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Operator: Hello, and welcome to the EXLService Holdings, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Also, as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. I will now turn the call over to Shirley Macbeth, Chief Marketing Officer. Shirley Macbeth: Hello, and thank you all for joining EXL's Third Quarter 2025 Financial Results Conference Call. On the call today with me are Rohit Kapoor, Chairman and Chief Executive Officer; and Maurizio Nicolelli, Chief Financial Officer. We hope you've had an opportunity to review the third quarter press release we issued yesterday afternoon. We've also posted a slide deck and investor fact sheet on our Investor Relations website. As a reminder, some of the matters we'll be discussing this morning are forward looking. Please keep in mind that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, general economic conditions, those factors set forth in yesterday's press release, discussed in the company's periodic reports and other documents filed with the SEC from time to time. EXL assumes no obligation to update the information presented on this conference call today. During our call, we may reference certain non-GAAP financial measures, which we believe provide useful information for investors. Reconciliation of these measures to GAAP can be found in our press release, slide deck and investor fact sheet. With that, I'll turn the call over to Rohit. Rohit Kapoor: Thanks, Shirley. Good morning, everyone. Welcome to EXL's Third Quarter 2025 Earnings Call. I'm pleased to report another strong quarter as we consistently executed on our data and AI growth strategy. In the third quarter, we generated revenue of $530 million, an increase of 12% year-over-year. And we grew adjusted EPS by 11% and to $0.48 per share. In the quarter, our data and AI led revenue grew 18% year-over-year, reaching 56% of total revenue. Our data and AI-led revenue comes from EXL's AI-powered solutions and services, including those in which we embed data and AI into client workflows. This is the third consecutive quarter we have accelerated our data and AI-led revenue growth, underscoring both the rising demand for AI-driven solutions and demonstrating our leadership in embedding AI directly into client workflows. At the same time, our Digital Operations revenue grew 6% year-over-year. This is significant when you consider but as we embed AI into workflows, we manage, the revenue moves from Digital Operations to the data and AI-led revenue category. Our third quarter results displayed sustained momentum across all operating segments. The Insurance segment grew 9% year-over-year, which represented 1/3 of our revenue in the quarter. This growth was driven by our Insurance clients evolving their operations to be more AI-powered. We believe the increased adoption of AI in the workflow in Insurance is a long-term trend from which EXL is well positioned to benefit. Healthcare and Life Sciences represented 1/4 of our revenue and was once again our fastest-growing segment at 22% growth. This performance was fueled by our demand for data and AI solutions. This included growth in our payment services business as well as expansion of digital operations and analytics services with new and existing clients. banking, capital markets and diversified industries grew 12%, representing nearly 1/4 of our revenue. Looking ahead, we see significant opportunity to further increase value and improve business outcomes in this segment by leveraging our enhanced data and AI capabilities across the value chain. In Q3, we drove 8% year-over-year growth in our International Growth Markets segment as we continue to diversify our business geographically. This segment represented 18% of our total revenue in the quarter. International markets represent meaningful potential for us to accelerate our long-term growth trajectory and expand our global footprint. We are encouraged by the overall demand environment, which remains positive. Our sales pipeline grew with the addition of several new data and AI-led opportunities. As enterprises navigate ongoing economic uncertainty, their priorities are expanding beyond the traditional focus on cost efficiency. They are also looking to change their business models, expand their total addressable market and grow revenue. As clients adopt AI to help achieve these goals they need trusted partners to help them navigate change and deliver tangible business outcomes. With our proven track record and comprehensive set of innovative AI-led solutions. We are a natural partner for our clients on this journey. For our existing contracts, we maintain exceptionally high renewal rates. More than 75% of our revenue is recurring or annuity like. This provides revenue stability and predictability. Combined with a healthy new business pipeline, we have momentum to sustain double-digit top line growth into 2026. I'd like to highlight progress made in advancing our data and AI strategy to deliver differentiated value for our clients. I'll cover 3 areas: number one, the launch of our new EXLdata.ai solution; two, client momentum with the adoption of embedding AI in the workflow; and three, industry recognition of our domain, data and AI leadership. Firstly, I'll cover the launch of our latest innovation. Earlier this month, we unveiled EXLdata.ai the first its-kind agentic AI suite of data solutions that help clients make their enterprise data AI ready. Data is the single biggest barrier to AI adoption. Our research shows only 30% of organizations can access their data enterprise-wide and most struggle with unifying data silos across legacy platforms. The challenge is especially acute with unstructured data, which now represents 85% of all enterprise data, especially in regulated industries. To make unstructured data AI-ready, it needs to be annotated, labeled and categorized within a structure. This is a manual, time-consuming and expensive process. We built EXLdata.ai to solve these challenges with EXLdata.ai, more than 65 AI agents autonomously managed data modernization, governance, quality, lineage and data accessibility across the entire data life cycle. This AI-first approach sharply reduces implementation time, which previously used to take months, down 2 weeks and even days, Built on a platform-agnostic architecture, EXLdata.ai integrates seamlessly with all leading data platforms, including our launch partner, Databricks, and Snowflake and Palantir and can be deployed across all the major cloud providers, including Microsoft Azure, Google Cloud Platform, Amazon Web Services, as well as with NVIDIA's accelerated computing infrastructure. We believe EXLdata.ai is a game changer, helping clients overcome the biggest hurdle to AI adoption. Next, I'd like to highlight our success with embedding AI in client workflows. I'll share 3 examples that are illustrative of the scale of many projects underway and the client business value that we generate. The first use case is our multi-agent powered solution for a U.K. insurer designed to improve and accelerate risk assessment for underwriters. EXL embedded AI into a new business submission workflow that processes thousands of e-mails and attachments each month. The AI agents extract the right information and assess risk in real time. Processing time has been reduced from a week to a few hours and court conversion has increased by 7%. Real-time insights for brokers also help improve the customer experience during client interactions. The second client example is a large U.S. health care organization. The collaboration began with the successful delivery of an enterprise-wide Gen AI platform for document processing which has become a foundational solution for managing unstructured data across the organization. Building on that momentum, we are designing a next-generation agentic ecosystem to power safe and secure solutions across their finance, pricing and supply chain functions. These AI-powered solutions are helping to reduce the cost of care accelerate speed to market for new solutions and improve end user experiences, work that used to take weeks can now be done in hours. My third example demonstrates how EXL is using AI to transform digital operations for existing clients. EXL's in-depth knowledge of the client processes that we already run is a huge advantage in accelerating infusion of AI and driving faster outcomes. For the past two decades, EXL has been a strategic partner to one of U.K.'s largest energy and home services companies. We've helped them reimagine their end-to-end operating processes, including onboarding, meter to cash, consume-to-pay and customer exit. By integrating data and AI throughout the front, middle and back office operations, over 35% of transactions that we run for this client are now AI-enabled. Our solutions have driven significant improvements in customer experience, including achieving 98% onboarding accuracy and a 10% upliftment in billing accuracy and timeliness. In addition, our initiatives leveraging intelligent automation and applied AI have improved productivity by over 30%. Our revenue from this client has not declined as we were awarded additional work that grew the relationship. And we are positioned really well to begin implementing agentic AI for this client and grow value-added revenue streams. These 3 client examples are representative of numerous successful EXL client AI deployments. While many enterprises struggle to generate returns from AI investments, EXL's unique strengths in domain, data and AI are delivering meaningful ROI and transforming how businesses operate. This has resulted in a success rate of over 90% and for EXL's AI deployments. Finally, I'm proud to share that in Q3, EXL received several recognitions of our AI services and solutions leadership across our core industry verticals. Here are a few highlights. In Insurance, we were named a market leader in the HFS Research, Horizon Insurance Services 2025 report, which emphasized EXL's data-first approach, deep insurance expertise and AI-driven operational insights. For health care, EXL was recognized as a leader in Everest Group’s Healthcare Data, Analytics and AI Services PEAK Matrix 2025 for our domain expertise, analytics focus and strong partner ecosystem. In banking, EXL was recognized as a category winner in the 2025 IDC FinTech Real Results program. We were recognized for building a financing solution that allowed First National Bank of Omaha to introduce new financing options quickly, integrate seamlessly with merchants and scale with agility. These recognitions validate EXL's innovative data and AI expertise as well as our unique approach to helping clients deliver significant business outcomes at scale. In conclusion, we saw strong demand for our services and solutions across the markets we serve. We have bolstered EXL's competitive position by investing in next-generation data and AI capabilities with the launch of EXLdata.ai. Our business portfolio is well balanced and stable and we have excellent visibility and confidence for the remainder of the year. As a result, we are raising our revenue and EPS guidance for the full year. With that, I'll turn the call over to Maurizio to provide more details on our financial performance. Maurizio Nicolelli: Thank you, Rohit, and thanks, everyone, for joining us this morning. I will provide insights into our financial performance for the third quarter and 9 months ended September 30, followed by our revised outlook for 2025. We delivered a strong third quarter with revenue of $529.6 million, up 12.2% year-over-year on a reported basis and 12.3% on a constant currency basis. Sequentially, we grew 3.1% on a constant currency basis. Adjusted EPS was $0.48 and a year-over-year increase of 10.8%. All revenue growth percentages mentioned hereafter are on a constant currency basis unless otherwise stated. Now turning to the third quarter revenue by segment. The Insurance segment grew 8.5% year-over-year with revenue of $180.5 million and 4.9% sequentially. This growth was primarily driven by expansion in existing client relationships and new client wins. The Insurance vertical, including revenue from International Growth Markets grew 7.3% year-over-year with revenue of $211.1 million. The Healthcare and Life Sciences segment reported revenue of $135.3 million, representing growth of 21.6% year-over-year and 4.5% sequentially. The year-over-year growth was driven by higher volumes in our payment services business expansion in existing client relationships and new client wins. The Healthcare and Life Sciences vertical, including revenue from International Growth Markets grew 21.5% year-over-year with revenue of $135.5 million. In the Banking, Capital Markets and Diversified Industries segment, we reported revenue of $121 million representing growth of 11.8% year-over-year. This growth was driven by the expansion of existing client relationships, primarily in Banking, Capital Markets and new client wins. The Banking, Capital Markets and Diversified Industries vertical, including revenue from International Growth Markets grew 12.1% year-over-year with revenue of $182.9 million. In the International Growth Markets segment, we generated revenue of $92.8 million, up 8.4% year-over-year and 1.7% sequentially. This growth was primarily driven by higher volumes with existing clients in Banking, Capital Markets and Diversified Industries and new client wins. SG&A expenses as a percentage of revenue increased by 120 basis points year-over-year to 21.3% driven by investments in front-end sales and marketing. Our adjusted operating margin for the quarter was 19.4%, down 50 basis points year-over-year, driven by investments in front-end sales and new solutions. Our effective tax rate for the quarter was 22.1%, down 70 basis points year-over-year, driven by higher profitability and lower tax jurisdictions. Our adjusted EPS for the quarter was $0.48, up 10.8% year-over-year on a reported basis. Turning to our 9 months performance. Our revenue for the period was $1.55 billion, up 14% year-over-year on a constant currency basis. This increase was driven by double-digit growth across both our data and AI-led and Digital Operation Services. Our data and AI-led services grew 17.1% year-over-year on a constant currency basis. The adjusted operating margin for the period was 19.7%, up 10 basis points year-over-year. Our first 9 months adjusted EPS was $1.45, up 19% year-over-year. Our balance sheet remains strong. Our cash, including short- and long-term investments as of September 30 was $393 million, and our revolver debt was $355 million, for net cash position of $38 million. We generated cash flow from operations of $233 million in the first 9 months of the year versus $163 million for the same period last year. This improvement was primarily driven by higher profitability and better working capital management. During the first 9 months, we spent $42 million on capital expenditures and repurchased approximately 4.2 million shares at an average cost of $44 per share for a total of $183 million. This includes 2.3 million shares received upfront as part of the settlement of our previously announced $125 million accelerated share repurchase plan. We expect to receive the remaining shares in the fourth quarter. Now moving on to our outlook for 2025. Based on our strong year-to-date performance, continued momentum and current visibility for the remainder of the year, we are raising our revenue and adjusted EPS guidance. We now anticipate 2025 revenue to be in the range of $2.07 billion to $2.08 billion, representing year-over-year growth of 13%, both on a reported and constant currency basis. This is an increase of $15 million at the midpoint of our previous guidance. We expect a foreign exchange gain of approximately $2 million to $3 million, net interest income of approximately $1 million and our full year effective tax rate to be in the range of 22% to 23%. We expect capital expenditures to be in the range of $50 million to $55 million. We anticipate our adjusted EPS to be in the range of $1.88 to $1.92, representing year-over-year growth of 14% to 16%. To conclude, we delivered a strong third quarter, demonstrating our formidable competitive position in embedding AI into the workflow. Our resilient business model and strong sales pipeline gives us confidence in our ability to maintain double-digit growth momentum in 2026. With that, Rohit and I would be happy to take your questions now. Operator: [Operator Instructions]. Our first question will come from Surinder Thind with Jefferies. Surinder Thind: Rohit, can you maybe just talk a little bit about how you're thinking about the change in the overall demand environment? Would you characterize it as relatively unchanged or are clients maybe getting a little bit more positive when it comes to kind of some of the innovation spend that obviously, you guys sit on a different end of the spectrum versus some of your peers, but I just wanted to understand what you're seeing in your commentary on the sustainability of the double-digit organic revenue growth. Rohit Kapoor: Sure, Surinder. So I think the way I would characterize it is that the overall demand continues to be very strong. And what we are seeing is that the TAM for our services and solutions has really expanded. But this is probably the first quarter in which the shift in demand is now visible in our financials. And you can see that our data and AI-led revenue has moved quite significantly up and become 56% of our total revenue. We can see the conversion of some traditional domain and F&A operations, businesses that we used to manage being converted to AI-led operations. We can see Gen AI and agentic AI move from POCs to production to actually going to enterprise scale. And there is a huge amount of demand that is building up around data enablement for AI. So frankly, the market overall demand in terms of innovation spend and sustainability is moving exactly in the direction in which we thought we should be strategically playing and building out our capabilities. And some of this is now becoming quite visible in our financials. We are pleased with our ability to gain new clients. We are pleased with our ability to win market share from other providers. And we're pleased to become the AI transformation partner for these clients and help them along these journeys. So when we think about sustained growth in double digits, we are very confident of our ability to be able to drive that because our data and AI-led business, which is 56% and it grew at 18% in the third quarter, that alone will be able to command a double-digit growth rate for the full company. So frankly, all of these signs are very encouraging for us and the pivots that we have made seem to be playing out quite nicely. Surinder Thind: That's helpful. And then I guess as a follow-up in the shift in demand and the shift in the underlying business. I think you pointed out some interesting things where work that may be used to take months may now be done in weeks and in a few instances or some instances, maybe it can be done in the course of hours or a week. That sounds very deflationary, right, optically. Can you maybe help us understand how and where the makeup of this is that when you go to that client and you offer to do work that used to be 3 months, and now you're telling him, hey, we can do it in 3 weeks. Where is that incremental revenue coming from? Are you now doing 3 or 4x times as much work with that client? Or what is going on here to help us understand the sustainability of the growth rate? Rohit Kapoor: Yes, absolutely. And the best anecdotal example of that was what I shared in my prepared remarks about an existing client for which we have implemented AI-led operations. And now we have 35% of the transactions, which are AI-enabled, and that's generated 30% productivity benefit for this client. And yet our revenue for this client has remained the same. And to your point, the reason the revenue has remained the same is, this client obviously has great confidence in our ability to be able to apply AI and deliver that productivity benefit to them. And therefore, they're giving us more and more work which is being shifted over from what they were running themselves or what they might have been running with other providers and we are winning more business from them. And therefore, this deflationary piece that you talk about, we don't really see that because today -- even today, I mean, the penetration of the work that we do with our clients is still relatively low. And the opportunity set for us is enormous. And then finally, there are new areas that this client would never have engaged with in the past with anybody, so things around agentic AI, things around bringing together their data together and bringing it in a manner that can be accessed, looking at data lineage, looking at data governance. These are things which were never necessary in the past because AI was not being used in these business operations. And now that it is these are areas that need to be kind of worked upon and we are the natural choice partner for them. So frankly, what we are seeing is the more benefit we can provide to our clients and the quicker we can do it for them. the more they tend to rely on us and give us more work and we become an even more trusted partner in this journey. Operator: Our next question will come from Bryan Bergin with TD Cowen. Bryan Bergin: First question is on digital ops. So can you just unpack further your expectations for the fourth quarter for digital ops and really into fiscal '26 as well, just given the first half comps. And Rohit, just based on that demand shift you noted here recently, where does the comfort lie in digital ops longer term? Is it still kind of high single digits? Is it mid-single to high single? And then my follow-up, I'll ask both up front here. Just on the top client, what's driving that top client strength and what's the sustainability. Rohit Kapoor: Sure. So Bryan, first of all, I just want to make sure that everybody understands that when we talk about Digital Operations, it includes 3 service lines below that. Number one is domain operations; Number two is finance and accounting operations; and number three is platform services. So those are the 3 elements that constitute our Digital Operations business. Now in terms of the growth rate of Digital Operations, clearly, as we embed AI into domain operations, F&A operations and platform services, some of that revenue is moving from the Digital Operations bucket to the data and AI-led bucket. So that's very important to understand because we ourselves are AI-enabling a lot of digital operations and making it data and AI-led operations. What you are seeing is the net growth of Digital Operations, which is at 6% for this quarter. What you are not seeing is that the overall growth rate of this business is much higher. And because the shift of Digital Operations to data and AI led is taking place, that's not visible to you. So that's something which I just want to preface the conversation in. Now in terms of how we are seeing domain operations grow, finance and accounting operations grow, platform services growth. We're actually very pleased with how clients are engaging with us a lot more in this direction. And when they first engage with us, a lot of this is some of the traditional work that we have done with them. And then very quickly within the first 6 months to 1 year, we start to apply AI into this operation. So frankly, this engagement with a new client, starting out with the Digital Operations and then converting it to an AI-led operations is a very good pathway and we feel very good about the kind of growth that we are seeing, the kind of engagement that we are experiencing. And this seems to be working really, really well. The top client question that you asked, for us, the top client grew very nicely year-on-year. And I will tell you this that our penetration rate with this top client still is extremely low. And we think there's an opportunity set for us to really expand this volume of business with the top client far, far more meaningfully. In fact, it can be multiples of the amount of business that we do with this client today. So there is no real limit to how much we can grow. I think if you also look at our second largest client, that also grew very nicely. So frankly, as we get more engaged with clients across multiple service lines, which includes domain operations, finance and accounting operations platform services, analytics, data management, AI services, our ability to expand work and revenue with large clients is actually -- there's a tremendous amount of potential out there. Operator: Our next question will come from Maggie Nolan with William Blair. Margaret Nolan: Maybe to build on an earlier question about your ability to win additional work in these clients, can you talk about how you're changing your client relationship management, your go-to-market motions and those types of things. And just in general, your confidence in your ability to win additional market share as these shifts happen? Rohit Kapoor: Sure, Maggie. I think that's a really important attribute and you're touching upon something which we've been working on very proactively because clearly, the nature of our conversation with our clients has changed. It's no longer about just providing them with cost efficiency. It's much more about innovation. It's much more about transformation of their business model a lot more about applying AI correctly in a sustainable way. So what that means is 2 or 3 things. Number one, our account managers and our client executives and our sales hunters. They all need to be proficient in terms of being able to engage and talk to clients with the use of some of these highly complex and newer technologies. So they need to be conversant with data with AI. They need to know how to apply that into the client workflow. They need to understand what it takes in order to pull this whole ecosystem together and deliver that business outcome to them. So that's a big change, and we are training our front-end teams to learn, understand and be able to communicate this appropriately to our customers and our prospects. The second thing that's happening is, we are no longer talking only to the Chief Operating Officer. We're talking to the CIO. We're talking to the CDO. We're talking to the Business Head. We are talking to the CEO. And therefore, the buying centers are much more integrated and much more spread across the organization. What that also means is these are much larger deal sizes, and these are much more strategic decisions that the client needs to make. And the third part of it is the entry point for us is it starts off with providing them the confidence on a single use case and then expand that use case at scale for the enterprise and then actually expand and proliferate across the organization across multiple businesses, multiple geographies and multiple functions. So the go-to-market piece has changed quite significantly. And then the third element of this is a large part of our go-to-market is now with partners. So the partners has got a number of the technology partners that we partner with. So we partner with Microsoft Azure, with GCP, we partner with AWS, we partner with the data platforms, Databricks, which is our launch partner for EXLdata.ai, with Snowflake, with Palantir and the go-to-market motion is jointly with these technology partners. We're also partnering with private equity firms, which are looking at applying this AI into their portfolio of clients a lot quicker. So again, the go-to-market motion has changed very, very significantly. Margaret Nolan: That's great detail. My follow-up would be about the growth in revenue per employee. Can you talk about the puts and takes there, just given that your growth was led by the data and AI? I would have expected that to track a little more closely with that growth rate? Any incremental color would be great. Rohit Kapoor: Right. So we are seeing there to be changed an upward improvement in terms of the revenue per employee across the company. So that's a trend we would expect to see going forward for the next several years as we apply AI and we get into more complex work for our clients. But keep in mind that we are also going to see this happen over a period of time. So there may be quarters in which this will move in different directions. It all depends upon what work we are winning, what the business composition of that work is and how that correlates. You can see actually quite visibly that the number of employees that we've added year-on-year is at a much slower pace as compared to our revenue growth rate. And that's been trending for the last several quarters. And that's something which we would expect to see going forward. So we would expect to see our revenue grow double digit but we don't expect to add employee head count at a double-digit growth rate. It's going to be pretty much in a single digit, maybe a mid- to high single-digit kind of a growth rate. Operator: Our next question will come from David Koning with RW Baird. David Koning: Good quarter. I guess A couple of questions. My first question, Healthcare has dramatically grown the last couple of years. It's about 50% bigger than 2 years ago. Maybe just talk a little bit about the outlook there. Can you keep growing this fast? What are you doing to kind of keep the pipeline going. But yes, the biggest question is just can it keep this growth rate up? It's been so good. Rohit Kapoor: So Dave, for us, the way we think about it is that our Healthcare business is really in its infancy because the health care market is so enormous and so huge. You also know that it's very data rich. It's got broken and fragmented processes. It is adopting AI and it's applying analytics in a much more aggressive way. And therefore, the opportunity set in health care is enormous. We are pleased with how we've -- we are building up our Healthcare business. If you talk to our clients in Healthcare, they can clearly see the kind of value that we bring to them. Our payment integrity business continues to grow very nicely. But what we are also very pleased with is that our domain operations business in health care this year grew very nicely. So frankly, there are multiple areas where we can help our clients as such. One of the biggest opportunities for health care is going to be able to help them around their data. And that's something which we can see again is growing nicely. So the headroom for us is enormous. These are enormous markets for us. And I think even if we've grown 50% it's just a fraction of where our potential is within these industry segments. David Koning: Yes. Okay. Great to hear that. And then a question for Maurizio. You're doing a really nice job executing to the full year plan on margins. But it's a little bit lumpy just the way Q1 was so good with margins. And then now as you're kind of going through the year just as expected. But margins being down in Q3 and maybe flattish in Q4, it looks like is -- you still expect growth next year, right, like growth in margin next year? I'm just wondering the cadence this year, is next year going to be more kind of stable growth through the year? Maurizio Nicolelli: So Dave, you are correct, right? So the first half of the year, our adjusted margin was 19.9%. We just closed the quarter at 19.4%. So it's a little bit lumpy this year, right? We started extremely high, just over 20% in Q1, and we're trending more towards what I've been guiding to is 10 to 20 basis points higher on a year-over-year basis, which would put us right around 19.5% for the year. So going forward, when we look at Q1 and also 2026, we continue to see margin improvement of 10 to 20 basis points a year, but a little bit more flatlined than what you've seen this year, meaning Q1 should be a little bit more reflective of the annual margin going forward. And you should see that for the rest of next year. So a little bit more balanced next year. But right now, you're seeing us spend a bit more on front-end sales and also on capability development and that's where we're really putting our investment dollars in the second half of the year. Operator: Our next question will come from Vincent Colicchio with Barrington Research Associates. Vincent Colicchio: Rohit, the EXLdata.ai, the product sounds very promising. Just curious, what does the landscape look like there? Are there similar products out there? Rohit Kapoor: So yes, Vincent, I think on the data side, a number of companies which are trying to build solutions and help clients manage their data and get their data AI-ready, we all know that, that's the #1 problem that clients face. But I think the way in which we have thought about being helpful to our clients is really to use AI to make data AI ready. And therefore, the large part of the effort and the heavy lifting is not manual, but actually it leverages AI itself for helping our clients have that data be AI ready. I would say that we differentiate ourselves in 2 ways. Number one is the use of AI for data being AI ready. And number two, is we built this platform and the solution set, which is fully comprehensive end-to-end. And that means it can help in data lineage, data accessibility, data governance, master data management, having data being coordinated across different platforms and silos and really attacking unstructured data which is the heaviest piece of lifting that needs to happen and do that by leveraging AI itself. So as of today, we think this is really a first of its kind. When we talk to our launch partners and other partners, which have data platforms, they find this solution to be compelling. And we are seeing tremendous amount of excitement around this. So a lot of demos, a lot of use cases and a lot of activity associated with this at this point of time. Vincent Colicchio: Thanks for that. The International segment looks should be a large opportunity for you given your penetration. What are you doing to accelerate that? Are you making investments in the marketing side, for example? Rohit Kapoor: Yes, Vincent. You're right. The International piece for us should overall be growing at a faster pace. And that's something which we are consciously investing in and also making sure that we have senior executive talent closer to our customers out there. So we are bringing on additional talent out there. We are taking our solutions and capabilities that we've created and leveraged with some of our U.S.