometimes at times, things don't make sense, specifically in the public space. And so we just keep our heads down, and we'll keep recycling capital in a way that's meaningful. And we'll certainly look for some of those other opportunities in our tool belt when they present themselves. Operator: Your next question comes from Rich Hightower with Barclays. Richard Hightower: Just a quick clarifying question. Dallas, I want to go back to the sort of the different buckets of potential competitive supply you referenced earlier on the call. And I think last quarter, the forecast is for BTR specifically to drop pretty significantly in 2026. And so I'm just kind of piecing that together with what you said earlier. So does that imply that those other buckets that are sort of the non-BTR would be maybe bigger question marks or growing at a more rapid rate? Just help us understand maybe some of the dynamics there. Dallas Tanner: Yes. No, it's a fair question. On the latter point, there isn't anything that's suggesting we're seeing like an acceleration in terms of supply. In fact, as I mentioned before, there are some markets where we're actually cautiously optimistic. I don't want to call a bottom yet, but we're seeing some good signs in Florida. And there's markets like Phoenix where it's still pretty tough from a new lease perspective. There's just more inventory on the market. And those are the markets where we obviously have the biggest exposure. And so we spend a lot of time looking at these markets and sort of dissecting those 3 different buckets, which is what are we seeing in BTR. And actually, we've seen better velocity in our own book of business on the BTR leasing side. There seems to be like a pickup in demand there, which has been pretty helpful. We've spent a lot of times with our partners and data out there to try to understand what's going on in the listing universe and how much of that is maybe Joe Homeowner converting to a lease. You see more of that in the summer. We'd expect some of that to wane here as we get into Q4 and Q1 to John's point. So no, it feels like it's sort of flattened out. It's kind of right where we expected it would have been, albeit there's just -- it's just a pear more competitive if you're vacant in those markets right now and you're competing for the customer. You got to be on your game. You have to be priced appropriate. And as Tim mentioned before, there are times and we've done this in normal markets, October, November, where you got to be a little bit more aggressive. And so our philosophy right now is versus having something sit on the market for an extra 3 or 4 weeks, we might be a little bit more aggressive and fill it up here in Q4. Operator: Your last question comes from Jade Rahmani with KBW. Jade Rahmani: Just to touch on geographies. It'd be helpful to hear if there are any markets that you were surprised with either their outperformance or underperformance relative to your expectations. Dallas Tanner: It's an interesting question, and we probably all have different views on different things in our business. I would just say generally, and this -- I really should say this, kudos to our team, like Costa maintains -- they've done a wonderful job in terms of managing the turnover and costs and the way that we're managing sort of some of those expenses. I think on the renewal side of the house, we've been very pleased with the things that we've even seen in markets like Miami. Some of the Florida markets are still really, really strong on the renewals, while maybe it's a different story on the new lease side of things. And Atlanta has been a generally pretty strong market. I think what we've sort of acknowledged over the last couple of calls is that Chicago and Minneapolis have both been outperforming now for 4 to 6 quarters. I'm not sure that, that can go on forever in terms of what the Midwest does, but that has been a very good bright spot for us over the last year, 1.5 years, where those markets have basically had no new supply over the last 10 years, and you're seeing it in some of the data. Operator: That completes our question-and-answer session. I would now like to turn the conference back over to Dallas Tanner for any closing remarks. Dallas Tanner: Thank you, guys, for joining us today. We're looking forward to seeing many of you at our upcoming Investor Day and looking forward to sharing more of our story broadly through the webcast. Thanks for all your support and for listening. We'll see you soon. . Operator: The conference has now concluded. You may now disconnect.
Operator: Good morning, and welcome to the Primaris REIT's Third Quarter 2025 Results Conference Call. [Operator Instructions] I would now like to hand over to your host, Leslie Buist, SVP of Finance, to begin. Please go ahead, Leslie. Leslie Buist: Thank you, operator. During this call, management of Primaris REIT may make statements containing forward-looking information within the meaning of applicable securities legislation. Forward-looking information is based on a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond Primaris REIT's control and that could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information. Additional information about these assumptions, risks and uncertainties is contained in Primaris REIT's filings with the securities regulators. These filings are also available on Primaris REIT's website at www.primarisreit.com. I'll now turn the call over to Alex Avery, Primaris' Chief Executive Officer. Alexander Avery: Thank you, Leslie. Good morning. Thank you for joining Primaris REIT's Third Quarter 2025 Conference Call. Joining me today are Pat Sullivan, President and Chief Operating Officer; Rags Davloor, CFO; Leslie Buist, SVP, Finance; Mordy Bobrowsky, SVP, General Counsel; and Graham Procter, SVP, Asset Management. Claire Mahaney, our VP of Investor Relations and Sustainability, is out with some of our Board members doing Board engagement with investors today. Q3 2025 delivered another excellent quarter of results, including same-property NOI growth and almost 6% FFO per unit growth, driven by the continued secular recovery in the Canadian mall sector. Once again, this quarter, we demonstrated disciplined capital allocation, recycling capital from strategic dispositions and retained free cash flow into both strategic acquisitions and unit repurchases. 2025 has been an incredibly active year. With the business delivering strong operating and financial results, we have been using this time to recycle capital with the objective of structurally raising Primaris' long-term internal growth rate from its portfolio of exceptional properties on a sustained and durable basis. While 5 disclaimed HBC leases were an occupancy and NOI headwind in the quarter, we are very excited to announce substantial leasing progress made on 5 of the 6 disclaimed HBC boxes and the leasing of the vacant Sears box at Lime Ridge. This includes the HBC at our Promenades St-Bruno property in Montreal acquired in early October. Pat will provide more details shortly, but we have leased almost 0.5 million square feet of space to single-tenant occupiers and anticipate tenants to take possession as soon as November as in next month and in Q1 of next year. Late Tuesday, we learned the remaining 5 leases were disclaimed, allowing Primaris unfettered access and control of these spaces as of November 27, 2025. In 2025, we have acquired 4 top-tier malls, including Oshawa Center, a 50% interest in Southgate Centre in Edmonton, Lime Ridge Mall in Hamilton and Promenades St-Bruno in Montreal, bringing total acquisitions for the year to $1.6 billion. Consistent with our strategic ambition of becoming the first call, all of these acquisitions are consistent with our target mall criteria and were chosen to increase portfolio quality and to structurally increase the base level of internal growth in our portfolio to an above-sector average 3% to 4% same-property NOI growth rate on a durable and recurring basis. These malls, in addition to our other acquisitions to date, are important centers for retailers in Canada, are the leading shopping centers in their markets and elevate Primaris' stature in the mall industry. The resulting scale and quality of our mall portfolio makes us a strategically important landlord to retailers across Canada. Even better, all of these acquisitions were completed with FFO accretion on an NAV-neutral basis, while keeping leverage within our target range. In September, we held a very well-attended property tour at Les Galeries de la Capitale in Quebec City, where we hosted analysts and investors. Capitale was acquired in 2024 and is the leading shopping center in Quebec City. We showcased Primaris' execution of its acquisition strategy, as well as our mall management team, the quality of the asset, the scale of the recent renovations prior to our purchase and spent some time on the value creation opportunities we are exploring with the excess land at this site. We also invited local industry experts to participate, providing the full picture of the opportunity we see ahead for this asset. Some of us even rode the Electro roller coaster, which left my knees weak and my stomach queasy, mission accomplished. Throughout the tour, we emphasized the connection between these acquisitions and our ambition to be the first call for retailers seeking space in Canada's top malls. We hope attendees found it valuable and a great use of time. Along with our quarterly results, we are also announcing a 2.3% distribution increase, our fifth annual increase. Effective with this increase, we anticipate Primaris will be added to the Dividend Aristocrats Index at the next appropriate rebalancing. With all of the transactions we have completed over the past 2 years, we have substantially repositioned Primaris' portfolio to deliver and exceed the outcome our investors want most, high-quality and durable NOI with sustainable same-property NOI growth in the 3% to 4% range, translating to above-average FFO and AFFO growth per unit. I'll now turn the call over to Pat to discuss operating and leasing results, followed by Rags, who will discuss our financial results. Pat? Patrick Sullivan: Thank you, Alex. We've been hard at work reshaping the portfolio to achieve structurally higher internal growth by acquiring some of the best malls in the country and recycling capital from our noncore property portfolio. Underlying fundamentals for shopping centers continue to be supported by low retail supply, strong tenant sales and continued tenant demand for quality space. In March 2025, HBC filed for CCAA protection, and a process commenced shortly thereafter to surface value from the leases. In June 2025, 5 HBC locations in our portfolio were disclaimed. These 5 locations occupied approximately 532,000 square feet. A proposed assignee emerged for 28 locations, including 5 sites owned and managed by Primaris. These 5 locations not originally disclaimed encompass approximately 624,000 square feet. Last week, to our satisfaction, the court rejected the proposed assignment. And on October 28, all remaining HBC leases were disclaimed. In addition, we obtained control of the vacant HBC box at St-Bruno upon the closing of our property acquisition. The HBC St-Bruno location is about 131,000 square feet. For reference, the average minimum rent HBC paid in our portfolio was $4.18 per square foot, equating to $5.4 million annually. With the [ disclaimant ] of all remaining HBC leases, retailers will now be able to understand and assess the full inventory of HBC space available. We now anticipate an acceleration of negotiations with tenants for all available space. We have made significant leasing progress at our HBC boxes and are pleased to announce that we have agreed to terms with tenants for the entire HBC box at St-Bruno with [indiscernible], as well as for 1 level at Galeries de la Capitale with [indiscernible] and with Zellers at Sunridge Mall. We anticipate the Medicine Hat lease deal to replace the entire premises formerly occupied by HBC will be signed imminently. All 4 deals have been completed with very limited capital contribution from Primaris and have been kept short term with the potential to extend further. These stores will collectively occupy approximately 384,000 square feet and will open in spring 2026. At Place d'Orleans, we are in advanced discussion with a single tenant to occupy the entire premises on a long-term deal with limited capital contribution from Primaris and anticipate completion of a transaction in Q1 2026. We are in active negotiations with national covenant tenants for space within all our HBC locations, and we will provide further updates on leasing and development activity in the near term. As a general statement, we continue to estimate that it will cost approximately $25 million to $30 million to demise an HBC box and approximately $8 million to $9 million to demolish, including all site works. Where a single tenant takes an HBC box, the cost to Primaris could be as little as 12 months of free rent. We are currently estimating a total HBC-related spend of $125 million to $150 million over the next few years. Furthermore, we expect yields on this invested capital of between 7% and 12% or more, or a lower 3% to 6% when including only the incremental NOI beyond the foregone HBC rent. We would like to take the opportunity to announce that we have signed a lease with