-based clients and applying that into these international geographies. We are building up some local partnerships in these geographies. And we really do need to mature the business as such, but the opportunity and the potential is very, very strong here. Operator: Next question will come from David Grossman with Stifel Europe. David Grossman: I wonder if we could talk a little bit more about the requirements to really deploy enterprise or AI, if you will. And I think Rohit, you're talking quite a bit on this call about the amount of data preparation required to execute that and the new products that you have in the marketplace that automates a large part of that. So when you're going to these clients, are you going to market offering this service, which is then converting into follow-on revenue? So in other words, is it being sold as a stand-alone business. And if it is, what is the typical multiplier effect that you're getting once you get in with the client on that type of engagement in terms of the following work. Rohit Kapoor: That's a great question, David. You're right. We're doing this in two different motions. One is on a stand-alone motion. So we are taking EXLdata.ai as a stand-alone capability and whether or not our clients use us for embedding AI into the workflow, we're just helping them get that data estate in order and make sure that their data is AI ready. And so these are stand-alone engagements. They typically start off with demonstrating our ability with one particular use case, but it very quickly expands to kind of working across the enterprise and working across a number of their legacy data platforms and converting that and moving that to the cloud and moving that into a much more modern data platform. So that's one motion. The second motion is where we engage with clients to help them embed AI into the workflow, and we have the responsibility of doing the end-to-end charter, which means we have to get the data estate in order. We have to apply AI to that data and we have to deliver a business outcome to the client. And there, it's in a much more integrated format that we bring in our capabilities and services. We are finding actually both of these seem to be resonating. And clearly, the need for this across our clients is very, very strong. David Grossman: So what do you think the multiplier is stand-alone versus kind of the integrated sell? Rohit Kapoor: At this point of time, David, the data management piece in itself is a large part. So the AI enablement is a much smaller piece, but the heavy lifting is much more around the data enablement. So the multiplier at this point of time is not that strong. But I think as this kind of progresses, it will become larger and larger. And so we'll see how that plays out. David Grossman: And then just as you're thinking I know you've guided to double-digit growth as your target model here. And as you kind of formulated that double-digit target, how much of that is kind of net revenue retention or same-store growth, same client growth versus new bookings? Rohit Kapoor: Yes, that's a very strong metric for us, David, because with existing clients, as we embed more AI as we deliver greater value to them, the renewal rates are north of 90%. We continue to win additional business from them and then we add on new clients. I think we've shared this metric before for us, adding new clients in any given year only contributes somewhere between less than 5% of the revenue for that year. So a large part of this is with existing clients that we are able to kind of build and grow. David Grossman: Got it. And just if I could sneak one more in because I was a little confused by your response to an earlier question because I think you said that you were getting 30% productivity gains from a client, yet their client -- their revenues were remaining flat. So I think the context of the question was the deflationary -- or potential deflationary component of AI to the industry, not just for EXL. So did I hear that right that it's flat? And if I did, again, I guess I would ask the same question again. How should we think about this if we're just getting to flat off of a 30% productivity gain? Rohit Kapoor: Yes. So think about it this way that if our revenue was $100, we were able to provide a productivity benefit of 30% and it dropped down to $70 we were given incremental revenue of another $30 that brought it back to $100. Now we came back to $100 with better margins, higher revenue per head count and an increased amount of value for the customer. So our penetration rate with that customer increased and the strategic relationship with that customer just got enhanced. David Grossman: Got it. So then is that more of a I wouldn't call it a onetime event, but is it really just more of an upfront event. So if you can keep it flat, that's kind of a victory, and then you can grow off that base going forward? Is that the way to think about it at higher margin and higher value? Rohit Kapoor: Yes. So that part of the business for us remained flat. But we then became a strategic partner for the same client on helping them use agentic AI. And agentic AI is a space that we would have never played with in the past and the client would never have kind of used us in the past. And therefore, it opened up newer revenue streams, which are much more higher value added and a much more strategic and much higher margin. Operator: We have no further questions this time. This concludes our call. Thank you, and have a good day.
Operator: Welcome to the Radware conference call discussing third quarter 2025 results, and thank you all for holding. [Operator Instructions] As a reminder, this conference is being recorded today, October 29, 2025. I would now like to turn this call over to Yisca Erez, Director of Investor Relations at Radware. Please go ahead. Yisca Erez: Thank you, operator. Good morning, everyone, and welcome to Radware's Third Quarter 2025 Earnings Conference Call. Joining me today are Roy Zisapel, President and Chief Executive Officer; and Guy Avidan, Chief Financial Officer. A copy of today's press release and financial statements as well as the investor kit for the third quarter are available in the Investor Relations section of our website. During today's call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. These forward-looking statements are subject to various risks and uncertainties and actual results could differ materially from Radware's current forecast and estimates. Factors that could cause or contribute to such differences include, but are not limited to, impact from changing or severe global economic conditions, general business conditions and our ability to address changes in our industry, changes in demand for products, the timing in the amount of orders and other risks detailed from time to time in Radware's filings. We refer you to the documents the company files and furnishes from time to time with the SEC, specifically the company's last annual report on Form 20-F as filed on March 28, 2025. We undertake no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date of such statement is made. I will now turn the call to Roy Zisapel. Roy Zisapel: Thank you, Yisca, and thank you all for joining us today. I'm pleased to share that we delivered another solid quarter with revenue of $75 million, representing 8% year-over-year growth. Non-GAAP earnings per share climbed 22% year-over-year to $0.28. The quarterly results demonstrate steady progress in delivering on our strategic priorities. We remain focused on expanding our business in cloud security, driving innovation through AI and automation and strengthening our global go-to-market capabilities. Let's talk a bit about each one of those. Cloud security remained a key growth driver in the third quarter delivering another exceptional performance. Cloud security ARR climbed to $89 million, up from $72 million in Q3 last year. Our cloud ARR growth trajectory accelerated once again from 21% last quarter to 24% year-over-year growth in Q3. We also saw continued double-digit growth in active cloud customers and a strong wave of new logo acquisitions, backed by a robust and expanding pipeline. This sustained momentum reflects our strength and competitive edge, the growing demand for our cloud security offerings and accelerated growth in North America. To meet this growing demand and our expanding customer base, we've continued to scale our global cloud infrastructure and resources. We're adding more R&D, delivery and sales personnel to support the growth. In the third quarter, we opened 2 additional cloud security centers and we plan to open 3 more in the fourth quarter, bringing the total number of centers opened in 2025 to 8. The growth in cloud security ARR was a key contributor to our overall subscription revenue growth, which grew 21% and rose to 52% of total revenue in the third quarter compared to 47% in the same period last year. This shift from a product appliance revenue stream to a subscription revenue model driven by cloud security growth enhances both revenue visibility and long-term business stability. One of the cloud deals we closed in the third quarter was a competitive displacement in the U.S. health care sector. The customer selected Radware Cloud DDoS Protection to replace their incumbent cloud-based solution. We secured this win through a combination of trusted relationship, Radware's best-of-grade DDoS technology and world-class support. As part of our broader cloud application security portfolio, Radware continues to drive innovation in API security. With APIs now central to modern application and application layer attacks surging, our AI-powered protection dynamically adapt to evolving threats, mapping business logic and defending against complex multi-endpoint attacks. Complementing this, our API analytics capabilities provide deep insights into API behavior, empowering teams to detect anomalies, understand business logic sequences and optimize performance with actionable intelligence. Following our success in cloud DDoS protection and cloud application security, we see API security as the third wave in our cloud security growth strategy and believe it is a significant potential for 2026. Radware's leadership in application security continues to be recognized. We were named a leader in the 2025 SPARK Matrix for web application firewall and bot management and an overall leader in the 2025 KuppingerCole Leadership Compass Report for web application and API protection. These honors reflect our commitment for delivering intelligent, scalable and multilayered security, including web application firewall, API protection, bot management and DDoS mitigation across modern cloud environments. Our go-to-market strategy continued to gain momentum this quarter. In North America, the team is now fully ramped, as reflected in a 28% year-over-year revenue growth in the Americas and 15% growth over the trailing 12 months. We recorded solid business with our OEM partners, making our second best quarter ever. This continued successful collaboration reflects the growing demand for our integrated solution and the strength of our joint value proposition. One example of this is a strategic win in EMEA through Cisco with a telecom provider. Seeking to transition from a legacy DDoS competitor, the customer required a more advanced and future-ready solution to support its expanding infrastructure and services. Our technical leadership and responsiveness to the customer's evolving needs helped to build trust and positioned Cisco and Radware as a long-term strategic partner. Another win with Cisco was with a large U.S. health care system. Facing increasing threats and limited internal resources, the organization sought comprehensive protection across web applications, API and bot traffic. After evaluating multiple vendors, they selected our solution for its broad coverage and operational efficiency and our ability to align with their evolving needs. Third quarter performance was also fueled by a strong DefensePro X refresh cycle, which grew approximately 40% year-over-year alongside successful competitive displacement in DDoS that doubled during the quarter. As previously noted, the DefensePro X refresh opportunity remains substantial with less than 50% of our end-of-sale installed base upgraded to date. During the quarter, we secured several 7-digit DefensePro X refresh deals, including a deal with one of the largest telecom companies in the U.S., a deal with a European financial service provider and with a leading European bank, among others. In closing, our third quarter performance highlights the steady progress we're making against our strategic plan. Cloud security continue to be our strong growth driver with robust ARR expansion and accelerating momentum. We're seeing the benefits of deeper collaboration across our partner and channel ecosystem, which is helping us scale efficiently and reach new customers. At the same time, our continued investment in AI-powered innovation is enhancing our platform and reinforcing our competitive edge. With a healthy cloud security business, a growing global partner base and increasing demand for our security solutions, we believe in our ability to sustain our momentum and capture long-term growth opportunities. With that, I will turn the call over to Guy. Guy Avidan: Thank you, Roy, and good day, everyone. I will provide an overview of our financial results and business performance for the third quarter as well as our outlook for the fourth quarter of 2025. Before beginning the financial overview, I would like to remind you that unless otherwise indicated, all financial results are non-GAAP. A full reconciliation of our results on a GAAP to non-GAAP basis is available in the earnings press release issued earlier today and in the Investors section of our website. In the third quarter, revenue grew 8% year-over-year to $75.3 million, fueled by sustained demand in our cloud security business. Our cloud ARR growth accelerated from 21% in Q2 2025 to 24% year-over-year, reaching $89 million, a clear validation to our strategy. This momentum reflects the growing demand for our cloud solution and underscore the strength of our transition to a recurring cloud-first business model. This recurring revenue base is a cornerstone of our long-term growth. Total ARR rose to $240 million, up 8% year-over-year, reflecting the momentum behind our revenue growth. Total ARR is serving as a strong indicator of our overall revenue trajectory. As our cloud security business continues to scale at a faster pace, we expect it to drive total ARR growth higher and, as a result, drive faster company revenue growth. Looking at regional performance. In Q3, the Americas lead the growth race with revenue rising 28% year-over-year to $35.4 million, representing 47% of our total revenue, up from 40% in the same period of last year. On a trailing 12-month basis, the region grew by 15%. EMEA revenue was $22.8 million, representing a 10% decrease in year-over-year and accounting for 30% of total revenue. Trailing 12 months growth was 7%. APAC posted modest growth with revenue up 3% year-over-year to $17.1 million, contributing 23% of total revenue. On a trailing 12-month basis, APAC grew by 8%. Turning to profitability. Gross margin remained strong at 82.2%, similar to that of Q3 2024, underscoring the efficiency of our operations. Operating income grew 34% year-over-year to $9.6 million, up from $7.2 million in Q3 2024, this growth achieved alongside continued investment in cloud initiatives, highlighting the scalability and resilience of our business model. We are executing our strategy of scaling our go-to-market and R&D capabilities. These investments are designed to capture rising demand and position Radware as the leader in cloud and AI-driven security. Adjusted EBITDA for the third quarter of 2025 increased by 25% to $11.4 million compared to $9.2 million in the same period last year. Excluding the Hawks business, adjusted EBITDA was $14.4 million representing a 19.1% EBITDA margin, up from $11.9 million, and a 17.2% EBITDA margin in Q3 2024, a testament to the operational leverage in our core business. Financial income for the quarter was $5.3 million, up from $4.9 million in the same period last year. Due to decrease in interest rates, we expect slightly lower financial income in the fourth quarter. Our effective tax rate for the quarter was 15.5%, the same as in Q3 2024. We expect the effective tax rate to remain approximately at the same level in the coming quarter. Net income rose 24% year-over-year to $12.6 million compared to $10.2 million in Q3 2024. And diluted earnings per share increased by 22% to $0.28, up from $0.23 in the same period last year. Turning to cash flow and balance sheet. Cash flow from operations in Q3 2025 was negative $4.2 million compared to positive $14.7 million in the same quarter of last year. The decline was primarily driven by an increase in accounts receivables due to timing of cash collections from several large deals and a decrease in deferred revenue. Looking ahead, we expect RPO at year-end to exceed the level at the end of 2024 and anticipate a return to positive cash flow from operations in Q4 2025. We ended the quarter with a strong balance sheet, holding approximately $465 million in cash, cash equivalents, bank deposits and marketable securities. And now for the guidance. We expect total revenue from the fourth quarter of 2025 to be in the range of $78 million to $79 million. We expect Q4 2025 non-GAAP operating expenses to be between $52.5 million to $53.5 million. We expect Q4 2025 non-GAAP diluted net earnings per share to be between $0.29 and $0.30. I'll now turn the call over to the operator for questions. Operator, please? Operator: [Operator Instructions] Our first questions come from the line of Chris Reimer with Barclays. Chris Reimer: Congratulations on the strong results. First off, I was wondering if you could talk about how you feel your operations are going now. You mentioned that North America fully ramped and the 2 centers opened, plus another 3. Going forward, do you think there will be any other areas that you want to reorganize? Or are you satisfied with the level you're at now? Roy Zisapel: Thanks, Chris. So I think given our progress in North America, we actually would like to ramp our investments further. We see the potential. I think we've discussed it last quarter that given the momentum in cloud and the opportunities we see, we are planning to continue to increase there. I think still we will see that with good output on the profitability. But we are definitely very optimistic about North America and about us actually investing more for growth. That's on the sales and go-to-market side. And with that, across the world, we are continuing to expand the cloud security platform, the R&D investments there. We really feel there's a big opportunity. Chris Reimer: Got it. Yes, that's helpful. And how would you describe your competitive position in the market now? Are you seeing any new players? What would you say is the most important thing the customer is saying when they make their decision? Roy Zisapel: Yes. So I think overall in the market, and we are competing in multiple areas, but in cloud security specifically, I think we are known for the strength of our security capabilities and specifically on the fact that we are very, very algorithmic based. A lot of our protections have a very strong algorithmic support and that makes us unique versus our competitors that, I would say, are more reliant on policies, rules, databases and so on. The second thing that we are very strong is in the fully managed service that we provide as part of our offering. And we are able to do that not because we deploy or we have such a big amount of people, but because of the algorithms and the automation. So we actually use the technology to create a very strong advantage in the fully managed solutions. So customers, large customers that have the need, and I think, the majority are, to have augmentation to their capabilities, 24/7 global expertise in application security or DDoS, this is a major advantage. And I think you see that in our growth and the accelerated growth. Operator: Our next questions come from the line of Joseph Gallo with Jefferies. Joseph Gallo: Can you just talk through the demand environment that you saw in the quarter? How did it compare to 2Q and what assumptions you're baking into your 4Q guide? Roy Zisapel: Okay. I think the demand across enterprise and carriers across the world was solid. I don't think it improved or degraded from previous quarters. We do see strong environment going into Q4. We're actually very encouraged with what we are seeing. As it relates to guidance, I think Guy mentioned it and I'll let him talk about it more, but we see the ARR -- the total ARR growth, we're seeing as our guiding indicator for future revenue growth. And having that at 8%, that's how we're guiding forward. Of course, we have additional appliance deals and CapEx deals that can take it higher. But overall, short-term guidance is based on our total ARR growth. Guy Avidan: Yes. So as Roy already mentioned, we have a pretty good visibility since currently around 82% of our business is based on recurring. So ARR is a very good indicator for guidance. But we also have now, after 1 month into the quarter, pretty good visibility about demand, which we feel pretty good. We posted 24% growth on cloud ARR and we're back to the levels we used to see, let's say, 2 years ago. And we always mentioned going to 25%, but we're not saying 25% is the ceiling. So we think this is the main growth engine for us and it will continue to grow. Joseph Gallo: That's helpful. And maybe just as a follow-up. So ARR growth was super impressive and that's definitely the North Star for revenue growth going forward. But just on the billings side and the free cash flow weakness. You mentioned RPO will rebound. Will billings follow that same trajectory? And was there anything unusual to call out in 3Q relating to the timing of billings? Guy Avidan: First, yes, we expect billing and cash collection to be stronger this quarter and we mentioned it's going to be positive cash from operations. We also alluded to the fact that we expect the backlog represented by RPO to be higher than the numbers we mentioned in December last year. We're mentioning the 8% because of ARR. We're looking at, let's say, high single-digit year-over-year RPO growth. So all the KPIs or, let's say, the negative cash from operation or the decrease in cash balances this quarter, we're planning to be positive in Q4. Operator: Our next questions come from the line of Ryan Koontz with Needham & Company. John Jeffrey Hopson: This is Jeff Hopson on for Ryan Koontz from Needham. Congrats on the strong performance in North America. Kind of talking about the competitive landscape like you were earlier, some of your large competitors have been focused on other things besides security like cloud computing, So I was just curious if this kind of presents an opportunity for you to gain more customers who may be focused on just security and not some of these other offerings that they have. Roy Zisapel: Yes. I think it's a great question and that's exactly what we are talking with customers. Actually, while some of our larger competitors are, I would say, broadening their offering and, by that, not necessarily staying as focused on application, API, data center security, we're actually double downing there. And the reason is we see more complicated attacks, more AI-based attacks, more challenges. And it's an extremely critical area for our customers. So we continue to broaden the algorithmic moat that we're building. We continue to broaden the competitive advantages there. And therefore, we feel very good about the competitive positioning and the long-term strategy that we have. So we see a huge amount of opportunities. The market is the TAM and the SAM is huge for us versus our current revenues. And therefore, we continue to focus there, double down on security. I've mentioned API now as the third wave of growth. That's where we are investing. John Jeffrey Hopson: And maybe just a follow up on the AI piece. You've been adding capabilities to SOC X. You announced the vulnerability you guys found in ChatGPT. Just kind of curious where we are with AI. And is it still just driving conversations? Or is it getting to that point of driving production and your AI offering, SOC X, could start to meaningfully contribute? Roy Zisapel: Yes. So I think we're using AI today on the general availability capabilities, mainly to improve the security we provide to our customers. So like you mentioned, SOC X is our agentic AI on the platform that automatically detects and mitigates for our customers' attacks by detecting early and providing recommendations or automatic modification to the security posture. In that sense, our customers are enjoying faster time to resolution. They are able also in a conversational way talk to our platform and understand exactly what's happening and what the recommendations are. So to summarize, we're using a lot of AI and Gen AI in the platform to improve the security we provide to the customer. I do believe there might be also good opportunities in protecting the AI systems of our customers. To that end, you mentioned that we uncovered a major vulnerability in OpenAI agents, and we're working on these problems. And I'm sure we will update you in the coming quarters on our progress there as well. Operator: Thank you. We have reached the end of our question-and-answer session. I would now like to hand the call back over to Roy Zisapel for any closing comments. Roy Zisapel: Thank you, everyone, and have a great day. Operator: Thank you, ladies and gentlemen. This does now conclude today's conference call. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