a single national tenant for the entire former Sears premises at Lime Ridge Mall, which measures approximately 139,000 square feet. The term of the lease is 20 years with limited capital investment from Primaris. The tenant is expected to take possession in November 2025 and open early 2027. Our same-property cash NOI was up 0.7% for the quarter compared to Q3 2025 and 5.1% for the first 3 quarters of the year. The primary drivers were higher rents and specialty leasing revenue. Same-property NOI was also impacted by a $600,000 accrual adjustment in the prior quarter and $800,000 in lost revenue due to the closure of 5 HBC locations. Excluding these 2 items, same-property cash NOI would have been 3.1% positive. Recovery ratios for the quarter were essentially flat compared to the same quarter in 2024 and up 1.5% to 79.4% on a year-to-date basis. While our property tax recovery ratio was negatively impacted by the closure of HBC, we realized a gain in our operating cost recoveries of 2.3% as compared to the same period of the prior year. We have adjusted our spending to incorporate the shortfall in operating contributions from HBC to maintain affordability for our tenants. The increase in operating cost recovery ratio continues to trend towards a return to historical norms in the metric, which is around 92% to 93% for property tax and 96% to 97% for operating costs as compared to our current figures of 74.8% and 84.4%, respectively. For context, every 1% increase in CAM and tax we recover equates to approximately $2 million annually. This number directly impacts the bottom line. Portfolio in-place occupancy was 91.7%, down 1.6% from Q3 last year, but higher than the 88.8% reported in Q2 2025. New store openings pushed occupancy higher in Q3 2025. Over the past several quarters, we note there's a higher proportion of committed area being related to CRU space, which generates higher rents than anchor and major premises. Leasing activity was very strong during the quarter with 121 leases renewed at spreads of 5.3%. In addition, we completed 41 new deals encompassing 79,000 square feet during the quarter. Average CRU rents achieved in new deals during Q3 was $57.60 per square foot, which is 20% higher than our average CRU rents of $47.81 per square foot. Year-to-date, we have completed 97 new deals for 228,000 square feet with 88 of those deals being CRU tenants equating to 162,000 square feet. During the third quarter, approximately 175,000 square feet of tenants commenced rental payments, and we anticipate 135,000 square feet of tenants will commence rental payments during the fourth quarter. Our leasing team continues to experience strong demand for space, and our watch list is limited. We are in active discussions with existing retailers in our properties to expand their footprint and from retailers looking for new locations, including both Canadian and international retailers. Our weighted average net rent per square foot for the quarter increased to $29.16 per square foot versus $25.28 per square foot at year-end. This material increase is a result of our acquisition activity of properties with higher rents, disposition of properties with lower rents and the 5 disclaimed HBC leases with net rents significantly lower than our portfolio average. Tenant sales within our properties continue to grow, and our malls realized positive sales growth on both the same-store and all-store basis during August, which is generally the third busiest month of the year for enclosed shopping center sales. Including St-Bruno, total sales productivity has grown to $800 per square foot versus $715 per square foot at Q3 2024, and total sales volume now exceeds $3.5 billion compared to $2.1 billion at the end of August 2024. Several of our properties have shown strong productivity growth, including Oshawa Center, where same-store sales have grown from $758 per square foot at acquisition to $825 per square foot. Our sales productivity numbers continue to grow because of strong tenant performance and capital recycling, including the strategy of acquiring leading shopping centers in growing markets. Over the long run, we anticipate sales growth at our properties will [ occur in ] the strong fundamentals in the enclosed shopping center industry, including a 30-year low in per capita enclosed mall square footage in Canada, coupled with population growth. To conclude, it is a very exciting time to be in the mall business. Primaris' business continues to perform very well, and we are very well positioned to capture continued growth within our malls. And with that, I'll turn the call over to Rags to discuss our financial results. Rags? Raghunath Davloor: Thank you, Pat, and good morning, everyone. Our operating and financial results for the quarter continued to remain very strong. We're seeing very strong NOI growth from our portfolio, specifically the acquisition properties. And our many operating metrics are continuing to improve. These results are flowing through to our cash flow metrics with FFO per diluted unit up 5.7% for the quarter. We achieved these impressive per unit results despite higher interest costs, increased unit count, sale of noncore assets and the impact of the disclaimed HBC leases. Internal growth and accretive high-quality acquisitions completed over the last 12 months are the drivers of our outperformance. During the quarter, we closed on the sale of 3 strip plazas in Medicine Hat, Alberta for proceeds of $12.7 million and the disposition of Northpointe Town Centre, an open-air plaza in Calgary, Alberta, for $54.5 million. This brings total dispositions year-to-date of $246.1 million. Notably, we have Northland Village up for sale, a high-quality recently-developed power center. The center is anchored by Walmart, Winners, Best Buy, Good Life, Dollarama and Spinelli Italian Centre Shop, a specialty grocery store and restaurants similar to Eataly, all in an affluent trade area in Northwest Calgary. As expected, this asset has attracted a broad pool of interested buyers, and we expect this deal to close late in the year. Our disposition strategy aligns to our strategy to own a growing high-quality portfolio of leading enclosed shopping centers in Canada. At Primaris, we talk constantly about our differentiated financial model. We are highly committed to maintaining very low leverage at below 6x debt-to-EBITDA and maintaining an FFO payout ratio of approximately 50%. This model gives us structurally higher FFO and AFFO per unit growth as we retain and compound capital faster. As our public company track record continues to grow, we expect this to result in an improved cost of capital with higher FFO and AFFO multiples from their current levels. Our average net debt to adjusted EBITDA was 5.9x. As a reminder, this range forms part of our executive compensation structure with the top end of the range of 6x. Our financing strategy is another critical piece of our structure. Our investment-grade rating, made possible by our sector-low financial leverage and low payout ratio, allows us to access the unsecured debenture market. This greatly simplifies our ability to arrange debt financing for our acquisitions as the mortgage financing alternative for these large value properties and stretch the limits of the secured mortgage market in Canada. The unsecured structure also allows us to buy and sell properties, as well as renovate and redevelop the properties, without the constraints that come with secured mortgages. This gives us a significant advantage over potential new entrants to the mall market and over smaller private groups. In October, concurrent with the Bruno acquisition, Primaris issued a 5-year $250 million senior unsecured green debenture at a spread of 110 basis points, resulting in a coupon of 3.845%. The net proceeds from the issuance will fund eligible green projects as described in our green finance framework. Including this issuance, our weighted average term to maturity is extended to 4.2 years and the weighted average interest rate is reduced to 5.03%. With unencumbered assets of $4.4 billion, $618 million of liquidity and no debt maturing until 2027, we have eliminated financing risk in the medium term and have access to significant liquidity. Primaris has been in the market repurchasing units since March 9, 2022 under the NCIB. In 2025, we have purchased for cancellation 4.7 million units at an average value per unit of $15.09, or an approximate 30% discount to NAV of $21.58. Repurchases under the program in 2025, funded in part by proceeds from dispositions, have already exceeded all repurchases completed in 2024. This program is very accretive to unitholders. Given our strong results to date and confidence in the strength of our business, we are reiterating our 2025 guidance for cash NOI of $352 million to $357 million and FFO per unit of $1.78 to $1.82. This guidance accounts for accretive acquisitions completed during the year and no rental income from the remainder of the HBC leases. We do not anticipate any significant CapEx spend with respect to the HBC boxes in 2025 due to the timing of the CCAA process. Our guidance includes the impact of the acquisitions of Oshawa Centre, Southgate Center, Lime Ridge Mall and Promenades St-Bruno, and approximately $250 million in dispositions that have been completed. No additional acquisitions are incorporated into the guidance. We anticipate same property cash NOI growth to remain in the range of 4% to 5%. We adjusted our occupancy guidance for the balance of 2025 to 85% to 87%, which assumes the HBC leases are disclaimed and accounts for acquisitions with lower occupancies. Further details of our 2025 guidance can be found in Section 4 of the MD&A titled Current Business Environment and Outlook. We are also announcing 2026 guidance with an anticipated cash NOI of $385 million to $395 million, same-property cash NOI growth of 1% to 3% and FFO per unit of $1.83 to $1.88. This guidance includes the sale of Northland Village on or about December 31 of this year. No other acquisitions or disposition activity are considered. We had a lot of positive leasing momentum in our same properties that is offsetting the hurdles of HBC and Toys "R" Us vacancy and the high volume of prior year tax recoveries in 2025. If you are trying to reconcile same-property NOI growth to FFO growth, it is important to note that 1/3 of the 2026 cash NOI guidance is attributable to 2025 acquisitions, which are not included in same property. Overall, we are pleased with our results for the third quarter and are optimistic of the outlook into 2026 and beyond. Maintaining our conservative financial model and generating free cash flow after distributions and operating capital is the core focus from which we will not deviate from. And with that, I will turn the call back to Alex. Alexander Avery: Thank you, Rags. We are very pleased with our results so far in 2025. 2025 has been a remarkable year for Primaris: $1.6 billion of strategic acquisitions completed; over 6% FFO per unit growth, based on our 2025 guidance midpoint; continued strong leasing and operating results; our fifth consecutive annual distribution increase; a rising weighting in the TSX Capped REIT Index; and a doubling of our trading volume as measured in dollars of units traded per day from about a year ago. We completed our 3-year sustainability plan and established a new plan for the next 3 years. Our trustees are out meeting with investors today as part of our annual Board engagement program. With visibility to controlling all HBC spaces by the end of November, we are confident that 2026 will be another remarkable year for Primaris. We'd now be pleased to answer any questions from the call participants. Operator, please open the line for questions. Operator: [Operator Instructions] Our first question comes from Sam Damiani from TD Cowen. Sam Damiani: So just on the HBC spaces, backfilling of those, great initial progress. I wonder if you could just maybe give us a picture of sort of how you see it playing out. You've got 11 spaces. It looks like pretty much 5 are put to bed imminently. How is that going to look in terms of leases to tenants that are sort of quick backfills with minimal CapEx versus maybe tenants coming in, maybe bigger tenants with longer commitments that are taking a little longer to ramp up operations and open their stores? Patrick Sullivan: Yes, I mean, our ultimate goal is to get long-term leases with national covenant tenants. The tenants we've done deals with right now are relatively short term in basis, but we are optimistic that they will -- that there's a chance they'll turn into longer terms. It might not be in the square footage they're in today. They might actually get a reduced size as we go forward. One of the issues with this process that started back when the bankruptcy was filed in March has been, it's been a long process and really ultimately had a lot of really quality property tied up. And the result of that has been that tenants have been rather slow in dealing with commitments. They wanted to understand the full inventory of the space that was available before they really press forward with their plans to commit capital for new store openings. So with the announcement on Friday coming out, we really received a lot of positive inbound calls wanting to tour, wanting to start proceeding with discussions. So we're optimistic we can move a lot of the other