Operator: Good morning, and welcome to Dana Incorporated's Third Quarter 2025 Financial Webcast and Conference Call. My name is Regina, and I will be your conference facilitator. Please be advised that our meeting today, both the speakers' remarks and Q&A session will be recorded for replay purposes. For those participants who would like to access the call from the webcast, please reference the URL on our website and sign in as a guest. There will be a question-and-answer period after the speakers' remarks, and we will take questions from the telephone only. [Operator Instructions]. At this time, I'd like to begin the presentation by turning the call over to Dana's Senior Director of Investor Relations and Corporate Communications, Craig Barber. Please go ahead, Mr. Barber. Craig Barber: Thank you, Regina, and good morning, and welcome to Dana Incorporated's Earnings Call for the Third Quarter of 2025. Today's presentation includes forward-looking statements about our expectations for Dana's future performance. Actual results could differ from what we present here today. For more details about the factors that may affect future results, please refer to our safe harbor statement found in our public filings and our reports [indiscernible]. I encourage you to visit our investor website, where you'll find this morning's press release and presentation. As stated, today's call is being recorded and the supporting materials are the property of Dana Incorporated. They may not be recorded, copied or rebroadcast without our written consent. With me this morning is Bruce McDonald, Dana's Chairman and Executive Officer; and Timothy Kraus, Senior Vice President and Chief Financial Officer. Bruce, call is yours. R. McDonald: Thank you, Craig, and good morning, everyone, and thanks for joining Craig, Tim and I for a discussion here on Dana's Q3 earnings. Maybe just before I get into my slide here, just stepping back and talking about kind of the puts and takes in terms of the third quarter. I guess, here's what I sort of see as the highlights. First of all, I think you'll see improving business performance, and that's something that we expect to see accelerate as we get into our fourth quarter. And the driver for that would really be a few restructuring initiatives that have been completed or substantially complete and will start to turn from sort of headwinds that are in our numbers right now with tailwinds for us going forward. Secondly, on the volume side, even though we're down year-over-year, the comps are getting better. They're negative, but they're getting better and that drives improved financial performance. On the tariff side, less of a headwind. You'll see we have minimal impact here in Q3. Our full year charge in terms of tariffs is lower than we thought a quarter ago. And then cost savings, we're on track to deliver the $310 million we talked about last quarter, but we are realizing those quicker, and that's helping us with some of the uplift to our outlook here. In terms of negatives, I'd say we have some volume softness, particularly in CV North America and to a lesser extent in Brazil. We did have JLR down for about 5 weeks in the quarter. So those were headwinds against us. And then the last thing I'd sort of point out is we do have -- there has been some supplier or some EV program cancellations and we have some charges in the quarter that we took associated with that, that we expect will recover here in the fourth quarter. So just turning to the highlights in terms of the Off-Highway divestiture, that remains on track. We do expect to close here later in the fourth quarter. In terms of regulatory approvals, we've received almost all of them. We have 1 minor European country that we expect to wrap up here in the next week or so. I'd say the joint teams between ourselves and Allison are working hard to sort of all the plethora of work streams that we have in place to affect an orderly transition here in the quarter. In terms of our capital returns, you'll see in our note, we talked about buying between $100 million and $150 million of shares in the third quarter. We actually bought more than that $9.5 million or 7% of our shares outstanding. We have had a 10b5 plan in place throughout the quarter. And as we sit here today, we've bought nearly 30 million shares or just over 20% of our shares outstanding and we expect to complete the balance of the share repurchase here over the next month or so. As I said in my earlier remarks on cost savings side, really good number here in the quarter. We're almost up to our full year run rate of $73 million. We continue to look for other opportunities. I guess, really pleased with the progress our team has made on bringing these homes. Tariffs, the situation, I guess, is getting a little bit better. We continue to make progress getting USMCA compliance which reduces the sort of headwind both from an on-charge point of view, but also the margin deterioration that we see. And our outlook, our recovery rate is now up in the upper 80%. Then lastly, in terms of the balance of the year outlook, I'd say the light demand -- the light-truck demand remains relatively stable. We do have the odd production interruption here and there. But overall, Light Vehicle is looking good for the quarter. In terms of Commercial Vehicle, we continue to see deterioration in North America and to a lesser extent, Brazil. Nonetheless, the fact that we've got a better outlook in terms of tariffs, quicker realization of cost recovery, we are taking our full year guide up $15 million at the midpoint. I would note that within our guidance, we do have some volume catch-up factored in here JLR. We factored in the lower Commercial Vehicle outlook here in North America in line with like estimates out there. And then we've factored in the latest Super Duty schedule releases that we have as of this week. So with that, a good solid quarter. And Tim, I'll turn it over to you to go through the financials. Timothy Kraus: Thanks, Bruce, and good morning to everyone. Turning to Slide 6 now. Let's review our third quarter financial performance. First, a reminder, results are presented excluding the Off-Highway business, which is classified as discontinued operations. Sales for the quarter were $1.917 billion, up $20 million compared to Q3 of last year. This reflects recoveries in currency benefits offsetting the impact of lower demand. Adjusted EBITDA came in at $162 million, an improvement of $51 million year-over-year. Our margin expanded by 260 basis points to 8.5%, driven by cost-saving actions and operational efficiencies that help mitigate the profit impact of lower sales and tariffs. EBIT improved significantly to $53 million from a loss of $8 million in the prior period. Net interest expense increased $11 million to $44 million due to higher borrowings and modestly higher rates. Income tax was a benefit of $2 million. While this is down $16 million from last year, we continue to benefit from positive adjustments to the carrying value of our deferred tax assets. Net income attributable to Dana was $13 million compared with a loss of $21 million in Q3 of last year, a positive swing of $34 million. Overall, these results demonstrated an effect -- the effectiveness of our cost savings initiatives, operational improvements in offsetting market headwinds. Please turn with me now to Slide 7 for the drivers of the sales and profit change for the quarter. In line with the new reporting method, we have revised our walk presentation to include the impact of discontinued operations in the current -- for the current and prior periods. The $579 million in sales and $121 million of profit removed from 2024, represents the Off-Highway business being sold and the accounting treatment for discontinued operations. Beginning with sales this year's third quarter volume and mix were $66 million lower, driven by lower demand in Commercial Vehicle end markets, partially offset by higher sales in Light Vehicle. Production disruptions at certain customers had minimal impact on Light Vehicle System sales in the quarter. Performance drove sales higher by $8 million due to pricing actions, while tariff recoveries totaled $49 million. Currency translation, primarily the strength of the euro against the U.S. dollar, yielded $21 million in higher sales compared to last year. Moving to adjusted EBITDA. Volume mix lowered EBITDA by $35 million. This was a decremental margin of about 50%, higher than we typically expect, reflecting significant mix changes and continued operational impacts within our thermal products business, including battery cooling. But recall, we are breaking out performance, which includes efficiency gains in manufacturing separately. Performance increased profit by $11 million due to pricing and efficiency improvements across both segments. Cost savings added $73 million in profit through the actions we have taken across the company. This brings us to $183 million to date, and we are securing our increased target of $235 million in savings for the full year 2025. Tariff impact in the quarter was minimal at just $1 million. Due to the catch-up in tariff recoveries, we expect to see continuing profit headwind in the future, but we do expect recovery of majority of this impact this year. Next, I will turn to Slide 8 for details on our third quarter cash flow. As I discussed on Slide 6, the accounting for cash flow includes both continued and discontinued operations as shown here on [ Slide 9 ]. For the third quarter of 2025, we delivered adjusted free cash flow of $101 million which represents a $109 million improvement compared to the prior year. This strong performance was driven primarily by higher profitability and lower working capital requirements. Onetime costs primarily related to our cost savings program were $17 million, which is $8 million higher than the prior period. Net interest increased by $11 million, primarily due to higher borrowing costs associated with the capital return initiatives. Taxes were lower at $47 million compared to $72 million last year, driven by the timing of payments. Working capital improved significantly by $76 million, reflecting better management -- inventory management and timing of receivables and payables. Capital spending was $59 million, up $16 million year-over-year as we continue to invest in new programs to support our backlog. Overall, these factors combined to deliver a substantial improvement in free cash flow, positioning us well to achieve our full year target. Please turn with me now to Slide 9 for an updated guidance continuing operations. For all our targets, we have narrowed our ranges as we approach the end of the year as we remain confident in achieving our targets. We expect sales from continuing operations to be approximately $7.4 billion at the midpoint of the tightened range. Adjusted EBITDA from continuing operations is now expected to be about $590 million at the midpoint of the narrower range. This is approximately $15 million higher than previously anticipated, driven primarily by accelerated cost savings and performance improvements. Full year adjusted free cash flow is anticipated at $275 million at the midpoint of the tighter range for the year. The profit improvement in continuing operations is expected to be offset by lower profit from discontinued operations. Please turn with me now to Slide 10 for the drivers in sales and profit change for our full year guidance. As with the quarterly walk, we showed earlier, our full year guidance walk adjusts 2024 for estimated discontinued operations and walks forward our guidance for continuing operations. Beginning on the left, discontinued operations reduced 2024 sales by $2.5 billion, so we begin 2025 at $7.7 billion in sales for continuing operations. Adjusted EBITDA from discontinued operations was $490 million reducing adjusted EBITDA to $395 million, resulting in a 5.1% margin. In this presentation, we have combined the impact of sales from continuing ops in our Off-Highway business into the volume and mix category. We are expecting volume and mix to lower sales by approximately $600 million, driven by lower demand in traditional Commercial Vehicle markets as well as for electric Light Vehicles impacting our battery cooling business. Adjusted EBITDA from volume and mix is expected to be lower by $130 million. Performance is now expected to increase EBITDA by approximately $110 million, mostly through pricing improvements. Cost savings will add $235 million in profit, as I mentioned previously. The tariff impact for the full year is expected to add about $150 million to sales, and we now expect it to lower profit by about $20 million. The majority of this profit headwind will be recovered next year. Foreign currency translation is now expected to increase sales by $25 million, primarily driven by the strengthening euro compared to the U.S. dollar, offsetting some of these sales impacts of lower volume. Finally, commodity cost recovery should drive about $15 million in higher sales and now only about a $5 million headwind to profit. The net result will be about 290 basis point margin improvement in continuing operations compared to last year as performance and cost saving actions overcome market headwinds. Next, I will turn to Slide 11 for the details of our free cash flow guidance. As I mentioned, we anticipate full year 2025 adjusted free cash flow to be about $275 million at the midpoint of the guidance range. We expect about $105 million of higher free cash flow from increased adjusted EBITDA. Onetime costs will be about $30 million higher as we invest in our cost saving programs and restructuring. Working capital will be about $105 million lower as we continue to reduce the requirements to operate the business. And capital spending net is expected to be about $325 million this year, which is $45 million lower than last year. And finally, I will turn back over to Bruce for some closing comments on Slide 12. R. McDonald: Okay. Thanks, Tim. So this slide is really the same as we talked about last quarter, which kind of reflects the fact that I think the business is performing well, and we're delivering on our commitment. So cost savings for the year or so the run rate that we're targeting, the $310 million, we're solidly on track. And as we've discussed here earlier, we're realizing more of that benefit here in 2026 -- sorry, 2025. In terms of our margin outlook, we've been consistent for a year now that we were going to have 10% to 10.5% [Audio Gap] margins for 2026. And it's really nice to be giving guidance here for the fourth quarter that's in top or in that range or even slightly on top of. I'd say, overall, our team is doing a great job over delivering on the things that we can control, and it's helping us offset the things that we cannot control. In terms of our return of capital to shareholders, we're committed to the $600 million this year. And then lastly, I would say, in terms of our growth story, I think it's underappreciated by the market. We have had some deteroriation or backlog due to easy program cancellations, deferrals or lower volumes. But nonetheless, our team has done a nice job this year gaining share, winning incremental programs. And so we plan on having an analyst call here in January and going through our revised backlog. We continue to win new business. And I hope to add to our backlog between now and January. With that, we'll turn it over for Q&A. Operator: [Operator Instructions] Our first question comes from the line of Tom Narayan with RBC Capital Markets. Gautam Narayan: Yes. My first one, it's kind of an OEM question, but it relates to you guys to -- the big story from this earnings season was the big policy change, the MSRP exemption or extension that included broadening the scope of parts. And you saw that 2 large OE -- U.S. OEMs, huge impacts on their tariff guidance and presumably their volume outlook. Conversely, earlier this morning, a large European OEM reported results. It had no positive impact from that. So I was just wondering if you were seeing some dynamic here where the U.S. OEMs, which you guys have more exposure to, maybe benefiting more from tariff policy changes than perhaps others, European or maybe even the Japanese and the Korean -- and I have a quick follow-up. R. McDonald: Yes. Yes. No, I think you're absolutely right. I mean the rebate is based on vehicles assembled in the U.S. and obviously, the big -- the Detroit 3 make more in the U.S. than the European or the other transplants. So I think to me, the most important thing in the recent announcement in that regard is, I think there's always been some concern around are customers going to have to pass along the higher prices that in the short-term, they are eating in their margins to the end customer. And to the extent that were to happen, then obviously, vehicle demand is going to drop. And so I think that risk has substantially diminished with the new guidelines that have come out. That's kind of the way I look at it. Gautam Narayan: Okay. And then my quick follow-up, the Commercial Vehicle side, it sounds like from your prepared commentary that, that situation is deteriorating. Just curious if you could give us the context of like how typically that cycle works? And are you seeing any kind of light at the end of the tunnel? R. McDonald: No. We're not seeing any light at the end of the tunnel. I would say -- I mean, if you look at kind of the run rate here -- I'll talk about North America specifically in the third quarter, we're running around a 200,000 unit annualized run rate. I know from talking to our customers that the backlogs that they all have, have really been run down. I think there's a lot of uncertainty in the marketplace. There's -- we would have expected maybe to start to see some signs of pre-buy in 2026 associated with some emissions legislation changes, and we're not seeing any of that. So I think it's going to be a fairly soft market here certainly for as long as we can see into mid-2026. And at this point in time, I don't see any green shoots that would suggest it's going to turn around. I also don't think we're going to have a heck of a lot of deterioration from here either. I mean, we're at pretty historically depressed levels. Operator: Our next question comes from the line of Emmanuel Rosner with Wolfe Research. Emmanuel Rosner: My first question is on the implied outlook for the fourth quarter, which, as you pointed is, is pretty strong and with margins already basically above -- slightly above the high end of your margin outlook for next year. Just curious if you can help us out in terms of sequential drivers. So it's like it will be a 200 basis point margin improvement versus Q3 on what is essentially lower revenue at the midpoint. You flagged a few exogenous events such as some of the forward schedules and the impact potentially from the fire. So just curious how to think about the performance quarter-over-quarter into the fourth. Timothy Kraus: Yes. Emmanuel, this is Tim. So a couple of things. Obviously, we've got a continued improvement coming through from our cost savings initiative. We do see mix improving in the quarter. And then I think the other big driver and Bruce mentioned this in a couple -- in his opening comments, we are at the tail end of some restructuring actions that we believe -- well, which have some headwinds certainly through the third quarter that we think will also drive additional performance and better profitability into the fourth quarter, and that provides us a great springboard into 2026 as we get some of these actions behind us. And we did announce the closure of a battery cooling plant earlier in the quarter. So -- this is part of what we're seeing, and we're continuing to work to improve the cost base of the business across the board. So you'll see those come through in the fourth quarter as well as next year. Emmanuel Rosner: That's helpful. And then just honing in on the top line and the mix dynamics. So -- could you give us a little bit more color around what mix you're referring to in terms of improving in the fourth quarter? And also maybe sort of like any color around what's assumed for some of these potential indirect impact on your customers from the Novelis fire because IHS has one view around fourth schedule and then Ford obviously give their own guidance, which had a fairly massive amount of volume production of a loss. So just curious what's embedded in your -- the schedules that you have received. Timothy Kraus: Yes. So obviously, I don't want to get ahead of our customer, but we're fairly in line with what our customer has said publicly around those, how they ultimately run, we'll see. But certainly, from our perspective, we're fairly in line with where we see Ford's public statement. In terms of mix, some of this is really the mix of products as we're moving from plant to plant. So that's -- we do have a bit better mix on some of the products where we have better contribution margin quarter-to-quarter. But a lot of it is really getting some of the restructuring and the movement of some of the product around in the plant as we rationalize our production footprint. R. McDonald: Yes. Maybe just one other comment on that one, kind of going the other way is if you look at our third quarter, we were -- we are pretty constrained in terms of magnets. We have facilities in China, India and Europe, where we had difficulties getting magnets. And that log jam [ knock wood ] seems to broken free here. So we do -- we do expect to have some substantial catch-up in terms of frustrated orders, which are, for us, very high margin. Timothy Kraus: Correct. Operator: Our next question will come from the line of Edison Yu with Deutsche Bank. Yan Dong: This is Winnie Dong on for Edison. My first question is on the $110 million performance. I think in your prepared remarks, you mentioned that it's mostly driven by pricing improvement. I'm just curious, is there sort of like bigger programs that are all going on at better pricing? And then what are some of the other drivers that might be embedded in this number? Timothy Kraus: Yes. So some of it is as we move through and bring new platforms and new programs in place that comes with revised pricing. So that's running through there. And then the teams -- the commercial teams have done a really nice job with the customers to go get recoveries both from an economic and for improvement. So a lot of that is real pure pricing that we see. And you see that falling through. I don't have the number in front of me, but I think there's about $80 million of top line that's flowing through, and that's what you're seeing in that $110 million. The balance of that is really productivity and performance improvement at the plant level, net of all of the inflationary impacts that flow through the business. Yan Dong: Got it. That's very helpful. And then maybe on both Light Vehicle and Commercial. You can maybe just provide some higher-level preliminary puts and takes that you're seeing or considering into 2026? Timothy Kraus: Yes. So I think Bruce mentioned we don't -- we're probably not seeing a lot, at least through the first half on the Commercial Vehicle side, especially in North America, that there'd be a whole lot of improvement. As we look through on the Light Vehicle side, we have a number of programs that are launching next year. That should be -- should help volume. But our core Light Vehicle program, especially on the driveline side, right, Super Duty, Bronco, Wrangler, Ranger, those are all still very strong runners, and we would continue to see those well into next year to continue to drive the volume side of this and Wrangler is going to come out and have some refreshments. So that should help as well. R. McDonald: Yes. And maybe just a couple of other color commentary on that. I mean, obviously, with oil prices being quite soft, that's a nice tailwind in terms of large SUV. Some of the short-term deterioration that we're seeing in Super Duty, Ford has already talked about uplifting their volume next year in the middle, I think it's August of next year, they're introducing incremental Super Duty production at their Oakville facility. So I would say the tailwinds in terms of ICE, large SUV our product exposure bodes well for us as we drift into 2026 year. Yan Dong: Got it. I'm just a little surprised to the question, I know I didn't mind before that you're just not seeing a lot of impact in Q4 itself from one of your larger customers. Is it just because like the original guidance was conservative and therefore, even if you're taking in some of the impact, you're still retaining a lot of it? Or are they not really flowing through that impact to you guys? Timothy Kraus: Yes, it's a bit of both, right? Winnie, it's a bit of both. So we had some of this in our forecast that we had back in August. So -- and then some of it's -- the view from the customers are going to make up some of this as we move through the back part of the quarter. R. McDonald: And I mean keep in mind, we're -- our exposure is Super Duty, not F-150. So when they -- when you're hearing the volumes, you're hearing kind of both. And I think just given the profitability of the Super Duty, they're kind of over-rotating to try and keep that running as strong as they can. Operator: Our next question will come from the line of James Picariello with BNP Paribas. James Picariello: Good morning, everyone. Just as we think about next year, are we at a point at all to quantify the next [ slot ] of cost savings beyond the $310 million program with respect to plant closures, which you touched on in your prepared remarks and just overall, I guess, stronger execution. R. McDonald: Yes. Thanks for that question. It's a good one. But yes, I would say, in terms of the opportunity we have to expand our margins, we still have a long way to go. If you think about the $310 million, it's heavily focused on things that we could implement quickly without investment. And so if I just look at that bucket of costs through standardization and some systems work, we would still say we probably have another $50 million, $75 million that we can get over the next few years. If I look at the cost base outside of where we've been focusing on in terms of our plants, for sure, we've got some footprint opportunities, and we announced 1 earlier this month. I would say just given the amount of investment that we've had to make in electric vehicle over the last few years, we've made those investments, you could think about at the expense of our core operations. And so if you looked at the level of automation that we have in our plants, it is well below what you would see at other well-capitalized suppliers. I think we've got other opportunities in terms of product line rationalization. We still have a lot of products where we make inadequate or negative returns, and we're working our way through that. And then I would say lastly would be on the EV side. We do expect to continue to refine our cost base there and get that business from being a drag on our margins to being accretive. And I expect that to sort of flip around here in the next 6 to 12 months. So there is still an awful lot of levers that we can pull. I don't see 10% or 10.5% as being our high watermark. I believe we've got opportunity to continue to grow it fairly significantly over the next couple of years. James Picariello: Got it. That's really helpful. And my follow-on, maybe on the topic of plant automation. How are you thinking about the right run rate for CapEx as a percentage of sales next year? And then could you just remind us what's assumed or expected for the stranded costs capture for next year as well? Timothy Kraus: Yes, James, so about sort of think of CapEx in about the 4% of sales range. So that's probably where we'll end up plus or minus. In terms of stranded costs, it's -- it's probably $30 million to $40 million. We do expect to be able to start taking a good chunk of those costs out as once we close the -- we close the transaction and move into 2026. Now some of those costs will remain because we'll have some transitional services that will need to be provided, but they'll be offset with payments from Allison for that. But again, $30 million to $40 million, and we believe we'll be able to take all those out really as we get through and we exit 2026. R. McDonald: You'll see next year a fairly big -- within that number that Tim talked about a fairly big step-up in terms of automation expenditure next year. And I don't want anybody being misled you. Like we're not talking about humanoid robots and stuff like that. We're talking about basic automation, unloading and loading machines, AGVs moving material in our factories, we're way behind the automotive standard. And I view that as a huge opportunity for us. Operator: Our next question will come from the line of Joe Spak with UBS. Joseph Spak: I just wanted to maybe follow up on that last point. So -- it sounds like there's a big bucket of opportunity here, but it will require some investments. I just want to be clear, should we expect some of that investment to start next year? And then maybe savings and just say how quickly can savings come in after that investment? R. McDonald: Yes, we will -- I mean if you think about it, we've been spending pretty significantly on EV over the last few years. We'll -- the easy way to think about this is we plan to take some of those dollars and re-deploy them. As Bruce mentioned, we were investing in EV to some extent at the expense of some of the stuff in our normal old-school ICE plants, and we'll spend that capital to find areas. And by the way, it's a target-rich environment in terms of being able to improve the efficiency on the plant floor. I mean -- we do this every day, but this will be a bit more deliberate and accelerated as we go through and those dollars are freed up. Don't forget that as we come through the transaction, we'll free up a lot of cash flow -- operating cash flow from lower interest expense and lower taxes, and we intend to make sure that we're investing in the right places at the right returns for the business to drive shareholder value. Timothy Kraus: Yes. With that level of CapEx, we're still maintaining our 4% free cash flow guide. Joseph Spak: Right. But some of it is redeployment and some of it's incremental is the right way to... Timothy Kraus: Yes. Yes, correct. That's correct. I mean, we're below that, obviously, today, but our view is that will have more -- given the improvement at the operating margin level, we're going to redeploy some of those dollars that we're delivering from increased profitability back into the business to kind of generate the snowball effect and continue to drive those margins higher over the next 2, 3 years. R. McDonald: Yes, this is fairly short payback stuff. Joseph Spak: I guess the second question, I just want to make sure I heard correctly, Bruce, I think in your opening comments, you talked about some EV charges in the quarter, I think that related to sort of -- I don't know if that was sort of some of the plant actions you took. But then you sort of alluded to a recovery maybe from lower EV volumes in the fourth quarter. I guess, a, were those -- are those charges in the third quarter results? And then is the recovery in the guidance? And how much are we talking about here? Timothy Kraus: Yes. So we did take -- I mean, let's say, charges. We did have to book some additional costs related to some of the EV programs that were canceled during the quarter. It's a number of different OEMs. The total number is, you can call it, $10-ish million maybe plus or minus. It's not a massive number. But again, we are in active discussions with the customer over recovery of these amounts, and we expect to get those in the fourth quarter. R. McDonald: Yes, they just didn't match. Timothy Kraus: It just didn't match up. The accounting rules are a little different between what we got to book in terms of cost and what we have to book in terms of the recoveries and since they're noncontractual on the recoveries. But I don't want to get into specifics of programs or customers because obviously, we're actively engaged with those discussions with the customer today. Joseph Spak: No, that's totally fine. R. McDonald: $8 million or $10 million in Q3 that we anticipate recovering in Q4. Timothy Kraus: Correct. Joseph Spak: I guess what I wanted to make sure was that, that was actually in the results. You're not excluding that to... Timothy Kraus: It's included in the adjusted EBITDA number, Joe. Operator: Our next question will come from the line of Ryan Brinkman with JPMorgan. Ryan Brinkman: And I know we just had the discussion about what's next in terms of the additional opportunity to improve margin and cash flow beyond even the 10% to 10.5% and 4% of sales that you target, respectively, you continue to target for 2026. I don't think that's a premature discussion to have. I plan to ask that question myself. If you really are at 10% to 10.5% exit run rate at the end of the fourth quarter. But maybe just taking a step back, I mean, it's worth pointing out, I think consensus is at like 9.4% for next year for EBITDA margin. So maybe just review a little bit to your confidence in next year and the lack of incremental execution, I think, that may be needed to get there in on the free cash flow number too, are there like additional levers that you need to pull or you feel like you're pretty much going to be on track for that so long as the end markets are there by the end of this quarter? Timothy Kraus: So just -- so making your assumption on end markets as the premise. Bruce and I and the entire team are supremely confident in our ability to deliver what we've said for next year. In the fourth quarter, we think, is a good indication of that. Do I think there's opportunities above that. Absolutely, I do. We -- there's a lot of things can go right and a lot of things can go wrong over the course of a year. But yes, we think there are additional opportunities both in terms of margin and cash flow even in 2026. Right now, we're focused on closing out 2025, delivering the $310 million and really setting the company and the team up for delivering on next year. So like when you say the consensus is below that, Bruce and I share a bit of frustration. I mean we've been saying this here for the better part of the year, and we're really -- we're thinking that what we're going to deliver in fourth quarter will help cement the fact that we're going to deliver that 10% to 10.5% next year with potentially some upside. R. McDonald: Yes. I'd say, Ryan, in terms of -- here's how I look at it. We -- a year ago, we said we're going to be 10% to 10.5%. And our consensus has slowly moved up. The reason why we bought back our stock so aggressively is because we're highly confident in our number. And if you use our number, our stock price is significantly undervalued. And so it's almost like we're buying two and getting one free. Timothy Kraus: So on sale. Stock is on sale right now. Ryan Brinkman: And congrats on the execution so far. Maybe just to finish on the end market point. I feel you have been -- well, others have been quicker to point out the headwinds that they were experiencing in the commercial vehicle market, both in North America and in Brazil. And I just wonder if you're situated a little bit differently relative to some of the