deals forward on the remaining 5 locations. And even in the stores that we've tied up short term with tenancies, while we're optimistic that we can keep them longer term, we're going to continue to look at our options for quality tenants that can take them for the much longer term. Sam Damiani: And with that -- I guess, with that sort of strategy -- initial strategy, let's say, Phase 1 of the strategy, I guess, it sounds like the CapEx for Primaris might actually be quite modest relative to that sort of $150 million overall perhaps budget certainly in the next couple of years. Would that be fair? Patrick Sullivan: Yes, I would say that's a fair comment. Operator: Our next question comes from Mario Saric from Scotiabank. Mario Saric: Just coming back to your '26 FFO per unit guidance, can you discuss what FFO you reflected regarding the HBC backfill that Pat was just talking about? And as a follow-up, what are the key items in that guidance that are driving the $183 million to $188 million range? Raghunath Davloor: Yes. So the HBC, I don't know that we have any cash rent coming in. There was some, but there's also some straight-line rent. I can't recall the exact numbers. So we'll have to get back to you on that. The guidance is really -- we almost look at it as 2 buckets. There's the same store, same property, which is sort of flat to up a couple of percentage points. And HBC is obviously the big factor there. So with the 5 other stores coming back, we had not assumed anything on those 6, I should say. The 5 that we got in progress, we did embed some assumptions on that. And then, we do expect some significant growth on the acquisition. So that's sort of what drove the overall FFO per share increase. There's a modest increase in G&A, as you can see. And that's about it. It was pretty clean, pretty simple. We did not include -- we reduced our assumption around the property tax rebates because we -- a lot of the appeals have now gone through. So we do have an amount in there, I think, about $1 million, and that's about it. If you're looking for noise, that would be the only sort of non-recurring item, if you want to call it that. Alexander Avery: I think just from a general guidance statement perspective, the pace of developments that we've experienced since September 30 on HBC in particular, initially with the ruling from Judge Osborne and then the disclaimer of the leases on Tuesday, the discussions have been pretty fast and furious. And we have the 3 leases that we noted in the press release and in the materials, but there are a lot of other discussions ongoing. And so, when you think just about how the timing of preparing guidance and the visibility into what has been executed, what is in process, I think as a general statement, we tend to be relatively conservative on what we include in guidance. But at the same time, we're trying to be as accurate as possible and capture the spectrum of possible outcomes. I think if you look at the bottom end of the range, that would assume that we have nothing and some other assumptions throughout the business. And at the top end of the range, you would include a little bit of HBC backfill revenue, mainly in the form of either sort of temporary tenant cash rent, or if we turn over some space relatively soon, we get percentage rent -- or not percentage rent, sorry, straight-line rent during the fixturing period. Raghunath Davloor: But just to reiterate on the [indiscernible] back, we have not assumed any income on those sets. At the time the budget was prepared, we didn't know what the outcome was going to be. Alexander Avery: Yes, we were still waiting for the ruling from Judge Osborne when we prepared the forecast. We assumed that we were going to get them back vacant, but we didn't assume any backfill for any of those. Operator: Our next question comes from Lorne Kalmar from Desjardins. Lorne Kalmar: Just on the 2025 guidance, on FFO, the range is still fairly wide despite there being just one quarter left. I was just wondering if you could provide some insight or some reasoning as to why you guys are giving yourself so much wiggle room here. Raghunath Davloor: It's just kind of nailed down what the percent rent. And we also weren't sure at the time where we were going to end up with HBC, when exactly would the disclaimers kick in, will not kick in. And sales have been strong, so just trying to kind of factor in what's going on with sales because they have been surprisingly resilient, given the economic backdrop. Operator: Our next question comes from Pammi Bir from RBC. Pammi Bir: It sounds like the leasing overall is going well in the business, tenants still expanding. Can you elaborate on that and which tenants are in that sort of expansion mode versus some that might be shrinking? And then, I guess, the second part of my question is, for Q1, typically, we obviously do see some seasonality. And are you anticipating anything outsized in terms of bankruptcies or closures or anything in terms of the watch list? Patrick Sullivan: Pammi, yes, no, leasing is going very well. I mean, there's -- as I noted in my speech, I think there's Canadian and U.S. and international retailers expanding. We've done some deals with Uniqlo. We're in discussions with Victoria's Secrets for new stores. Aritzia is looking to upsize. Lululemon is adding stores. Bath & Body Works is upsizing. Canadian side, you got Soft Moc looking for more space. Browns is looking to capitalize on the closure of HBC and it's looking for new stores. They're seeing a net benefit of footwear traffic flowing into their stores now that HBC is closed. There's a number of Southeast Asia retailers opening in Canada right now, Kiokii being one of them. So there's lots of new activity going on in the malls, which is great. On the other side of it, one thing we did build into our budget that we do anticipate is Toys "R" Us failing in the new year. We have factored that into our numbers, and that's something we've been expecting for some time, and we're being proactive on the replacement tenants, and we have a good handle on all the space right now to replace. So, on the small shop side, there's really not a lot of noise right now. The watch list is very limited. Sears came out of their troubles with the new purchaser. So that situation stabilized. Otherwise, nothing much more on the horizon. Pammi Bir: Sorry, just one follow-up. The Toys "R" Us you mentioned, can you just remind us how much square footage that is in total in the portfolio, and I guess, NOI exposure for rents? Patrick Sullivan: I'm going to have to get back to you on that. I don't know off the top of my head. Memory serves, it was 6 stores. The average store is about 20,000 square feet. We