competition. I don't know if it's a Class 5 through 7 relative to 8 or I'm not sure, but you are seeing the softening now. I mean others are saying the floor has fallen out on the new vehicle builds in North America. So just curious if maybe you've got a little bit different exposure, a little bit more on the aftermarket? I'm not sure. Timothy Kraus: Yes. So obviously, we have exposure to aftermarket, but I would assume most of the other players do as well. Look, vehicle fleets are aging. They're still up there. We do think that the run rate we're at now is still pretty low. Now we had some of this built in. So all others are calling it. I mean we were building a bit more conservative into the CV vehicle build when we came out 3 months ago. So that's part of the reason why we're not probably as calling it out as much now, and we're holding to the $7.4 billion. But I think as we move into next year, the first half is not going to be -- we're not going to see gains, but we don't see it going a whole lot lower than we are now. I just don't think even with the backdrop that the age of the fleet, they'll have to do some work to replace it. R. McDonald: Yes. I would maybe just adding to that one on the CV side, our business has gained share. If you look at kind of our share of wallet at our customers, we're -- we've done a lot of -- the team prior to when I got here, had done a lot of good work on re-footprinting that business. And I think we have a cost advantage model right now, and we are picking up share at our -- at the Big 3 customers that we have exposure to here in North America, which is helping to offset some of the market deterioration. Timothy Kraus: Yes, that's a really good point, right? Our share at some of these has increased significantly over the past 12 months, and we expect that to hold and continue to increase. Operator: Our next question will come from the line of Dan Levy with Barclays. Unknown Analyst: Josh on for Dan today. First one. Just kind of trying to wonder how we should bridge the 4Q margin into 2026. I understand on the slides, it kind of shows the main drivers of increased margin. We're trying to figure out if there's anything weird in 4Q that wouldn't, I guess, imply like a larger step-up in margin in next year? Timothy Kraus: No. I mean these are really -- if you look at Page 12, right, those basis points are off of our total 2025 full year continuing ops basis financials. So they're not off of the fourth quarter. But obviously, when you look at the fourth quarter, it's highly indicative of what we -- why we believe the full year overall run rate bridges into that 10% to 10.5% next year. Unknown Analyst: Okay. So I guess we should assume that -- I mean, I guess a decent portion of those main drivers are included already within the 4Q margin? Timothy Kraus: Yes. Think about the cost saving. It's 100 basis points. We -- I mean our fourth quarter, when you look at the full run rate out of 2025, right, we're going to deliver $235 million. We had $10 million last year. That's already in $245 million off of sort of where we were at in 2024. So like that incremental $65 million of -- or $75 million of cost savings runs through next year, and we'll have a full run rate of $310 million. So that's 100 basis points-ish right there. And then stranded costs, right? We just talked about that. That adds some incremental margin in the business because right now, when you look at our continuing ops, it's burdened with the stranded costs that we expect to take out. So to say it modestly, I think from our perspective, moving from where we're at on a full average basis this year to 10% to 10.5% next year, we do not see -- assuming the markets hold up, that we're going to have any trouble getting to 10% to 10.5% next year. And again, our fourth quarter run rate supports that in a very strong manner. Unknown Analyst: Another follow-up. I know you mentioned some of your key platform volumes are holding in next year. I know some of your customers have mentioned that just given the regulatory environment, some of the platforms can go to, I guess, with your mix off-road performance trends. I was just wondering if you would have like -- I'm going to see a significant benefit from some of those [ power chain ] changes? Timothy Kraus: Yes. I mean, obviously, better mix. I mean, we're one of the original creators of the 4-wheel drive vehicle where we created the Wrangler or the Jeep for the government for World War II. So yes, richer mix, larger axles. So if you think of Wrangler, right, if that mix moves further to Rubicon, that's much better for us. We have more content on it. The same would be true for Bronco. And Bruce already mentioned Super Duty with Ford's plans to expand that capacity and build more trucks for us, that's a great program to have content on. And that content, if it gets richer, is better for us as it is for the OEM. Operator: Our final question will come from the line of Colin Langan with Wells Fargo. Colin Langan: Great. I just want to follow up on the sequential margin increase of $220 million on lower sales. I mean, just to make sure I'm capturing all the factors, you have the incremental cost savings from Q3 to Q4. I think you mentioned like $20 million of EV headwinds and those will get recovered. So it's like -- sorry, $10 million of headwinds that will get recovered. So $20 million maybe swing quarter-over-quarter. And then I think mix. Are those the big factors? And then a little surprised by the -- I thought you said in the last quarter, you had taken most of the actions. So I'm a little surprised there's even more coming sequentially in Q3 and Q4. Timothy Kraus: When you say -- Colin, this is Tim. And when you say actions, what are you talking about for actions? You talked about the cost saving actions? Colin Langan: Yes, I thought that was the comment you made last... Timothy Kraus: Yes. No, I mean -- but I mean, we had a -- we still have additional actions coming through the third and into the fourth. Now I think the incremental or sequential savings will be lower in the fourth quarter. It's implied when you look at our $235 million. So they're obviously slowing down. But right, we're on track to have a run rate exit at 310 coming out. But we do have -- we do have those actions. There's also additional performance actions at the plant level that will come through in the fourth quarter. I mentioned, hey, we're in the middle of rationalizing some product, and that's been a headwind for us in our performance and in the volume and mix through the first 3 quarters of the year, we do see that improving as well. So that's -- all of that combined continues to drive that margin from quarter-to-quarter up. Colin Langan: Okay. Got it. And then I think in the past, you've mentioned that the backlog of $300 million for next year is still pretty much intact. Has that changed much with some of the EV cancellations that you just mentioned on the call. And in the past, it was like 70% EV or something. What are some of the ICE launches that are going to help as we think about next year? . Timothy Kraus: Yes. So I don't want to get into the specifics, but our backlog has been impacted by program delays and cancellations. I think what we want to do is we'll take you through a pretty fulsome review of backlog and how it looks and how it shakes out in January, probably mid-January so that you get a really full view. We're right in the middle of finalizing our plans for New Dana. And we want an opportunity to really have a -- give you the full information and be able to answer your questions then. So I think that's it. But we do see increases in ICE, no question about it from a backlog perspective. R. McDonald: There's EV in there, but the proportion will be more ICE. Timothy Kraus: Yes. Colin Langan: Okay. But nothing -- has anything changed since the last quarter with the comments on... Timothy Kraus: Yes, sure. I mean, obviously, we've had cancellations in EV. I mean like we talked about the [indiscernible]. Absolutely, that's impacting -- that will impact some of the backlog that we have out there. R. McDonald: And delays. Timothy Kraus: Yes. R. McDonald: Okay. Maybe with that, we'll sort of get into some closing comments here. So first of all, and it goes without saying, thanks to the Dana team for continuing to deliver on our commitments, like I said earlier in my comments, despite external headwinds, we're over delivering on the things that we can control, and I couldn't be prouder to be part of the team. A year ago, we committed to 3 things: one, selling our Off-Highway business, and we're very close to having that done. When that has been completed, we will have returned a substantial amount of capital to our shareholders and still be left with what we think is a best-in-class balance sheet in terms of our sector. We committed to $200 million of cost reduction, which we subsequently up to $310 million, and we're in great shape and basically at that run rate here this quarter. And then lastly and very importantly, we said we could get to double-digit margins in 2026, and we're exiting 2025 at that level. I know there was a healthy amount of skepticism around some of our -- some of these commitments last year, but hopefully, the market also recognize that the Dana team is delivering on its commitment. Despite some EV deterioration, we have an impressive backlog that we will talk about in January, it does have a combination of both ICE and EV. But as we said before, EV will be a smaller percent there. And we'll see a lot more details on our January call. Long-term, I continue to see a lot of upside in terms of our margin potential. I think a combination of us getting our margins up to the double digit and growing them beyond the 10% to 10.5% in 2026, combined with our balance sheet, we believe we're going to be rewarded with multiple expansion. And so I think we've got an extremely motivated management team here. I couldn't be prouder of the accomplishments year-to-date, and I think our best days are in front of us. And so with that, thanks for joining us on our call today. Operator: This will conclude today's call. Thank you all for joining. You may now disconnect.
Operator: Good morning, and thank you for standing by. Welcome to the Chemed Corporation Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Holley Schmidt, Assistant Controller. Please go ahead. Holley Schmidt: Good morning. Our conference call this morning will review the financial results for the third quarter of 2025 ended September 30, 2025. Before we begin, let me remind you that the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call. During the course of this call, the company will make various remarks concerning management's expectations, predictions, plans and prospects that constitute forward-looking statements. Actual results may differ materially from those projected by these forward-looking statements as a result of a variety of factors, including those identified in the company's news release of October 28 and in various other filings with the SEC. You are cautioned that any forward-looking statements reflect management's current view only and that the company undertakes no obligation to revise or update such statements in the future. In addition, management may also discuss non-GAAP operating performance results during today's call, including earnings before interest, taxes, depreciation and amortization or EBITDA and adjusted EBITDA. A reconciliation of these non-GAAP results is provided in the company's press release dated October 28, which is available on the company's website at chemed.com. I would now like to introduce our speakers for today: Kevin McNamara, President and Chief Executive Officer of Chemed Corporation; Mike Witzeman, Chief Financial Officer of Chemed; and Joel Wherley, President and Chief Executive Officer of Chemed's VITAS Healthcare Corporation subsidiary. I will now turn the call over to Kevin McNamara. Kevin McNamara: Thank you, Holley. Good morning. Welcome to Chemed Corporation's Third Quarter 2025 Conference Call. I will begin with highlights for the quarter, then Mike and Joel will follow up with additional details. I will then open the call for questions. Both operating units fell primarily in line with our expectations in the third quarter of 2025. VITAS continued to execute the strategies required to fully mitigate any potential Florida Medicare Cap billing limitation for the government's fiscal 2026 year. Additions in VITAS during the quarter totaled 17,714, which equates to a 5.6% improvement from the same period of 2024. An important metric that we have been tracking related to Florida admissions is the percentage of total admissions that come from hospitals. Our analysis indicates that an appropriate balance for sustained long-term stability in the Florida patient base given the current mix of referral sources is between 42% and 45% of the total admissions should come from hospitals. During our community access program, this ratio dipped below the preferred range for a sustained period of time. In the third quarter of 2025, this ratio was 44.5%, which represents a high watermark during the post-pandemic period. The ratio has been above 42% for all of 2025. We previously estimated that the consolidated Florida program with 2025 Medicare Cap year with a $19 million billing limitation. We came in slightly better than that with a billing limitation of $18.9 million. Management continues to believe there will be no Medicare Cap billing limitation related to our Florida program in 2026. As discussed above, the initiative to admit a higher percentage of hospital-based admissions has gained traction, and we anticipate that to continue. We have cleared all hurdles to opening our new Pinellas County location, which is now on track to open in early November. Our new program in Marion County, Florida, which opened in May of 2025 has grown to an ADC of 75 as of September 30, 2025. We project that it could double in size to an ADC of 150 by the end of 2026. Now let's turn to Roto-Rooter. Roto-Rooter revenue increased 1.1% in the third quarter of 2025 compared to the same period of 2024. Branch residential and commercial revenue were both encouraging with increases of 3.4% and 2.8%, respectively. Revenue from independent contractors continues to be disappointing, declining 4.7% in the third quarter of 2025. For the first time in several quarters, we saw strength in our residential plumbing revenue service line. Residential plumbing revenue increased 8.2% in the third quarter of 2025 compared to the same period of 2024. A multipronged campaign to target selected high revenue dollar plumbing services yielded positive results in the quarter. The campaign included more targeted Internet focus on specific services, enhanced sales materials for the technicians in the field and more frequent close rate reporting to branch management related to the specific services. We are encouraged by the results of this campaign in the quarter. Total leads were down 1.3% in the third quarter of 2025 compared to the same period of 2024. This is a nice improvement compared to the trajectory we saw in 2024 and earlier in 2025. As discussed in the past few quarters, the trend of increasing paid leads offset by declining natural leads continues. During the third quarter, paid leads increased 8.6% compared to the same quarter of 2024. The entire decline in leads is in the natural lead category. In my opinion, this trend is both a positive and a negative. While we are paying for more leads causing some margin pressure, we also believe this trend indicates a potential moderation of competition for leads from our most significant private equity competitors. We are monitoring these trends closely. As Mike will discuss further, Roto-Rooter margins continue to be below our long-term expectations. However, gross margin during the quarter was exactly in line with our guidance. The many operational initiatives discussed in past calls are having positive impacts. The shift from unpaid leads to paid leads was the main driver of the $3.6 million increase in SG&A costs in the quarter. This led to EBITDA and EBITDA margins to be slightly lower than our expectations for the quarter. We are very encouraged with the performance of both businesses in the third quarter. VITAS is on track to ensure that the Florida Medicare Cap issue is behind us. While still below our long-term expectations, there are signs that the Roto-Rooter business has stabilized and is on the way to returning to a predictable, sustainable growth trajectory. With that, I would like to turn this conference over to Mike. Michael Witzeman: Thanks, Kevin. VITAS net revenue was $407.7 million in the third quarter of 2025, which is an increase of 4.2% when compared to the prior year period. This revenue increase is comprised primarily of a 2.5% increase in days-of-care and a geographically weighted average Medicare reimbursement rate increase of approximately 4.1%. The acuity mix shift negatively impacted revenue growth 121 basis points in the quarter when compared to the prior year revenue and level of care mix. The combination of Medicare Cap and other contra revenue changes negatively impacted revenue growth by approximately 124 basis points. The $6.1 million Medicare Cap billing limitation accrued in the third quarter of 2025 is comprised of $4.6 million for our Florida combined program and $1.5 million related to all other VITAS programs, mainly in California. We came in slightly better than our estimates for the quarter in both Florida and California. Average revenue per patient day in the third quarter of 2025 was $205.08, which is 298 basis points above the prior year period. During the quarter, high acuity days-of-care were 2.3% of total days-of-care, a decline of 259 basis points when compared to the prior year quarter. Adjusted EBITDA excluding Medicare Cap totaled $70.4 million in the quarter, which is a decline of 3.8% when compared to the prior year period. Adjusted EBITDA margin in the quarter excluding Medicare Cap was 17.0%, which is 157 basis points below the prior year period. The lower EBITDA margin in the quarter reflects the impact of admitting more hospital-based short-stay patients. The EBITDA margin is within our expectations and guidance. Now let's turn to Roto-Rooter. Roto-Rooter branch residential revenue in the quarter totaled $150.9 million, an increase of 3.4% from the prior year period. This aggregate residential revenue change consisted of plumbing increasing 8.2%, excavation increasing 4.5% and water restoration increasing 6.8%, offset by a decline in drain cleaning of 2.6%. Roto-Rooter branch commercial revenue in the quarter totaled $55 million, an increase of 2.8% from the prior year period. This aggregate commercial revenue change consisted of excavation increasing 10.2%, water restoration increasing 3.5% and drain cleaning revenue increasing 1.2%, offset by a decline in plumbing of 0.8%. Revenue from our independent contractor declined 4.7% in the third quarter of 2025 as compared to the same period of 2024. Our independent contractors are generally smaller operations in middle-market cities. In many instances, based mainly on resourcing constraints, they have less effectively capitalized on the add-on service segment growth opportunities than our owned branch locations. We are actively working with the contractor group to help mitigate the issues in this segment of our business and get it back to a growth trajectory. Adjusted EBITDA at Roto-Rooter in the third quarter of 2025 totaled $49.4 million, a decrease of 12.4% compared to the prior year quarter. Adjusted EBITDA margin in the quarter was 22.7%. The third quarter adjusted EBITDA margin represents a 351 basis point decline from the third quarter of 2024. The third quarter EBITDA margin is a 90 basis point improvement over the second quarter of 2025. While below our long-term expectations, Roto-Rooter's third quarter gross margins within our guidance range. The many field-level initiatives discussed in prior quarters have begun to take hold. The paid versus natural lead generation shift discussed by Kevin drove the $3.6 million increase in SG&A costs and the resulting EBITDA margin pressure. This is the main reason for the slightly lower-than-expected EBITDA margin in the third quarter. Management reiterates its previously issued guidance of $22 to $22.30 per share, excluding noncash expenses for stock options, tax benefits from stock option exercises, costs related to litigation and other discrete items. This guidance assumes that there will be no Medicare Cap related to our Florida combined program for the government fiscal year 2026, beginning on October 1, 2025. I will now turn this call over to Joel. Joel Wherley: Thanks, Mike. In the third quarter of 2025, our average daily census was 22,327 patients, an increase of 2.5%. In the quarter, hospital-directed admissions increased 10.4%. Home-based patient admissions increased 2.3%. Assisted living facility admissions increased 8.9%. And nursing home admissions declined 8.9% when compared to the prior year period. Our average length of stay in the quarter was 109.7 days. This compares to 102 days in the third quarter of 2024. The average length of stay in the second quarter of '25 was 137.1 days. Our median length of stay was 18 days in the third quarter of 2025, equal to the median in the third quarter of 2024. The median length of stay in the second quarter of 2025 was 20 days. It's important to remember that length of stay statistics are calculated based on discharged patients, not active patients. The return to a more normal length of stay metric in the third quarter is indicative of the success with our renewed focus on higher admissions from hospital as a preadmission location as previously discussed. I'm excited about the opportunity to lead VITAS into its next chapter. The new CON in Pinellas County is a significant opportunity for VITAS. We will continue to put our best foot forward when applying for new CONs in the state of Florida. We will continue to focus on providing the best possible care to our patients and their families. That focus will be coupled with getting back to the basics of ensuring that we grow the business responsibly while effectively managing the Medicare Cap. With that, I'll turn the call back over to Kevin. Kevin McNamara: Thank you, Joel. I will now open this teleconference to questions. Operator: [Operator Instructions] Our first question comes from Ben Hendrix of RBC Capital Markets. Benjamin Hendrix: Appreciate the reaffirmation and guidance with results in line with your expectations. But with the results in both segments falling a little bit below what the Street was modeling, we're getting a lot of questions about the elements that bridge us back to guidance in the fourth quarter. Can you kind of run through in each segment what you're seeing from a demand and cost trend perspective and even from a seasonal perspective that gives you confidence that we can kind of ramp back up to the guidance midpoint in fourth quarter? Michael Witzeman: Sure, Ben. I think the biggest sort of distinction is that there's a little more seasonality that we anticipate in the fourth quarter. And so when I looked at your -- how you progress the third and fourth quarter, and it was across all the analysts, it's not just you. But the third quarter was a little lower than our internal -- or a little higher than our internal expectations and the fourth quarter was a little lower. So all in all, where you ended up the year was exactly in line with where we end up the year. It's more of a seasonal thing. The two -- when you break it down between VITAS and Roto-Rooter, VITAS' fourth quarter is always their best quarter. It's when the new rate increase goes in on October 1. Our margin spikes in the fourth quarter from that because our cost structure really hasn't changed from September, for instance, from September 30 to October 1. So we get a pretty nice bump in margin from that. From a Roto-Rooter perspective, they always do better in the fourth quarter and the first quarter. The fourth quarter, it's a weather impact. When it's colder, wetter, Roto-Rooter tends to get more jobs. So it's just a little bit of a change. And I would tell you that the difference is only a couple of million dollars, right, between each quarter. And so it's not -- I don't think there was a huge difference between what you had and what we had. Kevin McNamara: Right. But now we're giving you some specifics, Mike, some of the elements that we do expect to improve during the quarter compared to the third quarter. Michael Witzeman: Sure, sure. So Roto-Rooter is probably the easier one where we talked about some of the things that we've been doing. We expect -- we've talked in the past about some of the issues that we've had from a cost perspective at Roto-Rooter with discounting in the field, with higher commission rates. That improved, as I mentioned in the prepared remarks. I think our sequential margin improved about 90 basis points, and we expect that to continue. So we're expecting some of the green shoots on the revenue side to continue but also to still improve margins as we go forward into the fourth quarter. And VITAS, I think, as steady as she goes in the fourth quarter from a margin and revenue perspective. Kevin McNamara: Joel, anything with regard to areas where you see some comparative improvements from the third quarter to the fourth quarter by the results? Joel Wherley: Yes. So -- and thanks for the questions, Ben. As we have talked about in the previous 2 quarters, we knew that we would have additional marginal compression specific to our shift in strategy away from community access and focusing more on hospitals as a preadmit driving a higher volume of shorter length of stay patients. However, what we have done to offset that is institute additional efficiency gains internally with labor management, which we are really excited and have effectively put into place as well as going into the fourth quarter, as Mike indicated, is usually a good quarter for us. And as we manage that preadmit environment, and as I indicated earlier, back to a more reasonable length of stay, we're effectively managing the fixed costs associated with that. Kevin McNamara: And just to give you one specific, how this relates to the results for VITAS. As we mentioned in the third quarter, we shoot for between 42% and 45% is the ratio of hospital admissions. For the quarter, it was 44.5%. To the extent that, that were to moderate closer to 42%, you would expect to see longer stay patients, nonhospital admissions, would still be in a healthy range but it would yield more profitable patients. So I mean, that expectation is that 44.5% is a high watermark during a period of extensive scrutiny on Medicare Cap. And just the moderation of that alone would cause the type of improvement we're talking quarter compared to quarter. Benjamin Hendrix: And if I could just do one follow-up here. Could you talk a little bit about your receivables? It looks like DSO is a little elevated. Just wanted to get your thoughts on how cash collections are progressing and if there's a timing issue there or kind of what we can expect from a cash collection perspective. Michael Witzeman: That's just a timing issue, Ben. I think it's mainly at VITAS and it's mainly relating to Medicaid, as you might imagine, with all the other sand in the air from a government perspective, Medicaid has -- payments have slowed down, but it's not an indication of any deterioration in our collection efforts or ability to collect. It's just a timing issue. Operator: Our next question comes from the line of Brian Tanquilut from Jefferies. Brian Tanquilut: So maybe just as I think about 2026 with where the Medicare rate shook out. I know you had previously provided some insights into how you were thinking about margins and growth rates for next year. So curious where that stands now and just broadly speaking, without giving guidance obviously, how you're thinking about the growth algorithm for 2026? Michael Witzeman: Sure. I'll start and then Joel or Kevin can follow up. But we -- well, first, we're only at the beginning stages of our budget process, as I know you know. But I think the fourth quarter, particularly as it relates to Florida and the Medicare Cap, will really inform our decisions on how the operations are going to -- what's the strategy for 2026 and then how that relates to the financial statements. And the reason I say that is, generally speaking, Florida in the fourth quarter is when we generate essentially all of our cap liability in a year. And then we spend the next 9 months overcoming that. And that's how it's operated. VITAS has operated since we started -- since we've owned them. We saw that, that number in the fourth quarter last year was a lot -- that liability in the fourth quarter was a lot higher than it has historically been. And so we had to moderate, as we've talked about a lot, to more hospital admissions. To the extent -- and we believe this to be the trajectory we're on, but that number is much more moderate in the fourth quarter this year, that informs our ability, as Kevin mentioned before, to be able to start creeping back up the long-stay patients and improving both the revenue growth rate and the EBITDA margin. Of course, that takes a little time as well as all patients on the first day are short-stay patients. So over time, we'll build a little more momentum in those long-stay categories to the extent we do it responsibly to make sure we don't have a cap problem. But the fourth quarter is really going to inform 2026. If I had to say from a high-level perspective, again, a little bit of speculation, but I would say revenue in the 8-ish percent range, margins at the 27.5% to 28% range is what we would think -- 17.5% to 18%, sorry, I was mixing that up. sorry, is what we would think off the top of our head. But again, we're putting the pen to paper now. Kevin McNamara: Joel, anything with regard to - from an operating margin profitability that gives you renewed confidence for next year? And I know it's -- you're early in your budgeting process. Joel Wherley: So thanks, Kevin. First, I would reiterate what Mike said. The fourth quarter is going to be a significant indicator as to the speed for which we can look at responsibly getting back to active census growth, especially within the Florida market. We are very encouraged by the strategies we put in place, the steps that we have taken, the moderation of the average length of stay from a discharge perspective and all of the initiatives that we have put into place to mitigate any concerns going forward with cap, which then puts us in a position where we can be agile and responsibly get back focusing on census growth in those markets. Brian Tanquilut: I appreciate that. And maybe my follow-up, just to try to keep this to two questions. Kevin, you talked about the improvement that you're seeing in the competitive dynamics in Roto. So if you can speak to that. And then maybe as I go back to your comment about gross margin coming in, in mind, clearly, G&A is the area, the other lever there. So just wanted to hear your thoughts on improvement performance and opportunity on the G&A line as we think about both Roto and VITAS. Kevin McNamara: Okay. Well, let me -- let's have Mike start with the numbers on it, but I'll give you my overall perspective following that. Michael Witzeman: Yes, sure. The first question, Brian, is our total leads for the second quarter in a row were up almost -- were high single digits on a paid search basis. The entire deterioration in leads that we've seen is in unpaid search categories. Again, as we talked about that, that creates margin pressure because we're paying for more leads. But ultimately, we are not seeing the competitive pressures for those paid leads that we have in the past. And we find that to be encouraging. The thing, I think, that gives us a little more confidence even in that is we've seen all other big players that -- in a lot of consumer service areas are also having trouble with unpaid. So it's not as if they're sort of targeting Roto-Rooter. All of the people who are willing to pay for leads are being forced to pay for more leads. And so that would include our private equity competitors and, as a result, we're very encouraged that we're getting the leads that maybe we hadn't been getting a year ago at this time. Kevin McNamara: I'll give you an example. In the second quarter of last year, roto-Rooter paid more, spent more for Google advertising and all of the Internet. And we didn't -- and it was met by a competitive response. And the net result was everyone paid more, but there wasn't a change in the balance of leads. That's not what we're seeing now. We're seeing now as we spend more, we're getting more. And it's just up to us and basic economics to make sure that we maximize the utility of that spending. Michael Witzeman: Yes. And then as far as sort of margin, when we talk about gross margin being in line, they're in line with our expectations for the quarter. But they're not necessarily, as Kevin mentioned in his prepared remarks, they're not in line with our long-term expectations. There's work to do there still. But we recognized -- when we talk about it in the second quarter, we recognized it was a multi-quarter fix on some of those things, particularly some of the discounting in the field and commissions. So while the gross margins are in line with what we expected in the third quarter, there's still work to do there. Kevin McNamara: Yes. And let me just say it. I'll make a subjective comment here. One of our biggest problems in getting margin on the calls we are getting is it's pricing discipline. And it's easier to have that pricing discipline when there's enough work to go around. And we're starting to see that as opposed to being down 10%, it's up 1%. So I mean, it's easier to have the discipline to not discount, to not -- to make sure we get a price that gives us our traditional margin. And again, it's the rising creek that more leads give you to provide that. And that's really -- it's subjective, but that's what we're really shooting for, for the improvement for 2026 in Roto-Rooter. Michael Witzeman: And then the last thing I would say, and this mirrors Kevin's remarks on the SG&A line. We're doing what we can to minimize the cost, but it's -- we want to make sure that we maximize the opportunities that are provided to us. And if it means spending a little more on paid search to provide the revenue growth that we think is appropriate, then we think that's a good investment. And we track revenue per lead cost and those sorts of things. So we track that pretty closely. And so we think it's the right use of money to drive top line to spend a little more on the paid marketing side. Kevin McNamara: And something we've -- it's not enough, but we have been talking about the operational aspects of Roto-Rooter and the internal metrics that is close rate at the call center, close rate in the field. A lot of those operational metrics remain very strong. So we feel that we're poised, if we get the calls, we should make more money from them. Operator: Our next question comes from Joanna Gajuk from Bank of America. Joanna Gajuk: So maybe just to continue on the Roto-Rooter segment. So if I read this right, margins are under pressure because of the marketing costs, right? So how should we think about sustainable margins? I mean, it sounds like maybe that's a new kind of business model. You've got to pay more. So how should we think about -- I know you don't have specifics for next year, but say, over the medium term or longer term, how you think about margins in that business? Michael Witzeman: Sure. From a longer-term perspective, we think that the right margin -- and I'll get it right this time, Kevin. The margin at Roto-Rooter is 25% to 26% is the right EBITDA margin over the longer term. We're not quite there yet. We think that we should be able to absorb higher marketing costs because of the higher leads and the revenue that they generate. And so there's no doubt that there's going to be continued pressure for the near term -- for certainly the foreseeable few quarters on marketing costs specifically. But we think that they are -- we're able to overcome them with other operational things we've talked about over the last few quarters. Kevin McNamara: Yes. Just let me tell you how it works in the real world. When calls are down, the service man goes out, makes a written estimate and it's all or nothing. Essentially, the customer says okay or no. And at that point, there's not another job on the board for that service man to go run to. You can see how he's inclined to say, "Well, what will it take for me to do it?" And that's the discounting. That's where you lose margin. And to the extent that we're able to get enough leads and get enough jobs on the board for those service men, you can see how that could have a dramatic effect on margin just by having that additional potential work. And it's like a multiplier effect. And again, we're not that far from getting back on an even keel with regard to leads. And when I say even keel, I mean something that's not down double digits. So that's the magic as far as paying a little bit more but still having strong margins. All or nothing. To the service man, if he cuts $70 off the job, that's at least something for his time. But again it's -- bad business drives out good business, and that's what we're always at war with. Michael Witzeman: And we've put in some a little bit tighter controls around what the technicians are able to do at the door, a little bit higher level approval requirements and things like that. But a learned behavior like that doesn't change overnight. And that's why we knew this was going to be at least a couple of quarters to really fix this learned behavior in the field. And we're pleased with where it has progressed through the end of the third quarter. Joanna Gajuk: Okay. Because like I say, if I look at year-to-date, adjusted EBITDA margin for the segment, about 23% or so. But I guess to get to your full year guidance, that just implies higher margin in fourth quarter. But you also alluded to the idea of like seasonality impact, right? So is that... Michael Witzeman: Yes, fourth quarter is always the highest. Joanna Gajuk: Always the higher margin. Okay. Because it kind of comes out to be like 25% or so to get to, call it, 24% for the year. So is that 24% like a good number to think about as we head into next year in terms of margins? Michael Witzeman: I think we can do better than that next year. But again, we're working on the budgets now. But I think we should see some margin improvement certainly next year compared to '25. Joanna Gajuk: And then when it comes to top line, right, so it's tracking, call it, 1% growth this year. So how should we think about it? Can this business kind of grow closer to mid-single digits? Is that still kind of on the table? And when would you think we should be able to see that kind of growth? Michael Witzeman: I think we, again, are in the early stages of our budgeting process. I think we'll see better growth next year than we've seen this year, whether that's 3% to 5%, it's speculating at this point. Kevin McNamara: I would say that's probably going to be our budget. It's the way, it's -- put it that way that our budget will definitely start in that range as submitted to us, let's put it that way, and then we'll go to more... Michael Witzeman: Yes. And then with the green shoots we've seen in certain revenue categories, in the third quarter here, there could be upside to that. But we're monitoring day-to-day what's happening in the field. And we're going to put together a budget that we think is achievable but also realistic. Joanna Gajuk: Okay. And switching to VITAS, right? So just to clarify first, so when you said you do not have too many liabilities in Florida under the cap. Is it because you just kind of based on the rate increase, you can tell that, hey, like the delta between the rates in Florida versus the cap increase is much smaller, so that's the reason for staying like no liability? Or are you in that statement, you also already assumed like some offsets from these new markets or other things? Joel Wherley: Yes. So Joanna, it's not just based on the year-over-year reduction in the rate increase. It actually is because of our focus and strategy within the marketplace and what Kevin referenced at the beginning of the call, which is the overall percentage of our admissions coming from hospital preadmit environment which, as we know, has a tendency to drive a shorter length of stay patients. So what we saw was, last year in the Medicare Cap year for '25, we had multiple months where our overall percentage of hospital admissions dropped to a record low of our overall mix of admissions. That's what Kevin was referencing, that sweet spot being between 42%, 42.5% and 45%. We are monitoring that on a regular basis. And as we indicated for the last quarter, we were at a high watermark of 44.5%. That's what gives us the confidence in knowing that we are in the right direction to mitigate any cap liability. Then with addition, on top of that, we have the Pinellas opening that we're excited about. Michael Witzeman: Also don't forget, Joanna, the length of stay has really come back into line, which really indicates that the bubble of patients that we create -- the bubble of long-stay patients that we created in community access has been moderating as we expected as well. Kevin McNamara: But Joel -- Joanna, you also pointed, there's no question that last year, the thing that pushed VITAS over the edge ultimately in one fell swoop,was the increase, the fact that the increase was 200 basis points higher than the rate that the Medicare Cap was going to be calculated on. That means that alone was, in retrospect, too much to overcome, particularly in line with the issues Joel just spoke about. And then again, just to reiterate, the fact that we now have the rate increase for the nation and Florida, and it's what we have characterized from our perspective is kind of in a sweet spot. It's up but it's very doable. Joanna Gajuk: So what is that number, if you can share with us, versus the 200 delta in fiscal '25? What is it in '26? Michael Witzeman: 30 to 40 basis points. The national average is around 2.6% or 2.7%. We've calculated our Florida average to be 3%. That equates to a $3 million or $4 million headwind, which is well within our ability to manage. That headwind last year was $22 million or $25 million. Joanna Gajuk: All right. Exactly. Okay. Exactly, that's what I was looking for. And then so I guess, when it comes to these short stay patients, and it sounds like you're getting better -- you've got better traction and now I guess you're kind of maybe stopping that. Because at some point, you're going to talk about sort of like some pause, as in like there was more competition for these patients. So it sounds like in third quarter, like things have changed to the point where you're now also taking more of these longer stay patients. Is that the way to think about how you describe the situation? Kevin McNamara: We definitely saw last year that -- as we said, VITAS knew at the beginning of the year that it's an uphill battle. And they've pulled various traditional levers that you would think would have the effect of getting more short-stay patients. That is more salespeople, more effort at the hospital level. And one of the things we observed, it didn't have quite the effect that traditionally VITAS would have come to expect. And one aspect of that was pretty much everybody in Florida got this big increase. Not everybody -- I mean, impact, that is hospices do continuous care got that type of 200 basis point increase. But there were increases in Florida that the hospices that traditionally weren't that concerned with short stay patients became more concerned with them. And the real effect last year was just we pulled some levers that we expected to have some reaction. And given that environment, they didn't have quite the impact that we would have hoped. Those, for all the reasons we talked about, are kind of 2025 issues. 2026 issues for VITAS is to get the hospital admissions, get the first-time Medicare admits, have a reasonable average length of stay. And given the reimbursement environment, we should be back to the position where we don't have the Medicare Cap limitation in Florida. It's just -- it's pretty simple. And maybe it's a lot of work to do those various components. But the conclusion from reasonable assumptions is pretty direct. Joel, anything to add just on that very general observation? Joel Wherley: No, I think you're spot on, Kevin. It was the combination of the census growth with the rate increase that just put us in a circumstance that was at a number where we couldn't get out from underneath it throughout the calendar -- throughout the Medicare Cap year. Kevin McNamara: And keep in mind, it's just one of those things. Even having said all that, no one likes a surprise $18.9 million hit. But that's still less than 2% of the -- I mean, it's still flying pretty darn close to what would have been arriving on fumes. We just didn't quite make it. We're within 2%. So it wasn't a big miss. It was a small miss. But it was -- the problem with it, it was the first time ever and it was a scary specter, a term that we hadn't really talked about in the past, that was Medicare Cap in Florida. Joanna Gajuk: And if I may follow up on the discussion on seasonality, right? So if I do the same exercise in VITAS in terms of just like how margins are tracking so far this year and what this impact was fourth quarter, so it sounds like margins, I guess, would need to go up year-over-year, like 50 bps or so to get to your prior, I guess, segment margin pre cap. But they've been down year-over-year. So I guess, what's going to be different? I guess, is this really the kind of the mix of patients you assume you're going to be having more of the tailwind from the long stay patients? Michael Witzeman: No, I think it's the things we've talked about already. We get a bump from the rate increase, I think Joel has talked about some of the things they're doing at the SG&A level. If you notice, in the third quarter for VITAS, SG&A actually is down year-over-year. That's going to continue in the fourth quarter. So they're combining rate increases, a little better efficiencies as well as some specific targeted cost-cutting measures. Kevin McNamara: Joanna, let me make one comment. And -- we don't give quarterly guidance. But I'd say, we reiterated guidance just yesterday. And Ben mentioned something earlier that as far as was basically wasn't aspirational to be shooting for midpoint of guidance. And I'll just say at this point, no, I mean, we're shooting at the upper end of guidance. We don't think it's aspirational in any respect. And you're certainly right. Most of the questions have been along the lines of -- okay, so it is doable. It is -- that you are on course. And the answer is not only you are on course, we think that we're on the upper end of the course. Joanna Gajuk: And if I may, sorry, last question. But since you mentioned sequentially G&A down, but also the gross margin was actually up sequentially more than historically at third quarter versus Q2. Gross margin in VITAS will be higher. But this quarter it was like 220 basis points versus maybe like 100 or something in that range in the past. So is there something that you did this quarter? Michael Witzeman: I don't think there's anything specific, Joanna. I think it's all the things that we've talked about with Joel talking about efficiencies that they've looked at. They looked program by program and are they properly staffed in Florida, and they made the adjustments when they needed to. So I don't think there's -- I wouldn't call there any specific initiatives or anything. I would call out directly other than they're looking program-by-program and managing costs appropriately. Operator: At this time, that does conclude the question-and-answer session. I would now like to turn it back to Kevin McNamara, CEO, for closing remarks. Kevin McNamara: I just want to thank everyone for their attention to our quarterly report. I guess the next time you'll hear from us is mid-February where we'll both have the fourth quarter and our guidance for next year. Thank you. Operator: Thank you. And thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
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 American Electric Power Third Quarter 2025 Earnings Call. [Operator Instructions] I'd now like to turn the call over to your host for today, Darcy Reese, Vice President of Investor Relations. You may begin. Darcy Reese: Good morning, and welcome to American Electric Power's Third Quarter 2025 Earnings Call. A live webcast of this teleconference and slide presentation are available on our website under Events and Presentations. Joining me today are Bill Fehrman, Chair, President and Chief Executive Officer; and Trevor Mihalik, Executive Vice President and Chief Financial Officer. In addition, we have other members of our management team in the room to answer questions, if needed, including Kate Sturgess, Senior Vice President, Controller and Chief Accounting Officer. We will be making forward-looking statements during the call. Actual results may differ materially from those projected in any forward-looking statement we make today. Factors that could cause our actual results to differ materially are discussed in the company's most recent SEC filings. Please refer to the presentation slides that accompany this call for a reconciliation to GAAP measures. We will take your questions following opening remarks. Please turn to Slide 6, and let me hand the call over to Bill. William Fehrman: Thank you, Darcy, and welcome to American Electric Power's Third Quarter 2025 Earnings Call. I'm happy to be with everyone this morning. This is a transformative moment for our industry, and I'm proud that AEP is standing out among our peers as one of the fastest-growing, high-quality pure-play electric utilities. Over the last year and to ensure AEP is extremely well situated for unprecedented growth and value creation, we have welcomed several new proven leaders. We have made significant changes to the organization to grow financial strength and deliver constructive regulatory and legislative outcomes while at the same time, driving accountability and operational excellence. I believe this is a different AEP from the past. Our winning team is executing at an accelerated pace of play to grow this incredible company and deliver results for our customers and shareholders as we invest significantly in infrastructure across high-growth regions in our impressive 11-state service territory. align our business with state and federal goals and achieve positive legislative and regulatory outcomes and leverage our size and scale to manage cost and supply chain pressures. For example, AEP is one of the best positioned utilities in the industry with 8.7 gigawatts of gas turbine capacity currently secured from major manufacturers and a high-voltage equipment agreement in place with a key industry player. As a result of our tremendous progress and rapidly growing opportunity in front of us, we are extremely excited to announce our new increased long-term operating earnings growth rate of 7% to 9% for 2026 to 2030 with an expected 9% compounded annual growth rate over the 5-year period. This impressive growth rate is driven by one of the largest capital plans in the industry, $72 billion, which is underpinned by massive system demand and supported by a balance sheet demonstrating strong credit quality. There is a lot to be excited about at AEP. And in my remarks today, I will provide an overview of our strong financial results and outlook before speaking to the drivers behind our growth trajectory, our recent regulatory and legislative progress and our focus on affordability for customers. An overview of our new financial plans and key messages can be found on Slides 6 and 7 of our presentation. We are pleased to share that AEP reported third quarter 2025 operating earnings of $1.80 per share or $963 million. These results, in combination with our strong financial performance in the first half of the year and ability to execute, give us confidence in reaffirming our 2025 full year operating earnings range of $5.75 to $5.95 per share, while guiding to the upper half of this range. We are also unveiling our 2026 operating earnings guidance range of $6.15 to $6.45 per share, which is an approximate 8% increase based off the 2025 guidance range midpoint. In a few minutes, Trevor will walk through third quarter performance drivers and provide additional details surrounding our outlook for 2026 and beyond. Electricity demand growth is happening, and we are seeing it play out across the country in real time. Regions with concentrated data center and industrial development, including AEP's footprint, are emerging as clear winners. Large annual capital budgets from hyperscalers totaling hundreds of billions of dollars reinforce the conviction, strength and staying power of this demand growth. At a high level, AEP's revised long-term earnings trajectory has been updated to reflect the strong load growth we are experiencing across the communities we serve. We project a system peak demand of 65 gigawatts by 2030 within our diversified service territory, especially in Indiana, Ohio, Oklahoma and Texas. This growth is fueled by data centers, reshoring of manufacturing and further economic development, which we expect to create jobs in local communities and maintain affordability as our load grows by almost 76% in the next 5 years. The 65 gigawatt AEP system-wide projection now includes 28 gigawatts of contracted load additions on top of our existing 37 gigawatt system. These incremental 28 gigawatts, up from our formerly reported 24 gigawatts are backed by electric service agreements or letters of agreement, protecting us and our customers from changes in planned usage. I also want to emphasize that it is critically important that costs associated with these large loads are allocated fairly and the right investments are made for the long-term success of our grid. For that reason, we have secured commission approvals for data center tariffs in Ohio and large load tariff modifications in Indiana, Kentucky and West Virginia with pending tariff filings in Michigan, Texas and Virginia. These baselines are designed to protect other customers from bearing the cost of grid improvements required to meet the energy demands of large load customers. As you can see on Slide 8, we have unmatched transmission scale and expertise and large load customers are drawn to our footprint because of AEP's advanced transmission system. Through innovation, we pioneered the modern 765 kV transmission system in North America. These are the highest voltage lines that form the backbone of the transmission network. We have over 60 years of expertise in design, construction and operation of assets like these and many current industry standards and practices for 765 kV transmission were developed by AEP. Today, AEP owns and operates in excess of 2,100 miles of these ultra-high-voltage 765 kV transmission lines across 6 states, representing 90% of the 765 kV infrastructure in the U.S. This is more 765 kV lines than all other utilities combined, uniquely positioning us with the biggest electric transmission system in the country to attract customers who need large volumes of consistent and reliable power. Building on this, AEP was recently awarded 765 kV projects in the ERCOT Permian Basin and through the PJM regional transmission expansion plan, setting us up well for future growth opportunities. These transmission awards were included in our new $72 billion capital plan spanning over the next 5 years. By combining AEP's vision for a modern, reliable grid and our partnership with a major energy infrastructure equipment provider, we can accelerate the development of 765 kV projects that are essential to meeting future reliability, resiliency and energy delivery needs. Turning to Slide 9. We are focused on operational excellence to advance service and reliability interest in each of the states we operate in, while achieving constructive outcomes that are good for our customers and our shareholders. ADP's (Sic) [AEP's] operating company leadership is changing how we run our businesses, and we are working diligently with legislators and policymakers for constructive outcomes. I personally have been actively engaged and met with regulators and leaders across all 11 states that we have the privilege of serving, to better understand each of their needs and priorities. In addition to better serving our customers, all of these efforts will help us to reduce regulatory lag and improve forecasted regulated ROEs to 9.5% by 2030. This will support operating cash flows as we drive forward with $72 billion of infrastructure investment while maintaining affordability. In 2025, we have been involved in the passage of constructive state legislation. Some of these positive legislative outcomes include Ohio House Bill 15, which establishes a new regulatory framework with a multiyear forward-looking test period with true-up provisions for AEP Ohio rate cases. Oklahoma Senate Bill 998, which authorizes the deferral of plant costs placed in service between rate cases at PSO and Texas House Bill 5247 that allows for a single annual unified tracker mechanism to recover depreciation and carrying costs associated with capital investments at AEP Texas. The improvement in the customer experience and stakeholder relationships also results in positive regulatory outcomes as we put power in the hands of our local leaders to build financially strong utilities in the communities we serve. Our operating companies continue to advance ongoing base rate cases including AEP Ohio, Kentucky Power and SWEPCO in Arkansas and Texas. We look forward to working with stakeholders to achieve positive and balanced outcomes that benefit both our customers and investors. As an update on the case that APCo filed late last year in West Virginia, we are pleased that the commission issued an interim order with full approval of the $2.4 billion securitization proposal, which will enable the redeployment of capital throughout our business, while at the same time driving affordability to our West Virginia customers. However, we are not finished with the recent base case order in West Virginia. There is more work to be done as evidenced by APCo's reconsideration filing made last month centered around adjustments to the authorized ROE, capital structure and rate base. We continue to have conversations with state leaders regarding fair financial returns that they desire to attract more capital and make West Virginia an energy hub. Moving on to resource adequacy. Electricity demand growth is putting pressure on reliability, and this new demand is driving the need for generation diversity, including significant generation additions or retirement delays. I will highlight several recent key developments that help support AEP's generation resource adequacy needs and reinforce grid stability for our communities. In August, parties reached a unanimous settlement on I&M's acquisition of the 870-megawatt combined cycle natural gas generation facility in Oregon, Ohio. This follows commission approval of Green Country, which is PSO's 795-megawatt natural gas-fired facility in James, Oklahoma. In September, generation resource filings were submitted by I&M for up to 4.1 gigawatts and by PSO for approximately 1.3 gigawatts. And earlier this month, APCo filed an integrated resource plan in West Virginia for roughly 5.9 gigawatts of resource needs over the next 10 years, outlining our strategic approach to meeting future energy and capacity requirements through a balanced approach. In summary, additional capacity is needed to ensure the availability of continued reliable power for both current and future customer needs, while providing more efficient and timely regulatory approval processes. AEP is well positioned to be a significant player in meeting these generation needs. Beyond these filings and in line with our history of innovation, we continue to explore generation solutions for the benefit of our customers during this period of massive demand. We previously announced our participation in the early site permit process for 2 potential small modular reactor or SMR locations, one in Indiana and another one in Virginia. As we evaluate these exciting opportunities, our moving forward with SMR considerations will require strong capital investment protections, safeguards for our balance sheet and credit metric strength and clear regulatory and governmental support. And finally, as seen on Slide 10, I would like to reiterate that our team is keenly focused on customer affordability as we advance our $72 billion capital plan over the next 5 years. We are mitigating residential rate impacts through affordability levers, including incremental load growth, rate design, continuous focus on O&M efficiency and financing mechanisms like securitization. Earlier this month, AEP also closed on a loan guarantee from the U.S. Department of Energy related to upgrading 5,000 miles of transmission lines. The loan backs projects that enhance reliability while also supporting economic growth in our states and reducing bill impacts for customers. As we ramp up our investments in this electric infrastructure super cycle, more of the incremental costs are assigned to commercial and industrial customers who are driving the increased investment. We forecast residential customer rates to increase on the system average by approximately 3.5% annually over the 5-year period. This is relatively mild and below the 5-year historical average inflation rate of over 4%. Wrapping up, we have had an extremely busy and productive year so far with the entire team working at an unmatched pace to deliver results for all stakeholders. We are investing substantially to meet an extraordinary moment in our industry, engaging with our regulators and state leaders to deliver on their key policy objectives and taking concrete steps to keep customer bills affordable. I have great confidence in our strategy and team, and I am excited about the opportunities ahead as we drive growth and create value for our investors. With that, I will now turn the call over to Trevor, who will walk us through the third quarter performance drivers and provide details surrounding our incredible financial growth outlook. Trevor Mihalik: Thank you, Bill, and good morning, everyone. I'm excited to share several key updates with you today. I will begin with a review of our third quarter and year-to-date financial results, followed by an in-depth look at our newly established long-term operating earnings growth rate of 7% to 9% Building on Bill's comments, I will also highlight the exceptional load growth we are seeing, supported by the updated $72 billion 5-year capital plan. And finally, I will wrap up with remarks on our financing strategy. Let's now walk through our financial results starting on Slide 12. Operating earnings for the third quarter totaled $1.80 per share compared to $1.85 per share in the same period last year. This change primarily reflects the impact of the prior year sale of the on-site partners distributed resources business within Generation & Marketing. Turning to Slide 13. Year-to-date operating earnings totaled $4.78 per share, up from $4.38 per share in 2024. You will see that this represents an increase of $0.40 per share or approximately 9% year-over-year. This strong year-to-date performance was mainly driven by favorable rate