already have 2 -- we have vacant possession of 2 already, and we're working on the replacement. Operator: Our next question comes from Tal Woolley from CIBC Capital Markets. Tal Woolley: I just wanted to talk a little bit about -- you've got a lot of college towns in your portfolio. And there's obviously been a lot of conversations around immigration and the impact, particularly on those markets. And there's been some discussion in the residential markets about what's going on. Just wondering like how you're seeing that? Are you seeing any impact from changes in approach in malls like Conestoga or maybe Cataraqui and Kingston? There's a handful of names that [indiscernible] off there just to see if -- yes, there's been any change at the CRU level. Patrick Sullivan: No, no, I can't say I've seen any correlation on that side of it. I think mall sales have been doing exceptionally well. Back-to-school was very strong. And that's a big indicator because that's when a lot of the kids are back shopping and looking for supplies and so forth in September. Preliminary numbers on September, I looked at the other day, and they were very good as well. So sales continue to be strong, but I really haven't seen any correlation between the university attendance and the international student makeup and the sales of the properties. Tal Woolley: Got it. And then, just when I look at your occupancy, if I look last year versus this year, like this quarter last year versus this year, you have more of your occupancy in these shorter-term leases. Is that a function of just acquisitions? Or is there something else going on there, too? Patrick Sullivan: Yes. I think the occupancy -- the malls that we bought have rather -- they have low occupancy for the most part. Oshawa had a significant amount of vacancy. And I think as you can -- as you've seen by the numbers, the mall sales are doing very well, and we've been leasing up a lot of space. But like Lime Ridge, Galeries de la Capitale, I mean, these have been very opportunistic buys for us because they have not had the attention that perhaps we're affording to them. And not that the previous owner did a poor job. I think just in their greater portfolio, they had some much higher profile malls that got a lot more attention, and we're certainly giving them the attention they need. In the remainder of our portfolio, we have pretty good occupancy levels, and we're driving that forward still, but the opportunity really lies in the malls we've acquired. Alexander Avery: And just as a... Tal Woolley: Go ahead, Alex. Sorry. Alexander Avery: Sorry, Tal. I was just going to say that one thing that struck us as we were going through the quarterly analysis internally is, 30% of our portfolio by NOI, by value has been acquired this year and almost 40% has been acquired in the last 4 quarters. So we have a tremendous amount going on. And your question about whether we're seeing any impact from foreign students and things like that, I think the mall business is a lot like the office business right now, where if you own the AAA product, it is going extremely well. Occupancy is essentially full. Rents are at all-time highs. And if you own a C product, you're having a very, very difficult time. And so, what I think may not be fully appreciated is just how much we have transformed this portfolio. And some of that shows through in some of our metrics. If you look at -- for instance, I was looking at our leasing activity, and in Q3 2025, our average new tenant CRU rent was over $50. And then, if you look at that same number 2 years ago, it was $35. And that's not on a small number of leases. It was 88 leases this quarter, 38 leases 2 years ago. The average rent for the whole portfolio was $29, up from $25. Our pro forma average sales per square foot across the whole portfolio was $800. Two years ago, it was $621. The business has really changed quite a bit. And the macro backdrop, I think, is something that a lot of people put a lot of emphasis on. But I think supply and demand of space is really what drives our business. And for the space that we own, there's a lot of demand. Tal Woolley: And just for the short-term leasing component, like, versus the long-term in-place occupancy, like that's sort of ticked up from just below 3% to 4%. I assume, again, acquisition mix has driven that up probably too. But like do you -- I'm assuming you're always going to have a bit of short-term leasing in this business. And so, is there a number like where ultimately you want to get that to? Patrick Sullivan: I don't think there's a -- well, I think you -- my obvious answer is I'd love to have none, but you're right. We're always going to have some because we're always trying to remerchandise the properties. I think the max occupancy for Primaris at peak back 15 years ago was probably around 96%, 97%. And that's just simply related to the fact that we always had space that was swing space and remerchandising. That's part of the business, and that's how you continue to grow rents if you have to remerchandise. But you're right, the additional -- the uptick in our specialty leasing space or our temporary space is really tied to the new acquisitions where there was a lot of vacancy in place that was occupied by temporary tenants. Operator: Our next question comes from Mark Rothschild from Canaccord. Mark Rothschild: It sounds like in general, the demand is there, the fundamentals are good. To what extent should we be reading into a trend in leasing spreads? Obviously, it could be lumpy quarter-to-quarter, especially with perhaps some larger leases. But looking at the trend of the past few quarters, I just want to know if we should be reading into that. And what should we expect the trend to be over the next few quarters with your visibility on leasing? Patrick Sullivan: Mark, yes, the renewal spreads, there's 3 tenants -- if we remove 3 tenants from this number this quarter, it would have been up -- it would have been 2% higher. I think we've generally been guiding to the mid-to-high single digits. And I think that trend is going to continue. It's going to -- it always depends on the subset of tenants that's expiring. But while we're still in the phase of driving the occupancy higher, we've tended to hang on to tenants that perhaps in another time, we would have let go, just to maintain occupancy. So we're still working through the Bay portfolio and driving occupancy higher. So I still think mid-to-high single digits is the right number. Mark Rothschild: Okay. Great. And maybe one more, which I think you've kind of spoken about already, just to make sure I understand this clearly. For your guidance range for same-property NOI for 2026, at the top end, what