changes across multiple jurisdictions, strong transmission investment execution and continued benefit from load growth. Notably, we saw significant commercial and industrial load growth of nearly 8% on a rolling 12-month basis as of September 30, 2025, compared to the same period last year. Recall, a majority of our large load customers are under take-or-pay contracts, which I'll address in more detail shortly. Additional information on our sales performance can be found in the appendix. These positive drivers were partially offset by increased spending on system improvements, depreciation tied to higher capital investments and interest expense. Similar to the quarterly results, our year-to-date performance in the Generation & Marketing segment reflects the prior year sale of the distributed resources business. While this transition led to a lower contribution from the segment, it was meaningfully offset by favorable energy margins, which helped support overall results. Our strong year-to-date results provide us with the confidence to guide to the upper half of our 2025 operating earnings range of $5.75 to $5.95. Please turn to the next slide. We've established our 2026 operating earnings guidance range at $6.15 to $6.45 per share with a midpoint of $6.30. This reflects nearly an 8% increase over our 2025 guidance midpoint and is fully aligned with our newly introduced long-term operating earnings growth rate. As Bill mentioned earlier, we are excited to announce our increased long-term operating earnings growth rate of 7% to 9% annually from 2026 through 2030 with an expected CAGR of 9% over the 5-year period. We anticipate growth to be in the lower half of the range for the first 2 years and at or above the high end of the range in 2028, 2029 and 2030. This outlook is supported by our exceptional load growth fundamentals, highlighted by 28 gigawatts of incremental and contracted load backed by electric service agreements or letters of agreement. This unprecedented demand serves as the foundation of our expanded $72 billion capital investment plan, positioning us to deploy the critical infrastructure needed today while actively shaping the energy infrastructure landscape of tomorrow, building a more reliable, resilient grid of the future. Turning to Slide 15. We're illustrating AEP's strong load forecast for the period from 2026 through 2030. There are 3 defining characteristics I'd like to emphasize. Our load growth forecast is big, conservative and drives our capital strategy. First, it is big. In this quarter alone, approximately 2 gigawatts of data center load came online, roughly equivalent to 2 large-scale nuclear power plants. And for the 28 gigawatts of forecasted additions, this is equivalent to almost doubling our current system. Customers behind this growth are substantial with approximately 80% coming from data processors, including large hyperscalers such as Google, AWS and Meta. These are well-capitalized global firms with sustained demand profiles. The remaining 20% is driven by new industrial customers. These include major projects such as Nucor Steel Mill in West Virginia and Cheniere's LNG facilities in Texas. Together, these diverse customer groups form a strong foundation of long-term partnerships in infrastructure development, driving substantial energy demand and economic growth to the communities that we serve. Second, it's conservative. Our forecast is not a theoretical model. It's built on signed contracts. From roughly 190 gigawatts of customer interest, we have distilled this down to 28 gigawatts of executed financial commitments. We have evolved our contracting strategy to sign full take-or-pay agreements earlier in the development cycle, helping us to filter out speculative load. Commission approved tariff reforms have strengthened these contracts, especially in our vertically integrated businesses but generation investments must be tightly aligned with the real demand to protect customer rates. Finally, this load forecast is the foundation of our capital plan. To serve this growth, AEP must deliver more than 100 million-megawatt hours of incremental power annually by 2030. Meeting this demand will require a scale of capital investment that sets a new benchmark for AEP. I will walk through the details of our large capital plan on Slide 16. Our $72 billion 5-year capital plan represents a more than 30% increase over our previous plan. Over 2/3 of this investment is directed towards transmission and generation, supporting the extraordinary load growth I mentioned earlier. In addition, nearly order of the plan is focused on strengthening our distribution network including system enhancement programs and other grid modernization efforts that are critical to improving reliability and performance for our customers. This capital plan drives a 5-year rate base CAGR of 10%, with nearly 90% of the investment recovered through reduced lag mechanisms, including formula rates, forward-looking test years and capital riders and trackers. Importantly, we are applying a ruthless capital allocation lens to every dollar we deploy, ensuring that each investment is aligned with customer needs regulatory efforts and long-term shareholder value. This disciplined strategy allows us to prioritize high-impact projects and maintain financial strength as we execute at scale. Let's turn to Slide 17 to discuss our high-growth transmission business. As Bill mentioned earlier, large load customers are drawn to our footprint because of AEP's world-class transmission system particularly our ultra-high voltage 765 kV backbone. Our unmatched expertise in the design and construction of ultrahigh voltage transmission continues to secure major projects. positioning AEP as one of the industry leaders best equipped to meet and capitalize on the accelerating AI-driven demand. Transmission is a core engine of value creation for AEP. In fact, more than 50% of our projected 2026 operating earnings will come from this high-growth business. Looking ahead, our transmission rate base is expected to exceed $50 billion by 2030. And generating substantial shareholder value through highly constructive regulatory framework. Next, I will cover our 5-year financing plan on Slide 18. This plan is built on strong cash flow from operations, driven by disciplined investment execution, favorable legislative and regulatory developments and a continued focus on cost management. It supports robust liquidity and with only about 25% of our outstanding debt maturing through 2030. In addition, we remain committed to returning capital to our shareholders through consistent dividend growth. A key component of the plan includes a modest amount of growth equity totaling $5.9 billion. In fact, we have limited near-term equity needs with over 80% of the growth equity projected to be issued during the back half of the 5-year plan. This financing plan is designed with flexibility in mind, enabling us to evaluate and deploy the most efficient financing tools to support our capital expansion. Over the planned horizon, we are targeting an FFO to debt ratio of 14% to 15% for both S&P and Moody's. We currently exceed our FFO to debt target with S&P at 15.7% this quarter and comparatively we are above our 13% downgrade threshold at Moody's. We expect to be near our 14% target with Moody's by the end of 2026 and in the targeted range for the remainder of the plan. Additional details on our third quarter FFO to debt metrics can be found in the appendix. Before we open the line for your questions, let's turn to Slide 19 and recap the key takeaways from today's discussion. Each one reinforcing why we are so energized about AEP's future as a high-growth, high-quality pure-play electric utility. First, we have delivered exceptional financial performance year-to-date which gives us the confidence to guide to the upper half of our 2025 operating earnings range of $5.75 to $5.95. This reflects not only disciplined execution as we leverage our size and scale but also the strength of our streamlined organization, which is driving accountability, operational excellence and results; second, we formalized our large $72 billion capital plan driving a 10% 5-year rate base CAGR with nearly 90% of investment recovered through reduced lag mechanisms. We're applying ruthless capital discipline to ensure every dollar deployed delivers on customer priorities regulatory alignment and long-term shareholder value. Third, today, we introduced an increased long-term growth rate of 7% to 9% and with growth expected to be at or above the high end of the range in the final 3 years of the plan. This marks a strategic step forward in our outlook grounded in real accelerating demand. Fourth, our earnings growth is underpinned by strong load growth, driven by our ultra-high voltage transmission backbone that continues to attract new customers into our footprint. This growth outlook is not only substantial, but it's also conservative and it forms the foundation of our $72 billion capital plan. Fifth, affordability and balance sheet strength remains central to our strategy as we execute our multibillion-dollar capital plan with discipline. We are forecasting average system residential customer rates to increase at approximately 3.5% annually through 2030, well below the 5-year average rate of inflation of 4%. This reflects our commitment to ensuring cost stability for our customers as we invest in the system. At the same time, our financing strategy is grounded in strong cash flow from operations with over 80% of growth equity projected to be issued during the back half of the plan. This approach is intentionally designed to support disciplined capital expansion through efficient financing while maintaining financial strength and flexibility. And finally, our momentum is further supported by constructive legislative and regulatory progress as we continue to empower local leadership and build financially strong utilities in the communities we serve. These efforts are expected to reduce regulatory lag, trim the gap between earned and authorized ROEs and support strong operating cash flows. I am truly excited to be part of this journey. I firmly believe AEP is one of the most compelling companies in our industry, uniquely positioned to lead, grow and deliver in today's transformative environment. With a clear strategy, the strength of our size and scale disciplined execution and unmatched infrastructure capabilities, we are well equipped to seize the opportunities ahead with confidence and create significant value for our stakeholders. We appreciate everyone's time today and your interest in AEP. We look forward to seeing many of you at the EEI conference in the next couple of weeks. And with that, I will now ask the operator to open the line so we can take your questions. Operator: [Operator Instructions] Our first question comes from the line of Ross Fowler from Bank of America. Ross Fowler: Just a couple of questions. If I'm looking at Slide 14, that looks like a pretty big earnings step-up as I look at the CAGR going out on the bars in 2028. Can you just kind of maybe Trevor, walk through the drivers of that? And is part of that maybe the schedule and timing of the Ohio rate case filing or under the new construct? Or how should I be thinking about it? Trevor Mihalik: Yes. Thanks, Ross, and I appreciate you joining today. We do see a lot of the earnings being driven by the capital plan. And certainly, in the middle part of the plan in '27 and '28 is when the most CapEx gets deployed. And so we're seeing about the capital plan peaking at about $17 billion in the middle part of the plan. And that's really what's driving a lot of the increase in the earnings for that step-up in that period. The other thing is, as you say, we've also gotten some positive legislative and regulatory outcomes that will manifest itself in that part of the planning cycle. And that includes the forward-looking test year in Ohio, Certainly, HB 5247 in Texas is a huge benefit to attracting capital to the state and having us deploy capital, which also is helping to narrow the gap around ROEs. And then also SB 998 in Oklahoma is another piece of legislation that also is helping narrow the gap. And so those are where you see that a little bit of the step change. And I know it's been a little unorthodox with regards to how we have put out the growth rate saying that we would be at below the midpoint of the growth rate in the first couple of years of the plan. And in fact, you can see us going from the midpoint of the $585 million to the $630 million in '25 to '26. But then we're pretty confident of being at or above the high end of the range in the back 3 years of the plan, and that's why we also put that 9% CAGR out there for the overall earnings. Ross Fowler: That's very fair, Trevor. And I guess as I look at Slide 18, talking about $5.9 billion of equity in the plan. How are you thinking about the composition of the business? Do you think there's more potential for minority stake sell-downs? Or how should I think about addressing that equity need over time? Trevor Mihalik: Yes. I'll take the equity, and then I'll let Bill address where he thinks we are with regards to potential any other sell-downs. But what we've tried to do is recall that we've said that we anticipate between 30% and 40% equity with regards to increasing the capital plan. And so when we laid out the $18 billion increase in the capital plan, this is roughly, call it, 33% of growth equity. The good news is because we've been very proactive under the $54 billion existing capital plan with both the asset sale in the Transcos this year as well as issuing the equity for the full 5-year plan, we really have a situation where a lot of that growth equity is now in the back end of the plan. And so what we will do is we're showing an ATM in 2026 of, call it, roughly $1 billion. And then we don't need equity for a period of time in the middle part of the plan. And then as we get to the back end of the plan, we'll either do an ATM or potentially a block equity deal in the back end of the plan. But again, I think this is very indicative of us saying we will issue equity to fund growth and great growth at that across the system. And then, Bill, do you want to take the question on any further sell-downs? William Fehrman: Yes. Thanks, Trevor. As Trevor noted, we're very encouraged by very favorable legislative and regulatory developments across our states. And our continued focus on disciplined cost management is going to continue to be a major effort of ours to support FFO. And so at this time, we're not planning any asset sales to fund the plan going forward. But obviously, we'll continue to assess things as they come up. Operator: Our next question comes from the line of Shar Pourreza from Wells Fargo. Our next question comes from the line of Steve Fleishman from Wolfe Research. Steven Fleishman: Congrats. The -- I guess, maybe, Trevor, on the '28 to '30, the part where you're kind of 9% or better. Is there like -- is there some type of shaping to that over those periods? Like does it accelerate higher? Or is it just pretty consistently 9% or better those years? Trevor Mihalik: Yes. Steve, I think where we are is it kind of gets back a little bit to Ross's question as we see the earnings step up in the mid part of the plan. And I would say what we're feeling pretty confident about is that giving the guidance where we said of '28, '29 and '30, we will be at or above the high end of the plan, I think you can assume that, that is pretty flat as of this point. Now I will say the good news is we continue to see a lot of growth, and we're excited to roll out this new plan. '28, '29 and '30 are out quite a ways with regards to the plan. And so it still gives us a potential to see incremental deployments. We continue to sign LOAs and ESAs. But right now, the way we've got it modeled, and again, this gets back to my mantra of make sure that we're very confident in the numbers we put out and deliver on those numbers. And so this gets back to the underpromise and overdeliver. And from my perspective, by saying that we're at or above the 9%, you can assume that, that's pretty flat in those 3 years at or above that 9%. Steven Fleishman: One just clarification. What's -- can you just clarify what the difference is between an LOA and an ESA? Trevor Mihalik: Yes. So really, an LOA for the letter of agreement is generally a first step before you get to an ESA. Both have financial obligations, but an ESA, an energy service agreement tends to be more binding. Now that being said, I will say down in Texas in ERCOT, we only sign LOAs and not ESAs. And so from that perspective, we want to make sure that when we talk about that 28 gigs, we're very confident in that because they're all under LOAs or ESAs. And in Texas, where there is no ESA, we feel very good about those LOAs that are getting signed down there. I will say, as we distill down from that 190 gigs and we continue to scrub that, that ultimately generates the 28 gigs of incremental load growth, I will say there are some LOAs that are executed that are not included in that 28 gigawatts as we continue to negotiate and work through to ultimately get to an ESA. So again, it gets back to my point in the prepared remarks where I said that it's real and it's conservative on the 28 gigawatts. Steven Fleishman: Okay. And then last question maybe for Bill. Just -- you mentioned something about a partnership with an infrastructure provider. Could you maybe give more color there? And just the turbine orders, like I think those are somewhat new, kind of when do those come in? And any update on Bloom, so just all your different partnerships and supply chain? William Fehrman: Sure. Thanks, Steve. So we're in the process of putting in place long-term supply framework agreements for the major equipment components that we'll need to deliver on the plan. And the good news for us is that we have in place significant agreements for turbines and for the high-voltage transmission transformer equipment that we need. And so I'm very comfortable with where we sit. The team has done a nice job of positioning us well to deliver on this. As I noted in my comments, I've added a lot of strength into this management team, particularly from Berkshire, who are very skilled at delivering multibillion-dollar capital programs and bringing them in to deliver. And so again, I'm quite comfortable with where we sit both on the management talent and on the major equipment that we have. On Bloom, we're still working with potential customers to deploy the additional megawatts that we have with them and look forward to hopefully having more to report on that perhaps by EEI. Operator: Our next question comes from the line of Jeremy Tonet from JPMorgan. Jeremy Tonet: Just want to look through the planned roll forward a little bit more as it relates to dividends. I was just wondering if you could talk a bit more specifically on what you see the DPS CAGR over that time period being, particularly in the back part of the plan. Trevor Mihalik: Yes. So Jeremy, I appreciate that question. What we've really done here is we just got out of our Board meeting and our Board did recently raise the dividend by 2% going into this next year. And we're also signaling that we are going to be at a 50% to 60% payout ratio. And the reason for this is because we have this robust capital plan and deploying capital is critical right now during this period of growth. And so what we've done is in the plan, we've assumed that the dividends are really increasing by the number of shares outstanding, and then we would make recommendations to the Board. As you know, this is a Board discretionary item and the Board would ultimately make the decision as to where we're going with the dividends. That said, certainly, the discussion that we had with the Board was they are supportive of us growing the dividend over a period of time. And I will say this marks 115 consecutive years of AEP paying a dividend, and we have had a continued dividend growth over the last, call it, a decade or so. And so this is something that we really look at as part of the overall total shareholder return and getting value back to our shareholders is both the dividends as well as the growing earnings over that period of time. So again, I would say, in conclusion, the Board is very committed to our dividend and getting a dividend that has a yield as well as a payout ratio that is well within the industry norms, but we did moderate it a little bit and made that recommendation to the Board given the 30-plus percent increase in the capital plan. Jeremy Tonet: Got it. That's very helpful. And then I just want to come back to the EPS CAGR, if I could, one more time to put maybe a finer point. When you're referring to the high end of 28% to 30%, is that year-over-year or CAGR? So basically, is this a CAGR of '26? Or is this year-over-year from '27 into '28? Trevor Mihalik: It's a year-over-year. Operator: Your next question comes from the line of David Arcaro from Morgan Stanley. David Arcaro: I was wondering if you could maybe just give a bit more of a sense of how the conversations are going with data centers and constraints on the system that you're seeing. So I guess I'm curious, are you able to keep up with the transmission capacity needs for data centers to handle all of this load growth? What's the wait time to connect that you're having to discuss with these customers? And is it fair to characterize a lot of this transmission CapEx that you're adding to the plan here? Is that opening up additional capacity to bring in these new customers? Wondering how that all kind of balances right now. William Fehrman: Yes. Thanks for that question. Really excited about where we sit in this regard. As we've noted in here, the increased incremental load growth projected through 2030 is the 28 gigawatts, up from the 24 gigawatts that we talked about before. And that demand growth is roughly 80% tied to data centers in the commercial class and about 20% tied to the industrials. Breaking that up a little more, about 75% is related to transmission and distribution, while 25% is tied to the vertically integrated utilities. And so as I look out across the RTOs, roughly half ends up in ERCOT, 40% in PJM and about 10% in the SPP. And so as we look at where we sit to connect these customers, clearly, we're working with them to site where we have available transmission today to help them with their ramp-ups in the manner in which they want to run their side of the business. And then in other cases, we're working with them to put in place behind-the-meter solutions. Obviously, Bloom is a part of that in certain cases. But we also have other strategies that we're deploying to support the data centers. And so for me, this company is all about serving our customers and trying to figure out a way to get them connected as quickly as they can. As we build out the transmission system, of course, that's going to open up additional opportunities to perhaps bring on more of that 190 gigawatts, but in the meantime, as Trevor noted, we're very focused on reporting what we have signed. We're going to underpromise and overdeliver in this area, but I couldn't be more excited with where we sit across our service territory. We are in, I would say, the cat bird seat with regards to connecting data center load. The 765 kV transmission network that we have provides us with an extreme competitive advantage for where these folks are trying to site. And so I just see an amazing future ahead of us in this area. David Arcaro: Okay. Excellent. Yes, that's helpful. And then I was wondering if you could characterize your strategy or your thoughts on the generation side as well for vertically integrated utilities. Just how do you manage the balance between how you're thinking about renewables, serving this new load versus gas? Yes, that's basically the question. Just as you see -- you've talked about peak load for sure, but you're seeing energy demands across the entire system and then, of course, peak as well. But yes, what's the balance there between renewables versus gas on the generation side? William Fehrman: Well, we're focused on doing what our states want as their energy policy. And so as we go across our major states and work with the customers in those locales, we'll move forward with the types of generation planning that they want. That, of course, gets sorted out generally through the integrated resource plans that we submit. And if you look at our major states, obviously, they're very much driven by gas at this point in time. That said, a number of our customers are still heavily interested in renewables. We have about a little over $7 billion in our capital plan for the deployment of renewables to support those customers. And so we're going to continue to go down that path and make sure that we're balanced between what the states want and what our customers want. And I feel very confident in our team that we have the capability to be able to deliver whatever approach those customers want to have in the states that they're located. Operator: Your next question comes from Julien Dumoulin-Smith from Jefferies. Julien Dumoulin-Smith: Nicely done. What a difference a year makes Absolutely. Wow, dream team here. Look, let me frame 2 questions. One, going back to the direction Steve was pressing you guys with respect to cadence. I mean, if you're accelerating towards the end of the plan, naturally, you'd ask, how does that trend beyond the current plan? And if I can cite evidence here, your peers in Indiana put out a growth rate that extends beyond 2030 at this point. How do you think about what you're seeing shape up, whether it's commitments for further ramp beyond 2030 and/or just being able to process some of that load in the longer term, right? I know that folks are trying to get in the queue quickly. But certainly, some of that's just going to take longer to process and drive growth beyond that period of time. How do you think about that 31%, 32%, if there was anything to say preliminarily? Trevor Mihalik: Yes. So Julien, I appreciate the question. And I tell you, this kind of gets back again to what I have said earlier that what we want to do is be very confident in the numbers that we put out and deliver on those numbers. And that's why I think this 9% CAGR and saying that in '28, '29 and '30, we'll be at or above the high end of the range, we have a great deal of confidence in that. What I want to do is ensure that we are going to deliver on what our commitments are over the next 5 years. And then as we continue to see opportunities roll in, we will revise that on an annual basis. That being said, I did intimate that of the 28 gigs that we say we see and are under firm LOAs and ESAs that there is some additional opportunity to see continued load growth on the system as we convert some of the LOAs that are currently being discussed and signed before they get to ESAs to come on. But what I don't want to do is put something out there that I don't feel very confident that we can deliver in. And that's why I'm very positive and comfortable with where we are on the 5-year and again, saying that we're at or above that 9%. And then I don't want to kind of try to sculpt that beyond or where that is in the '28, '29 period. And that's why I told Steve that we're going to be fairly flat in that area at the 9% or above. But again, what we're seeing is just incredible growth across the system right now, and that has been accelerating, and I think that will carry into the years beyond. Julien Dumoulin-Smith: And again, if I can go back to it and ask it in a slightly different manner. With respect to the current 5-year outlook, obviously, you have a lot of folks knocking on your door, right? You've got this 28 gigawatts, as you described, that you've got under contract. To what extent could you actually see positive revisions further as you convert some of the interest into more of those LOA, ESA term sheets? Is that conceivable? Or do you think given what you understand about your system that, look, this is pretty locked in and we frankly have a pretty rigid ability to accommodate more in this 5-year period? Trevor Mihalik: Yes. Look, Julien, I think we're excited about just like you said at the very opening comment here, what a difference a year makes and what we've been able to do within this 1 year as we continue to see this mass amount of growth on the system. And I know that some people say that we should be somewhat cautious in talking about the 190 gigawatts that are backing the 28 gigawatts, and those are in various stages of discussion. But again, we feel very good about that 28 gigawatts because of the 190 gigs behind it. And so I think that really could color your view as to where we are on the growth for the system, is it conservative given that you've got 190 gigs in various stages of discussion. And even if only a fraction of that were to come online, it's still a pretty compelling story from where we are today. Operator: Your next question comes from Carly Davenport with Goldman Sachs. Carly Davenport: Just a follow-up on some of the comments that you've been making on the LOAs versus ESAs. Are there LOAs outside of Texas that are in the plan? And then is there a defined term or gating factor for the LOAs that are included in the 28 gigawatts versus those that are not? Trevor Mihalik: Yes. So there are some LOAs outside of Texas. So again, in PJM, what we have is 100% of the increase is under LOA and then almost 80% is under ESA. Likewise, in SPP, 100% is under LOA and then there's a piece of it is under the ESAs. And then in ERCOT, of course, everything is under LOA. So again, what I want to emphasize, though, is these LOAs do have financial commitments associated with them, and that's why we have so much confidence in the 28 gigawatts, Carly. Carly Davenport: Got it. Great. And then just on the new transmission budget, curious what that assumes on the PJM open window opportunities. Is the most recent window sort of baked in there? Or is that a source as you think about potential upside opportunities on the transmission piece of the business? Trevor Mihalik: Yes, Carly, I would say we've taken into consideration into the 5-year capital plan, everything that we know with regards to existing transmission that we feel pretty confident about. But again, we continue to see opportunities around incremental investments in the transmission system, maybe not under new transmission lines, but certainly the continuation of the rebuilding of some of the infrastructure. But the PJM opportunities are built into this 5-year capital plan. Operator: Your next question comes from Nick Campanella from Barclays. Nicholas Campanella: A lot of good questions have been asked, but just maybe just on the earned ROE improvement, '26 through 2030, just what are you kind of holding your team to in terms of improvement year-by-year? Is that supposed to happen linearly through the plan? I know you have some big rate cases like Ohio that will be filed, which can kind of help catalyze that. But just maybe you can kind of comment on the cadence of ROE improvement between now and 2030 and what you expect year-by-year? William Fehrman: Yes. Thanks for that question. And first and foremost, I want to make sure that everyone knows ROE is front and center with us, and we've been spending an incredible time with the states and our regulators to look for improvements in this arena. And as I look back at where we were a year ago, our ROEs have shown steady improvement. And the drivers of that were constructive regulatory outcomes and pretty favorable legislative developments. And so I know that as we look forward, we're going to continue to drive better outcomes. But I really like where we're at. Just in the recent past, we've had a lot of success. If you look at AEP Transmission, AEP Ohio, I&M, all of those have posted ROEs near or above their authorized. AEP Texas is going to continue to improve their ROE rising to 9% in quarter 3 from 8.6% last quarter. And again, that's due to a great legislative outcome in HP 5247. And then at PSO, SWEPCO and Kentucky Power, while those are impacted by regulatory lag, we expect to see good improvements and really better outcomes due to the new base cases and the generation filings we're making there. And then I want to address West Virginia right upfront. It was obviously -- their ROE was affected by the most recent regulatory order we got, but we're fully engaged in West Virginia. We have filed for reconsideration. We're working with all the stakeholders there, and that continues to be a major focus of mine. I'm spending a significant amount of time in West Virginia to try and support a better outcome there. And so when I add all that up and I think about where we're at overall from where we were just a year ago with the focus that we've had on ROE, I feel very good about what we put in the plan. I know we're 20 basis points off where we thought we might be, but for me, when I look at the significant improvement we've had across all of our states, I'm very excited about what the team has done, and it just really sets us up very strongly for moving forward from here. Nicholas Campanella: Okay. Okay. And I'm sorry if I'm not understanding it fully, but just on the 7% to 9% because there's just this dual communication here. Just in '28, should we be growing that 9% plus off of '27? Or should we look at that as a CAGR from '26 and what 9% would imply for '28? Trevor Mihalik: Yes. So I think what you want to do is we've kind of bifurcated it into the 2 pieces here. And we've said for the first 2 years of the plan, we will be growing at below the midpoint of the 7% to 9%. And really on the back 3 years, we will be growing at or above the 9%. And so from a standpoint, that's why I gave the 9% CAGR over that 5-year period starting from the midpoint of 2025. And so I think what that does, Nick, is it really allows you to kind of walk out the EPS numbers almost on an annual basis here because I'm giving you the midpoint of the 2026 and then you can assume that the 2027 is kind of consistent with that growth. And then once we go up to '28, '29 and '30, we'll be growing at that basically high end of the range, at or above that high end of the range for an overall CAGR over that 5-year period of 9%... Nicholas Campanella: I'm sorry to make you repeat yourself and looking forward to EEI. Darcy Reese: Are you there, Colby? We have time for one last question. Operator? William Fehrman: Well, it sounds like the call is coming to a close. Really appreciate all of you joining us on today's call. I'd like to close with just a few summary remarks. So I'm very excited about when I think the -- about the opportunities ahead at AEP as we advance on our long-term strategy to drive growth and create value while enhancing the customer experience. I'm also extremely proud of the entire AEP team and particularly all of the strong support received from our Board of Directors. We're putting our robust $72 billion capital plan to work as we continue to grow the business across our large footprint and deliver on our commitments for the benefit of our customers, our communities and all of our other stakeholders and investors. And finally, if there are any follow-up items, please reach out to our IR team with your questions, and we look forward to meeting with many of you at EEI in a couple of weeks. This concludes our call. Thank you.
Operator: Good day, and thank you for standing by. Welcome to the Smurfit Westrock 2025 Q3 Results Webcast and Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Ciaran Potts, Smurfit Westrock Group VP, Investor Relations. Please go ahead. Ciaran Potts: Thank you, Sarah. As a reminder, statements in today's earnings release and presentation and the comments made by management during this call may be considered forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the earnings release and in our SEC filings. The company undertakes no obligation to revise any forward-looking statements. Today's remarks also refer to certain non-GAAP financial measures. Reconciliations to the most comparable GAAP measures are included in today's release and in the appendix to the presentation, which are available at investors.smurfitwestrock.com. I'll now hand you over to Tony Smurfit, CEO of Smurfit Westrock. Anthony P. J. Smurfit: Thank you very much, Ciaran, for the introduction. Today, I'm joined by Ken Bowles, our Executive Vice President and Group CFO, and we appreciate all of you taking the time to be with us. I am very happy to say that we have again delivered on guidance in what is a challenging environment with an adjusted EBITDA margin number of USD 1.3 billion and an adjusted EBITDA margin of 16.3%. The quarter was characterized by some challenging months, specifically July in our North American region and August in Europe. Nonetheless, we were able to come through with the numbers we predicted and planned. Since our combination, our North American business has shown great improvement over the course of the last 16 months on both the commercial and operational front, that's reflected by an improved adjusted EBITDA margin of 17.2% for the quarter. As you will have heard us say, as we got to understand the legacy Westrock business, we have taken strong actions to remove uneconomic volume within our portfolio of businesses. This, of course, has resulted in a loss of volume as we transition and reposition our business. While there will be a time adjustment to this reposition, we believe we are clearly on the right track as we are already seeing quality customer wins. In addition to changing our customer portfolio, we're also continuing to rightsize the business by closing down inefficient or loss-making operations including the recently announced closure of a corrugated facility in California in addition to the 8 previously announced closures. In paper, we have already announced approximately 500,000 tons of capacity closure in both containerboard and consumer board grades. These footprint optimizations will be a continuing feature as we develop and grow our business. Turning now to EMEA and APAC. Our adjusted EBITDA margin of 14.8% is highly creditable given the environment that exists in the European sphere. We believe it clearly demonstrates the power of the integrated model, which is producing this resilient margin in an environment of paper overcapacity. Our mills continue to run optimally, while at the same time, our converting business are capitalizing on their outstanding leadership position in innovation. We believe this, combined with our insights into sustainability and the significant pending regulations from the European Union should give our customers confidence to help them in navigating this environment. In our LatAm business, with an excellent EBITDA margin of over 21% due to our strong market position principally -- these are principally in Brazil and our Central Cluster. Our sequential margin showed a small fall in the last quarter as a result of some operational issues in one of our larger mills in our Central Cluster, which is now being resolved. The region still has significant growth opportunities for us to develop in the years ahead. Turning now to the group and regional highlights. What I'm very happy with is the initial potential of the combination as evident in our cash flow performance in the quarter, with operating cash delivered USD 1.1 billion and an adjusted free cash flow of approximately USD 850 million -- USD 580 million. One of the things that especially pleases me about this number is that we're really only starting to get going on working capital optimization as we continue to focus on operating excellence. I'm also very happy to have the people in the new Smurfit Westrock have come together and adapted to the culture of the company and its values of loyalty, integrity and respect and safety adoption by everyone in the workplace. The group has also been working effectively on the synergy program, which Ken will speak on further, which is exceeding our expectations, especially when one looks at the commercial improvements that we can see across the businesses. Finally, in the group, not only in North America, but also in Latin America and Europe, we continue to optimize our asset base with the recent closure of a facility in Brazil and the transfer of equipment to other operating units, together with constant trimming of our assets in our European sphere. In terms of the regions, as I've mentioned, we continue to make excellent progress across our North American system. For example, in corrugated, our loss-making units have declined by almost 50% in a 1-year period with today, over 70% of our corrugated operations solidly profitable. And we expect significantly more progress to occur as we replace and swap out uneconomical volume. In our consumer business, this business is very well positioned with substantial investments and restructuring already done. With strong positions in SBS and CUK, we're actively working to transfer customers from CRB to these grades and have already switched about $100 million worth of business. We do, however, believe in offering all 3 substrates to our customer mix. Our first Global Innovation Summit was held in Virginia in September. And the rollout of our Experience Centers in our North American region, while in its infancy, is now happening. In EMEA and APAC, our integrated model is really proving the success of our business. Our mills are well utilized, and our outstanding position and innovative offering is retaining and developing customers. One of the great opportunities for us has been the effective integration of our consumer operations into our European business. We have a vastly greater customer base to introduce to our consumer operations into Europe, and moving these businesses back to local sales and manufacturing accountability has already started to see some significant benefits. And finally, during the quarter, the rationalization of 2 of our German converting plants has been agreed. This will significantly strengthen our leading German position as we await the inevitable upturn. Turning to Latin America. I'm increasingly excited about our Brazilian operations. The legacy Smurfit and legacy Westrock businesses are a perfect fit with one concentrated on recycled containerboard and the other on virgin kraftliner. Our converting businesses have quickly adopted our value over volume focus, which is already showing significant improvements. In our Colombian business, we experienced significant growth of 8% due to our commercial offering and the market developing as a growing exporter of fruits and vegetables. Across the region, we're capitalizing on many of the growth and development opportunities we have. For example, in Chile and Peru, where our volumes grew by 15% and 25%, respectively, during the third quarter. I'd like to give you a sense of the excitement that exists and is building in -- within Smurfit Westrock company today. We're a stronger and better company through the adoption of the owner-operator model. Everyone across our world is now responsible for their own P&Ls. This has unleashed a tremendous enthusiasm and internal competition to do better and lends itself perfectly into having a performance-led culture where everybody is responsible for what they do. I'm especially pleased that we have now initiated global and regional leadership programs, whereby over 300 managers will have started our group programs. In Smurfit Westrock, people are at the heart of everything we do, and we ensure that they have the tools to succeed in their job and to realize their potential. And our synergy programs and optimize asset base, together with our innovation offering and transfer of best practice will, we believe, contribute to superior performance in the future. I'll now hand you over to Ken, who will take you through the financials. Ken Bowles: Thank you, Tony. Good morning, everyone, and thank you again for taking the time to join us. On Slide 8, you'll see the business again delivered another strong performance in the third quarter, with net sales of $8 billion, adjusted EBITDA in line with our stated guidance of $1.3 billion, a very solid adjusted EBITDA margin for the group of over 16% and a strong adjusted free cash flow of $579 million. The performance reflects the strength and resilience provided by a diversified geographic footprint and product portfolio, particularly in the challenging macroeconomic environment, and of course, the commitment and dedication of our people to delivering for all our customers. Turning now to the reported performance of our 3 segments. And starting with North America, where our operations delivered net sales of $4.7 billion, adjusted EBITDA of $810 million and adjusted EBITDA margin of 17.2%, an excellent outcome. In the region, we saw continued margin improvement, predominantly due to higher selling prices, our operating model in action and the benefits of our synergy program, alongside input cost relief on recovered fiber, which combined to more than offset lower volumes and headwinds and items such as energy, labor and mill downtime. Corrugated box pricing was higher compared to the prior year, while box volumes were 7.5% lower on an absolute basis and an 8.7% on a same-day basis. An outcome very much in line with our ongoing value over volume strategy, which we estimate accounts for about 2/3 of that volume performance. Third-party paper sales were 1% lower, while consumer packaging shipments were down 5.8%. With shipments in our smaller Mexican operations being lower than our U.S. business, which saw volumes down 3.7%. Our differentiated, innovative and sustainable approach to packaging continues to resonate with customers, which, coupled with the empowerment of our people to drop uneconomic business and the implementation of our owner-operator model is driving continuous business improvement across the region. Looking now at EMEA and APAC segment, where we delivered net sales of $2.8 billion, adjusted EBITDA of $419 million and adjusted EBITDA margin of 14.8%. Despite the challenging market backdrop, our operations remained resilient with adjusted EBITDA moderately ahead of the prior year. This performance reflects the skill of our local teams in managing a highly volatile cost environment and underscores the effectiveness of our integrated operating model, where we have consistently delivered an operating rate in our containerboard mills in the mid-90s. Higher corrugated box prices year-on-year alongside lower recovered fiber costs and a net currency translation benefit were partly offset by headwinds on energy and labor and lower third-party paper prices, while corrugated box volumes remained flat on both an absolute and same-day basis. We believe we are the market leader in Europe with strong market positions and a proven operating model, supported by our best-in-class asset base, which allows our people to continue to deliver high-quality sustainable packaging solutions for all our customers. This position is supported by our approach to innovation, where we have a large data set and bespoke applications that place the customer at the center of that conversation. Our LatAm segment again remained very strong in the quarter with net sales of $0.5 billion, adjusted EBITDA of $116 million and adjusted EBITDA margin of over 21%. Corrugated box volumes were flat year-on-year or 1% higher on a same-day basis, with the demand picture in the region showing a marked improvement with strong demand growth in Argentina, Colombia and Chile, amongst others. All while our value over volume strategy continues to deliver strong results in Brazil as we have now largely phased out unprofitable legacy contracts with volumes, with volumes there moving into a more neutral position. The region successfully implemented pricing initiatives to offset higher operating costs [ and delivered ] another consistently strong performance with a small step down in EBITDA margin year-on-year due to a now resolved issue in one of our operations during the quarter. As the only pan-regional player, we believe that Latin America continues to be a region of high-growth potential for Smurfit Westrock, both organic and inorganic, and one where we are well positioned to drive long-term success. Slide 10 outlines our proven capital allocation framework. I don't propose to go through each of these [ frameworks ] today, but I would note that in February, we plan to provide detail on how we see capital allocation underpinning the achievement of our long-term business goals. What is new is that our CapEx target for 2026 will be between $2.4 billion and $2.5 billion, broadly in line with the current year. We continue to invest ahead of depreciation and so this level remains accretive to earnings as we invest behind identified growth, efficiency, sustainability and cost takeout opportunities. The core tenet of our capital allocation framework is that it must be flexible and agile. This was our approach at Smurfit Kappa and continues to be our approach at Smurfit Westrock. It is a proven track record of delivery, and we are already seeing the benefits of it since forming Smurfit Westrock a little over a year ago. Our approach to allocating capital is disciplined and rigorous and requires that all internal projects are benchmarked against all of the capital allocation alternatives and is, therefore, always returns focused. On our synergy program, I'm pleased to confirm we are delivering as planned and on track to deliver $400 million of full run rate savings exiting this year. And finally for me, as noted in the release, the year-to-date has been characterized by a challenging demand backdrop, and as a result, we expect to take additional economic downtime in the fourth quarter to optimize our system. If you recall, we set out our guidance for the year in April. And given the impact from the above, we are now marginally adjusting that guidance range to where we now expect to deliver full year adjusted EBITDA of between $4.9 billion to $5.1 billion. And with that, I'll pass you back to Tony for some concluding remarks. Anthony P. J. Smurfit: Thank you, Ken. I hope you get a sense from my earlier commentary and Ken's performance summary that we believe that Smurfit Westrock is very well positioned for continued performance as well and the economic growth as it revives, I would say the company has never been in better position. Throughout the company, all of the people that are aligned with this approach, and we can already see the tangible benefits of this as many loss-making operations move into profit and thankfully, with much more to come. Reflecting the generally well-invested asset base, our capital spend for full year '26 is expected to be in a $2.4 billion to $2.5 billion range. We believe this level enables us to accelerate cost takeout, increase operating efficiency and capitalize in high-growth areas. In parallel, we recently announced restructuring initiatives, which also allow us to continue to optimize our asset base. As a more general point, our philosophy has generally been to buy and not build. As we have typically acquired at a fraction of the replacement cost is invariably cheaper with an enhanced returns profile. On acquisition, our objective is always to optimize through measured capital allocation decisions. We will discuss this further in February, and Ken has already touched on this. The delivery of our synergy program, together with our ongoing capacity rationalization remains a constant focus. With a significant headcount reduction of over 4,500 people and an unrelenting focus on the owner-operator model, we believe our performance to date is an indication of our potential. We remain confident that our footprint remains unrivaled with strong and leading market positions in the majority of the markets and grades of paper in which we operate. There is no question in our minds that since Smurfit Kappa and Westrock combined, we are building a stronger and better business with management aligned with shareholders and developing our performance-led culture. Over the last 16 months, we have taken significant steps to build this better business, and we are increasingly confident in the future prospects. While for sure, the current economic outlook is somewhat muted, our view is that the steps we are taking, investments we're making, the alignment we have with shareholders and the culture we're building within Smurfit Westrock positions us to go from strength to strength as economies improve. We end full year '25 and enter '26 as a better and stronger Smurfit Westrock. To that end, in February '26, we will be setting out our longer-term targets, which are a bottom-up approach from all of our businesses, which will be designated to identify prospects for this company as we look forward into the future. So thank you for your attention, and I look forward to taking any questions that you may have. Thank you, operator. Over to you. Operator: We will now go ahead with the first question. This is from Mike Roxland of Truist Securities. Michael Roxland: Congrats on all of the progress. Tony, you mentioned obviously, weakness in the European market from both demand and price, is there anything you could do to expedite cost takeout? You mentioned, obviously, continuing to trim assets in Europe, rationalizing the 2 German plants. But given the weakness that persists there right now, can you expedite cost takeout to try to get things rightsized faster? Anthony P. J. Smurfit: Yes. I think -- Mike, thanks for the question. I would say that we have done a really good job over 15 years of optimizing our capacity in Europe. Obviously, there's always little things to be done, but we're running our system pretty well full in Europe with the exception of August and probably December, where we'll take some downtime because those months typically are months where the corrugated box plants close for holidays. So our system is pretty well optimized. Obviously, we continue to look at it. We're basically a low-cost producer in the European market. And when you look at our returns and you look at some of the other competitors' returns that have been publicly available. And obviously, we get a sense of how some of the private guys are doing. We're far exceeding the returns in Europe. And -- so unfortunately, it is a question you've already seen a number of mill closures around the place. I think we're going to see more, and I think that the pain is very, very real, and you can see even some public companies with negative EBITDA margins in the containerboard business in a very significant way. So I think the old saying, the worse it gets, the better it will get, well, it's pretty bad right now. And I think when it turns, it will turn very sharply. And so that's what we are waiting for. Obviously, as I said, that doesn't mean we're sitting on our hands doing nothing. We're continuing to close a few facilities here and there, not very big ones, but we've done a number of stuff. And we have a very, very active cost takeout program across all of the business to mitigate all of the wage inflation that we've had over the last number of years. But -- so cost reduction programs do not stop. They're continual, and we continue to look at our asset base and will trim if necessary. Michael Roxland: Got it. And then just 2 quick follow-ups. Any color you can provide in terms of how demand trended in both North America and Europe in September and what you've seen thus far in October and any outlook for November? And then just quickly on consumer because it was interesting, you mentioned transferring $100 million of CRB business to SBS and CUK. Can you just help us frame the logic behind those moves? Is it just a matter of wanting to run SBS more efficiently at a higher rate? And is there any margin uplift associated with that shift? Anthony P. J. Smurfit: Yes. Taking your second question first. I mean, basically, as the SBS price has trended downwards. Because SBS, you can run with a stiffer sheet and you can use a lower grammage, it's basically become competitive with CRB. And there are positive qualities to SBS versus CRB in the sense of brightness and transportation costs, so -- and runnability on printing machines. So I'm not saying that CRB is all bad. It's not. There are certain customers that will really want CRB. There are certain customers that really want SBS, and there are certain customers who want CUK. And clearly, where the positioning is right now, it's just advantageous for our customers to look at SBS and so we've taken that opportunity as well as some of the CRB issues where, again, you've got some opportunities to -- especially in the freezer for frozen products to move into CUK, which is something we're actively promoting. And I think, as I said, we've $100 million or so already transferred in the last 4, 5 months, and I think more to come. On the first question, Mike, just remind me what was it? Michael Roxland: Demand trends. Anthony P. J. Smurfit: Demand trends. I don't -- I could say that we were expecting to see an uptick in October, and we did not see it. Now you have to remember, Mike, one of the things that has happened is that we took on, as in legacy WestRock took on business in the latter half and first half of last year that we were running in the second half of last year. And a lot of that business that was taken on was not necessarily very economic for us. So we have been addressing that during the first half of this year. And inevitably, that's when we tend to see that exiting again. Some of it will come back as we are a good supplier. We're very reliable and high quality and high service supplier. So we expect some of it to return at prices as we've seen already in Brazil, for example. We expect some of it to return at a certain point in the future at the prices that make it economic for us. And if it doesn't, well, so be it, we'll go out and get some other business. But when you lose big chunks of business, Mike, it tends to go and get 10 chunks of smaller business, it tends to take you a little bit longer, and that's what we're seeing. But we have a huge pipeline of business in our system. We won't land at all. But certainly, our people are very comfortable and confident that we're going to get it. And as I said in my script, we're already seeing some very significant customer wins in high-quality names at levels that are going to be good for us to run that. Operator: Next question is from Phil Ng from Jefferies. Philip Ng: So Tony, you mentioned you're going to be taking some economic downtime in the fourth quarter. Curious what markets, is this North America? Is this Europe? How should we quantify the EBITDA impact? And appreciating you're walking away from -- you're taking a value-over-volume approach. But as we kind of think about how that translates, how should we think about that spread of your volumes versus the market overall, call it, the next 12 months? Anthony P. J. Smurfit: Yes. With regard to -- I'll let Ken take the downtime question. But with regard to -- we're sort of figuring out that -- we believe that the market is down somewhere around 3% or 4%, and we're probably down -- 5% of our loss of volume is due to our own decision making. That's the sort of number that we -- it's not going to be 100% accurate in that. It could be 3%. It could be 4% market down, but you saw one of our larger peers was down 3% in the quarter, and one would have said that they're probably winning some business in the marketplace. So therefore, taking that as a trend then I would say that the market is probably down a little bit more than that 3%. Ken Bowles: Yes. Philip, I think to take the second part of that question first, I think the simplest way to quantify the EBITDA impact is broadly, if you think about where our guidance was, [ where we're bringing to, ] call it, somewhere between $60 million to $70 million is the incremental impact of downtime in the fourth quarter versus what we previously would have said. I think, look, if we think about operating it in Europe and us in the mid-90s, unlikely to see any material -- for the remainder of the year, any material incremental downtime in Europe. So predominantly, it's going to be across the North American region because Latin America, we don't really see any downtime there either. Philip Ng: Ken, do you expect your inventory to be in a pretty good spot as you exit this year in North America? Ken Bowles: It's getting there, Philip. It's -- supply chains in North America is different than Europe in the sense that they're very, very long. So it takes a while to kind of get back to what you might like as kind of optimal inventory. The working capital as a percentage of sales for the group is probably around 16%, which is kind of higher than we'd like it to be. At Smurfit Kappa, we were down in kind of 8% and 9%. Don't expect us to get there over time, but certainly, somewhere in the middle there that the right answer is. You have to remember, as a third-party seller, Westrock over the years had grown into a number of different grades and a number of different widths of paper. So part of the optimization here is kind of bringing it back to not quite Henry Ford. We're getting it back to a place where it's a reasonable set of grades and flute sizes and widths that we feel are optimal for not only the paper system, but the corrugated system and a need for our customers. So it's all part of -- it all really comes back to helping our customers understand what their boxes need rather than just supplying what they think they might want. So I don't think we'll exit this year in perfect shape, Philip, but I think as we kind of move through '26, it gets incrementally better as we kind of understand the supply chains a bit better and rationalize kind of external board grades. Anthony P. J. Smurfit: Philip, if I can just add on to that, I'm really very excited about as we optimize our supply chain system and work through our board grade combinations that together with the corrugated businesses in our system, that this is going to present a big opportunity for us. But it needs careful thought and planning because as Ken has just rightly said, the distances in America are very big, and we've got to make sure that we get that right, but there's a lot of opportunity there for us to reduce stock. Philip Ng: Got it. And sorry, one last one for me. Tony, I thought your comment about pivoting some of your CRB and CUK business to SBS was fascinating. That sounds like a pretty attractive value prop for your customers. You gave us the CapEx guidance for '26 as well. Embedded in that, is there any mill conversions that you're possibly thinking in SBS? Or you feel pretty good about some of the opportunities you see in front of you on the SBS side, you're going to largely keep your footprint intact at this point? Anthony P. J. Smurfit: If you -- if I could just ask you to hold off until February for that because we'll give you a full answer then because clearly, we're working through some different strategies in relation to that, and then we'll give you a better -- once we've organized that, we'll tell you about that. But basically, we have some very, very good assets that we will continue to look at. And obviously, there's some that we will continue to evaluate and give you a better answer to those in February. Operator: Next question is from Gabe Hajde from Wells Fargo Securities. Gabe Hajde: I wanted to ask about the guidance, the CapEx guidance for '26 and maybe a little bit differently. I'm just curious if the organization for the year, if there's anything strategically that you guys are focused more on cash flow for 2026 versus EBITDA. Sometimes that drives different operating behavior. I'll just stop there. Ken Bowles: Gabe, no, not necessarily. I think