would that assume from HBC sites? And to what extent could that be exceeded if you get more leasing done in time? Or is it just not likely to lead to a lot of rent in 2026 just because of the work you might do at those sites? Alexander Avery: Yes. I mean, there's a bunch of moving pieces there. And when you think about the types of tenants that are going in, if you're going to take a full HBC store and the tenant is going to build out the space, we're probably going to give them 12 or even 15 months of build-out time. And during that time, they wouldn't be paying any cash rent. So we will be collecting straight-line rent in terms of our FFO. Other tenants we're going to bring in have less of a capital investment strategy, maybe shorter term in nature. And then, we have some where we're contemplating re-demising into CRU, which involves a lot more capital, but also would generate $70 and even higher than that average rents on the resulting CRU space. So a big part of what the -- I guess, the variability in our 2026 guidance is really about the timing of all of this. And I would say, the early results are pretty impressive in terms of how much leasing activity we've gotten done on HBC space since we got control of the first 5 of them back in June. But even with that control, it's really about the timing. I think we don't have guidance for 2027, but I would say, it's a lot easier to forecast what the financial results will look like in 2027 because 2026, if something comes in, in Q1 versus Q3, that's a huge swing, whereas we're pretty confident that a lot of stuff is going to come in through 2026, and stuff that doesn't come in, in 2026 is likely to come in, in early 2027, very early 2027. And so, the 2026 number is -- it's still -- there's still a fair bit of play in there. Operator: Our next question is from Brad Sturges from Raymond James. Bradley Sturges: Just, I guess, continuing along the lines of HBC questions. Just on the stores that you're getting back or get control of in November, how would you characterize the prospects in terms of leasing to a single tenant or multi-tenant or the requirement around maybe more of a redevelopment or capital requirement to re-lease the space versus what you've already had control of for a little bit longer and you've done some short-term leasing in the first few stores? Patrick Sullivan: Brad, yes, the stores that we're getting back now were clearly really high-quality locations. And that's Ruby Liu had tied up a lot of the best quality real estate with -- that HBC had in Canada. And so, we've been working on replacement tenants with these boxes for quite some time. And we pretty much know where we're going with this. And it's going to be a mix of -- there's a potential for a single -- there's more likely most of them will be multiple tenants, 2 or 3 boxes. And one will be, in all likelihood, a lot more CRU. And the CRU one will generate higher cost, but it will also generate very high returns because the CRU rents are so high. So it's going to be a mixed bag, but it's all high-quality real estate. And I think we can hopefully get some transactions put to bed pretty quickly as we've already had pretty advanced discussions with people to this point. Bradley Sturges: Okay. My other question would be just on the investment activity or transaction activity that Primaris has completed or just more on a go-forward basis, I guess, more specifically. Given you've had a lot of success on the acquisition side and you've high-graded the mall quite extensively -- or the mall portfolio quite extensively, where do you rank acquisitions in terms of priority going forward? And how should we think about Primaris' transaction activity, I guess, over the next 12 months? Alexander Avery: Thanks, Brad. So yes, we're almost $1.6 billion of acquisitions this year and $250 million of dispositions. We've got Northland Village, which is ballpark $150 million disposition that we're hoping to close by the end of the quarter. So, that will get us to about $400 million. And when we think about the ratio of acquisitions to dispositions, it might be 3:1 kind of a range. So we still have more disposition activity that we'd like to get done in the relatively near term. Transacting was a lumpy kind of an event, and each transaction is unique, but we do have some priorities in terms of dispositions, as you can see in our assets held for sale bucket. On the acquisition side, it is also very lumpy. We don't have anything that we're -- I would describe as being in any advanced stage or any serious focused negotiation, which is different from the status that we've had for most of the last 3.5 years, frankly. But we're optimistic that we'll be able to find some more additions for the portfolio over the next 18 or 24 months. We have a number of properties that we've identified that we'd really like to buy, but it takes a willing seller or a willing buyer and the meeting of the minds on price. So I think you can expect to see more on the disposition front in the near term than on the acquisition front. We also have a lot of -- I mean, when you come to our office, it's a beehive of activity, and we have an awful lot to do in terms of HBC backfills. We're doing a lot of master planning of properties where we see opportunities for [indiscernible] land and selling to developers or building out parcels for our own account. There's an awful lot going on in our business, and it's all great stuff. But yes, I mean, the -- to your point, the emphasis is less on acquisitions today than it has been at any point in the last 3.5 years. Operator: Our next question is from Matt Kornack from National Bank Financial. Matt Kornack: You mentioned, the number of tenants are expanding. Should we think of kind of this HBC opportunity as an ability for new entrants to come into the mall? Or do you think it will create a little bit of musical chairs with existing tenants maybe moving around and backfilling them with others? Patrick Sullivan: Matt, yes, I think in terms of new entrants, there are tenants looking for space in Canada that are struggling to find expansion opportunities just because of the lack of available space and nothing new being built. So tenants like Uniqlo, this presents an opportunity for them to expand their footprint where there was a lack of space in the market. And then, on the CRU side, it has given us the ability to actually be able to consider CRU for the bankruptcy of HBC, whereas in the past, with Sears and Target, I don't think that real opportunity was as prevalent for us. So -- and the CRU pays very good rent. So yes -- but in addition, I do think there'll be some musical chairs with tenants relocating some other developments, perhaps expanding within our own properties, whatever it might be. So it's going to be the same to an extent that it was with Sears and Target. Matt Kornack: Okay. Fair enough. And then, just maybe quickly, if you took out the noise from both years from HBC, are you still kind of expecting the rest of the portfolio to be in that kind of 3% to 4% same-property NOI growth range? And would that be a function of occupancy improvement? Or is it still capturing of the change in kind of the accruals that you've been able to charge back to them? Patrick Sullivan: Yes. I think your comment is fair, and I think it's really driven by occupancy. We're doing a lot of new leasing that's continued. Our recovery ratios are still only in the low-80s, and we're continuing to see growth in that every year. And that's going to continue for quite some time until we get back to our historical norms, which are more than 10% from where they are today. So yes, I think outside of the Bay, the business is very solid. Matt Kornack: Maybe very quickly a follow-up to that last point. Like what time horizon do you think you can kind of recapture that or... Patrick Sullivan: I'd like to say... Matt Kornack: The recoveries. Patrick Sullivan: Yes. I mean, I'd like to say it's probably going to be in the 3-year time frame of our forecast where we can get our occupancy back into the mid-90s. Raghunath Davloor: There's no question, '26 is a bit of a transitional year as we're dealing with Hudson Bay. But '27, '28, you should start to see that acceleration. I mean, we took a small step back on recoveries, and that was wholly a function of the Bay. And so, we can start to work that again. But '26 -- when you get into the latter half of '26 and move into '27, you're going to see quite the acceleration. Patrick Sullivan: I do want to circle back on Toys "R" Us just for everyone's clarity. So we had 6. We terminated 2 last month. We have 4 remaining stores. The average -- it's 104,000 square feet. The average rent -- the average base rent is well below our average in the portfolio. It's only $14 a foot. So good opportunity in one of those locations is at Dufferin where we know we could grow the rent substantially. Operator: Our next question comes from Gaurav Mathur from Green Street. Gaurav Mathur: Just a quick question on the forward guidance. What are the renewal spreads that you're underwriting internally when you're considering both the initial net rents and then also with the contractual rent increases? Alexander Avery: Gaurav, our -- I guess, our de facto policy is, we generally try to target 2% to 3% annual rental rate escalations in our leases. And that does play into cash same-property NOI growth. It doesn't show up in our FFO because of straight-lining of rent. So, that would be on the sort of step rent side of things. In terms of the leasing spreads, we continue to struggle a little bit with -- it's not an input. I know how you might model our business, but it's not how we would model our business in the sense that we have spaces and we know what we can generate from those spaces. Often, it's a function of the tenant that we can put in that space. And so, it's a little bit -- we don't really emphasize the leasing spreads as much as you might in other retail property types. There are differences. We proactively try to encourage about 25% turnover on an annual basis in our business. We're trying to really fine-tune the merchandise mix on an ongoing basis. And so, the leasing spreads as well, Pat was addressing it a few minutes ago, we're still seeing some statistical subduing of our leasing spreads because we still have some of these gross rent and percentage rent in lieu leases that are being converted to net rent leases. And those leases tend to offer the largest positive NOI impact for us, but we can't put them in -- I mean, we could put them in, but we just decided that it was too much funny math to try and convert them into some sort of a form that could be captured in the leasing spread. But the trend over the next few years is going to be that our leasing spreads are going to be stronger. But that -- again, that may not actually translate into an acceleration relative to what would otherwise be the case of same-property NOI because we're already capturing it through conversion of these leasing -- these leases that are nonstandard into net lease structures. So I guess, I've been rambling now for a little bit about leasing spreads, but it's not as much of an input into our business as it might be for others. Operator: Our next question is a follow-up question from Sam Damiani. Sam Damiani: First one is just on the disposition, I guess, ambitions over the near to medium term. How would you characterize the market today versus maybe 3, 6, 12 months ago for -- in the transaction market? Alexander Avery: Yes. I mean, we're seeing some interesting signs of capital becoming more available. We saw a transaction for a 50% non-managing interest in a mall that we would target for ownership, which was the first in some time, and that was at about a 7% cap rate, which is very constructive for our valuations. On the disposition side, it continues to be a relatively thin market from a depth of bidding perspective. There are quite a few parties that show up to the auctions for properties like the ones that we've been selling. But I think the decline in interest rates and increased availability of credit are 2 positives on that front. So we continue to be pretty optimistic that we'll be able to continue to execute on dispositions. Raghunath Davloor: It's really choppy. So, I mean, that's what we're seeing [1:00:05]. It depends on the day of the week, you call us. It is really kind of all over the place. And it's hard to get any firmness of sense that there's a trend one way or the other. Sam Damiani: Understood. And then, just lastly, on the Lime Ridge full space lease for the former Sears, I mean, that's great to hear. I wonder if you could just give us a little bit of a background there, how long that took to get across the finish line? Was it in play with the vendor? Any color there would be helpful. Patrick Sullivan: Yes, there was a discussion that was going on before we ended up buying the property. We advanced it very quickly once we closed on the property and brought it to a resolution very fast. Operator: We currently have no further questions. I'd like to hand back to Leslie for some closing remarks. Leslie Buist: Thank you, operator. With no further questions, we will close today's call. On behalf of the Primaris team, we thank you all for participating, and Happy Halloween. Operator: This concludes today's call. We thank everyone for joining. You may now disconnect your lines.