it's more a case of the reality is that Smurfit Westrock should be -- and if you look at this quarter, particularly, a strong free cash flow generator irrespective of the CapEx cycle. I think what we've always done, though, is be very disciplined about when we place capital into the system and indeed adopting a kind of portfolio approach where you don't have, a, too many big programs in any particular year, any big systems that are taking all the impact in a particular year and no region that kind of has that impact. But I think it's fair to say that when we went through the cycle this year and to Tony's earlier point to Phil, building towards February, when we look at the capital requirements for '26, the reality is that all we feel we need to keep the system going and improving and growing is somewhere between $2.4 billion and $2.5 billion. And that ultimately means that we don't end up with any kind of big build for CapEx going into '27 , for example. But it's a normal phased approach. So no, there's never a case of trying to, if you like, try and get to a free cash flow number at the expense of EBITDA, that never is. I think it actually becomes more of a virtuous circle, which is you place capital into the system, we expect the returns out which should drive return on capital employed in one sense and also drive EBITDA. And then that capital goes back into the system. I sort of -- I look backwards, look forward a little bit here, Gabe, in the sense that as Smurfit Kappa, we place extra capital in the system, increase ROCE, increase the dividend, delevered and grew. So I think it's a model, if you like, from an owner-operator perspective and a philosophical perspective, that's worked in the past. So no, it's not that we take that kind of that choice. It's actually that's the capital we think the business needs to kind of drive and grow. Anthony P. J. Smurfit: Yes. And I'll just add to that, Gabe, that the whole philosophy of our company is to remain agile, as Ken as said, we adapt to the situation that's around us. And one of the key tenets of our business is never to overinvest and have too much investment going forward that we can't back out of, so to speak, so that we're in a position to be able to flex if we need to because that's what really hurts companies, if you can't pivot depending on the environment, either positively or negatively. And so that's been the hallmark of the success of Smurfit Group, Smurfit Kappa and now hopefully in the future, Smurfit Westrock. Gabe Hajde: I wanted to switch gears to Europe. You guys provided a little bit of color as to the -- I know the number kind of jumps off the page where you're underperforming the market. But over in Europe, I think up a little bit, 0.2% is pretty impressive. You talked about the mills running mid-90s. Can you provide a little bit of color in the markets whether it's geographic or end-use markets where you guys are doing particularly well? And then I guess, maybe a little bit on the margin side. Obviously, prices kind of came up quite a bit in the spring and early summer and have come down, basically kind of given back a lot of that. How should we think about that flowing through? Is that hitting Q4? Or is that really more of an H1 '26 event? Anthony P. J. Smurfit: Just on the markets, in general, I would say that the -- there's no real change to what we've said previously that Germany continues to be a laggard, some of the other markets in the U.K. The Benelux tend to be basically flat with some positive movements in Eastern Europe and in Iberian Peninsula, which is growing strongly. So in general, there's no real change into how the markets are operating. We sometimes flatter to deceive in Germany where things get really good for a couple of weeks and then go back to the norm. So I think we haven't seen any material positivity in the German market yet. But inevitably, that will happen. And as I mentioned in my script, we're about to close 2 facilities with improved facilities in the incoming plants that are receiving capital. So when Germany does turn around, we'll be even better positioned than we were before to take advantage of that. With regard to... Ken Bowles: On pricing, actually, third quarter in Europe, we saw prices tick up by about another 0.5%. So not quite done there yet on pricing. I suppose, ultimately, without a crystal ball and forecasting, I think where pricing goes from here depends on -- really depends on the same question we've had all day, which is where does demand go. Because ultimately that will feed into what happens with paper prices. But irrespective of that, it's very much a kind of second quarter, third quarter question on '26 anyway based on where we sit now. But I think it's fair to say that both regions have done really well in terms of pricing given the backdrop, I think particularly Europe in terms of price increases received and held, if you like, even through the third quarter. But I think it's demand dependent really in terms of where it goes from here. Anthony P. J. Smurfit: I think as well, Gabe, if you look at where the paper price is at the moment, it's uneconomic for at least 75% of the business, I would say. And I think that we're lucky that we're very integrated. We've got our own customer. Our paper mills have our own customer, which is ourselves. And we're able to run basically full, but most of the others, demand is relatively weak. And unless you're in the top quartile, you're not making any cash at this moment in time. And I would say you've seen that from the results of a number of players in the marketplace. And inevitably, that will change. The question is, is it first quarter? Is it second quarter? Is it third quarter? And how much hurt will be in the market before then? Operator: Next question is from George Staphos from Bank of America Securities. George Staphos: Congratulations on the progress. Tony and Ken, I guess, I have 2 questions for you. First of all, regarding the North American converting operations in corrugated. I think you had mentioned that 70% of the business now is at -- and I forget exactly how you termed it, but better or acceptably profitable levels. If you could talk a bit more about what that means, recognizing that the margin in North America is maybe one of the proof points there. Can you help us quantify how you're determining the 70%, if that's the right ratio? And what else needs to occur to move the ball further, recognize you made a lot of performance already -- progress already? Secondly, on the boxboard side, you made a couple of interesting comments about ultimately, in essence, the customer is going to choose a substrate that makes most sense. Each of them, whether it's CUK, SBS, CRB has -- have their own unique aspects. The fact that you're being able to move the SBS to a customer, when in theory, they would have already been in a grade that -- using your discussion point, they already would have liked to have been in, i.e., CRB. What's causing the move to SBS? Is it just purely where price is right now? Or what else are you reminding people of in terms of SBS' performance versus the other grades? Anthony P. J. Smurfit: Okay. Let me take the second one first, and I'll come back to the North American corrugated. Basically, on the 2, we've seen the SBS piece is more about brightness. There's a brighter sheet. Caliper, you can get the same performance from a slightly lower caliper. And then I would say, printability, stroke, machine efficiency on the customers' lines, which -- the 3 reasons why we've been able to sell SBS versus CRB. Of course, there will be some customers, George, as I said in my thing that will want CRB because it's a fully recycled sheet. And that's fine, too and -- if people want that. But we are selling SBS, and it's competitive with where SBS price has gone. It's basically competitive now with CRB. And so therefore, we're comfortable to sell it to customers, and we make good money at it at these current prices because, as I say, the caliper is lower. And we have basically our 2 SBS mills in the United States, are very good mills in Demopolis and Covington. So -- and then the CUK has got some unique properties for the freezer and strength for the freezer and again, a caliper issue that can help make it competitive against the CRB sheet. So -- but that's -- again, some customers will prefer CRB and we can offer them that too. So what we've been doing is because, obviously, we have got very, very good SBS mills and very good CUK mills that were -- we would offer them that. And as you know, we've closed the CRB mill. So we have open capacity to be able to sell SBS versus CRB. And that's been a big positive win for us, George, as we look forward, and it's going to be something that's going to continue, I would say. With regard to our North American corrugated business, I mean, I think this is where you really see the owner-operator model in action. We have empowered our people to basically act locally, get involved in local markets again, think about their local customers and to think about profitability. And a lot of business was taken on in legacy Westrock under the basis of a combined profitability. That is not the way we think. We think that's the road to [ predation, ] that's road to death in our business where you have 2 sets of capital needs and 1 profitability. And that's the way that we have, I suppose, continued to survive in Smurfit -- legacy Smurfit, legacy Smurfit Kappa is that we treat capital as a very important thing. And if you want to make a capital investment, you better be able to justify it. And if you got 2 operations with 1 profit that masks where you're making the money, then you're not making the right capital decisions. So what we've done is we've spent the first 6 months of our tenure as a combination, making sure that the P&Ls were done correctly, that the balance sheets of each plant were put into the right order. And then we've told our managers, this is -- you're now profitable for -- you're now responsible for your profitability. And of course, when you tell them that and they see customers with negative 30% or 40% margins based upon a fair paper price transfer, they're going to do something about it, and we expect them to do something about it. And if they don't do something about it, they won't be with us, frankly. So the reality is we are actively moving both at a national level and at a local level to make sure that accounts where you've got terrible margins are not run on our expensive valuable beautiful machines in our converting plants. And that's a process that's ongoing. It's one of the reasons why, as I mentioned to an earlier question, a lot of business was taken on prior to us coming on board, which was not economic, frankly. And we've had to address that, and that's gone away again. And sometimes it's gone back to the same homes it came from, which is quite -- kind of interesting. But so that's how we've -- pardon me. George Staphos: No, please go ahead, sorry. Anthony P. J. Smurfit: Sorry, George. So that's how we've moved very quickly from people understanding their profitability to changing a lot of the plants. So we've gone from -- we've cut our loss makers by 50%. And as we continue to address this, and there will be some plants that will make it. But inevitably, I'd say the vast majority will get to profitability in the next couple of years. George Staphos: Tony, just a quickie and feel free to punt to February, if you'd like. On boxboard, recognizing it's not the majority of your business, clearly. If there's some rollback in tariffs, how might that change your overall view of the attractiveness of SBS? Has -- said differently, has one of the things that's changed in the calculation, your ability to move more SBS been the fact that maybe some of the folding boxboard that was coming to the market has been, I wouldn't say, tariffed out, but certainly has more cost coming into the market. How should we think about that? Anthony P. J. Smurfit: Thank you. I don't think tariff really comes into our thinking here. I think Obviously, the price comes into our thinking because the price of SBS has come down a bit. So therefore, it's more competitive as a grade versus other substrates. And obviously, FBB against SBS with the tariff is making it more challenging. But I still think that the FBB is going to be sold in the United States irrespective because the price -- there's a lot of capacity in FBB specifically in Europe, and they're going to come anyway, I think, to the U.S. with all the added costs that's with it. So I think it's up to us to sell SBS. I think one of the things that for everyone here to understand that SBS is a myriad of different grades. I mean you've got cup stock, you've got plate stock, you've got lottery cards, you've got cereal boxes, you've got freezer box. There like -- there's very, very many different grades of SBS that are sold at different price points, that are sold at different quantities to different customers. And so our hope and belief is that we can continue to develop newer grades into SBS that will allow us to earn a material return going forward. And there's no evidence to say that, that should be otherwise. We've been getting new customers in lottery cards, for example, which is -- it's only 15,000, 20,000 tonnes, but every little bit helps, as they say, over here. And these are good grades of highly profitable business for us to develop in the years ahead. Operator: Next question is from Charlie Muir-Sands from BNP Paribas Exane. Charlie Muir-Sands: Just a couple, please. Firstly, on the revised guidance, it obviously implies a fairly wide range of potential outcomes on Q4. Just wondered if you could elaborate on the main outstanding uncertainties for the range. And then previously, you've been sort of talking about beyond the operational synergies, the $400 million, you talked about at least another $400 million of opportunities. I just wondered if you had any kind of updates on that. And then finally, you mentioned that one-off operational issue in Latin America. I just wondered if you could quantify that given it was relevant enough to call out again. Ken Bowles: Charlie, I'll take those. Start with the last one first. It was a kind of a continuous digester issue in [Technical Difficulty] in Colombia, which probably cost about $10 million in the quarter, but it's $6 million now. So that's the big impact there. In terms of the guidance range, it really, I think the more it has on the years gone past, December tends to be the swing factor here in terms of why we've kept a slightly -- and I wouldn't say the range is wider. I think we just moved down the midpoint a bit to take account of the downtime piece. But really, it's going to come down to where you see December -- sorry, where we see December. And as kind of Tony alluded earlier on, as we're kind of exiting into the quarter, we're not necessarily seeing a much improved demand backdrop. But equally, in our natural sense, we haven't given up hope and a sense of optimism that things won't get better even before the end of the year. So I don't think we can be that negative on the outlook. So really, it's around where does December sit in that conversation. In terms of the bit in the middle, I think George actually pointed to part of this answer in his question, which is when you look at the margin performance in North America, given everything that they've been dealing with in terms of where volume is, the incremental downtime, the headwinds, the performance of the margin in North America probably tells you that a chunk of that additional operational commercial improvement is coming through in the numbers already. Where that goes to, that's the kind of how long is the piece of string to kind of answer because look, it really depends on how many programs we can get at. It sort of goes back to Tony's point earlier on about the owner-operator model and really putting empowerment in the hands of every single GM or mill manager to drive their own business for the best returns, their cost takeout, their improvement programs, their delivery on CapEx. So yes, we're still, I mean, very comfortable, if not more comfortable with the well in excess of where the synergies ended. But I think it's fair to say we are beginning -- without being able to quantify it exactly, we are beginning to see the benefits of that coming through simply in the margin performance in North America alone and particularly in the corrugated division. Charlie Muir-Sands: Great. And you've obviously given us the 2026 CapEx and elaborated on the rationale for it qualitatively. But just in terms of the returns that you're targeting beyond maintenance or onetime depreciation, what kind of thresholds are you typically setting for the investments you want to make in the business? Ken Bowles: As a blend, Charlie, look, it won't be any different than we've had before. It sort of goes back to that portfolio approach of trying to drive the incremental return and return on capital forward. So generally, no more than the old system, we would expect that entire portfolio to kind of be in that sort of 20% IRR range, delivering kind of mid-teens, at least in terms of where ROCE sits as a result. That is, of course, dependent on what those projects do, particularly cost takeout. You're obviously going to get higher returns from sustainability, energy back-end projects. You might get lower returns in the early years, but history has shown us that as those projects embed and move forward, you have much better returns as they move out. So not pinning it necessary to a target return in individual projects. But as a portfolio, it has to drive forward in terms of where ROCE is because ultimately, that goes back to my comment earlier on, this is about capital in and cash flow out. So not a dissimilar profile to what we would see -- you would have seen previously in terms of how we characterize the deployment of capital and allocating capital in a kind of Smurfit context. Operator: The next question is from Lewis Roxburgh from Goodbody. Lewis Roxburgh: Just my first question is on cost. You mentioned in the last quarter, you expected some relief on OCC pricing. So I just wondered to see if that was playing out as expected and if you're getting any other relief from the other buckets like energy or that might just spill into next year? And then just in terms of CapEx, I just wondered some more detail how much of that spend might be related to the legacy Westrock assets versus other projects as well and whether this is sort of the new normal or further increases might be needed to tie into those realization synergies? Anthony P. J. Smurfit: I'll take the second piece, Lewis, and then I'll let Ken take the first piece. Basically, the CapEx number is slightly skewed towards the legacy Westrock assets because we are a very well-invested base in Europe and Latin America. So what we're doing is we're putting a little bit more capital into some of the box plants to improve the quality and service aspects to improve the corrugators. So all the things that we have done over the last 10 years in Smurfit Kappa, we're now implementing over the course of years, not just next year but the years going forward to continue to improve the legacy Westrock business and make it better -- even better than it is. So there's a slight skewing towards legacy Westrock, but not massively material because, as I say, we're in very good shape. In Europe, we invested for growth, and we've got very good assets in our European business. And while there's always growth opportunities like in Spain, like in Eastern Europe and specifically plant by plant. I think that as a whole, the European business is very well invested. And what we'll do over the next 3 to 5 years is continue to develop out our Westrock asset base -- legacy Westrock asset base. Ken Bowles: Lewis, I'll just take some of the bigger cost buckets and just -- alongside fiber because it's probably useful to kind of round some of them out for yourself and your colleagues. In terms of fiber, I think at the half year, we probably said that, that was going to be a tailwind of about [ 100. ] We probably see that in the about -- as you sit here today, somewhere between 130, 140 of a tailwind. Energy, I think at the half year, we might have said about 250 of a headwind. Probably coming in now, we probably see that about the 180 space. Labor, similarly, we probably thought about 200, probably down around the kind of 180 space as well now. Downtime is probably going the other way in that, in a sense where we would have thought downtime was probably going to be 150. It's probably anywhere between 180 and 200 at this space given what we now see for the fourth quarter. So they are really the big cost buckets in terms of the incremental changes that we would have said Q2 versus where we see the year panning out. Operator: Next question is from Anthony Pettinari from Citi. Anthony Pettinari: On the full year EBITDA bridge, maybe Ken, just filling in on the pricing side. Can you give us an update on where you maybe thought pricing would shake out midyear versus where you are and where you might end up with the full year guide? Ken Bowles: Yes. I think it's pricing broadly, we would have thought to plug that in there. I think we probably see pricing coming out somewhere between, call it, 830, 840 versus where it would have been about 900 at the half year. So a small call off probably because of the fourth quarter and where demand is going, maybe a little bit of price weakness there, but not materially down versus what we would have thought. Anthony Pettinari: And would that -- would North America be 700 or 750? Or -- between North American and Europe, how would that breakdown? Ken Bowles: I'll defer that, to read the segmental bridge [ to you guys when ] you get into the trenches with them later on. I think if that's okay, I just have to [ take them ] with me here. Anthony Pettinari: Yes, no problem, no problem. And I guess maybe just one follow-up. You mentioned energy projects, and I mean from other industrial companies and paper companies, we've heard a lot about cost inflation and particularly electricity with demand from AI and data centers. Can you just give us kind of a quick recap of where you are with kind of current energy projects, especially in North America and not to steal any thunder from February, but just how you think about the opportunity in energy at your mills going forward? Ken Bowles: [ Well, where do we start? ] Anthony P. J. Smurfit: Well, we just approved a large energy project in our Covington mill, which will actually move away from coal to natural gas. And that's going to be the IRR on that is depending on where you think the price of the commodity is a minimum of 20% and a maximum of 80% -- sorry, not even a maximum. It's not the maximum is not capped, but realistically, a 50% return for the mill. So I guess what we will be doing, Anthony, is just taking every energy project as it comes and what kind of return we can get on it. Specifically, the only one that we've approved since we've come in is that one. We use gas primarily in most of our facilities. We do a little bit of coal where we have to, and obviously, in other places where we can remove it, we will be. We have a large biomass project in Colombia, which is going to be coming on stream next year, biomass boiler, which is a considerable saving for us in energy. So we're -- we continue to look at energy projects. But with regard to how these AI data centers are affecting us, I haven't heard that they're driving any major cost increases for our mill systems where our mill systems are located. Ken Bowles: I think kraft systems by their nature tend to be fairly well served from a power plant, back-end perspective anyway in that sense. And so not necessarily totally insulated, but generally CO2 positive. But great source of their own energy from a kind of a turbine perspective. In addition to what Tony said, we have a kind of progressive program. We electrified some boilers in Europe over the years. We continue to invest towards the reduction in CO2. I mean, the added benefit from the project Tony talked about there in Covington is it reduces our group CO2 by 1.2%. So very important, if you like, as you look forward to where our customers need to be on scope through emissions and things like that. So there's always benefits above and beyond the pure EBITDA benefit we find to energy projects, and it sort of goes back to what we're trying to get to in terms of low-cost producer and where those mill sits, which allows us to kind of be at the forefront of where we do that. So generally, it's always going to be a progression towards either less reliance on some fossils and something else and more sustainable renewable fuels. But the system in and of itself is fairly well set as we start off. Operator: And the last question today is from Mark Weintraub from Seaport Research Partners. Mark Weintraub: A few quick follow-ups. First off, so with other box shipments in North America, do you have a sense as to when you think you might be inflecting more positively versus the industry? How long is the process of sort of the shedding underappreciated business likely going to persist? Anthony P. J. Smurfit: Maybe overappreciated business. We've given them boxes for nothing, Mark. So yes, I would say that -- I would hope that from the third quarter on next year, you'll start to see some positive movements. We're still -- we still have some businesses that are very poor piece of business that are under contract that will run out during the first and second quarter of next year. And then obviously, we'll have to go out and replace those or we'll retain them. We'll see how the customer reacts to our discussions with them at that time. But if I look at the amount of backlog and pipeline that we have for new business, it's colossal in the sense that I feel very comfortable that we're going to start landing a lot of that business. And we already have landed a lot of that business, frankly, but it just takes a little while to qualify and then get into the plant. So -- when I -- so I would say the third quarter of next year, you'll start to see us inflecting versus this year with better quality business in all of our facilities. Mark Weintraub: And then what's your strategy? What have you been doing vis-a-vis outside sales of containerboard in North America into either export or domestic channels? Anthony P. J. Smurfit: Yes. It's -- the export market, as you know, is weak and a lot of the capacity closures that have been announced in the industry have been geared towards the export market, specifically down into the South American market specifically. And so one of the things that I found out is that these people down in these countries have pretty big inventories. And I think we need some time for those inventories to shake out before we see movements in export prices to the positive because the export price is clearly too low for it to be viable for people to survive. We are selling some into the export market, but clearly, we don't want to sell too much into the export market at that price that's there. But I would say it will be like a eureka moment. At some point, things will change, and people will -- the price will move up very sharply in the export market because it's too low at the moment. But all of the capacity that's come out of the market isn't really affecting it at this time because the stock levels of most customers down there are very, very high. Mark Weintraub: And in the domestic channel, I mean, historically, the legacy Westrock business had sold a fair bit to independents, et cetera. Has that continued? Or has there been some change in that regard? Anthony P. J. Smurfit: We do have outside customers, and they're important outside customers, and they're generally long-term outside customers, people that we served for a long period of time, and we continue to do that. And there's been no real change on that as I can see it. Mark Weintraub: Great. And one last quick one, just to squeeze in. So with the SBS from CRB, et cetera, I assume the customers are running that on the same machinery. And so is it pretty easy to switch back and forth between the grades depending on the variables at play? Anthony P. J. Smurfit: Yes. I mean, basically, yes. I mean you might need a technician to run a lower caliper product on the board just to adjust the machine slightly, but there's no real big -- one of the things that we have heard from our customers is that our -- the SBS runs better than the CRB. But I'm sure if you talk to somebody who runs CRB, they're going to say the opposite, but that's what -- that's what our people tell us from the customer. But I'm sure you can get someone else to say exactly the contrary. But I believe that to be the case because it's a cleaner sheet. Operator: Thank you. I will now hand the conference back to Tony for closing comments. Anthony P. J. Smurfit: Thank you very much, operator. I want to thank you all for joining us today. We remain very excited about the future of the Smurfit Westrock business. We're enthused about a lot of the changes that are happening -- that have happened and that are already happening. And we look forward to the future with great enthusiasm. So thank you all for joining us, and I look forward to seeing many of you in the months ahead. Thank you all. Operator: Thank you. This concludes today's conference call. Thank you for participating, and you may now disconnect. Speakers, please stand by.
Operator: Hello, and welcome to W. P. Carey's Third Quarter 2025 Earnings Conference Call. My name is Diego, and I will be your operator today. [Operator Instructions]. Please note that today's event is being recorded. [Operator Instructions]. I will now turn today's program over to Peter Sands, Head of Investor Relations. Mr. Sands, please go ahead. Peter Sands: Good morning, everyone, and thank you for joining us this morning for our 2025 third quarter earnings call. Before we begin, I'd like to remind everyone that some of the statements made on this call are not historic facts and may be deemed forward-looking statements and factors that could cause actual results to differ materially from W. P. Carey's expectations are provided in our SEC filings. An online replay of this conference call will be made available in the Investor Relations section of our website at wpcarey.com, where it will be archived for approximately 1 year and where you can also find copies of our investor presentations and other related materials. And with that, I'll pass the call over to Jason Fox, Chief Executive Officer. Jason Fox: Good morning, everyone, and thank you for joining us. Strong momentum we established over the first half of the year has continued in the second half, and we remain ahead of our prior expectations. As a result, we're further raising our full year AFFO guidance resulting in mid-5% year-over-year growth, which we believe will be among the highest in the net lease sector this year. Our raised guidance is supported by several positive trends within our business. Year-to-date, we completed $1.65 billion of investments at attractive initial cap rates averaging in the mid-7s, primarily with fixed rent escalations averaging in the high 2% range. The strength of our investment activity year-to-date has put us just over the midpoint of prior guidance range. I'm pleased to say we're raising our full year expectations for investment volume to between $1.8 billion and $2.1 billion. Our sector-leading same-store rent growth continues to be in the mid-2% range and is expected to remain around there or be slightly higher in 2026. The progress we've made funding our investments this year, primarily through asset sales, is expected to continue in the fourth quarter, achieving better than initially expected disposition cap rates and attractive spreads to where we're reinvesting the proceeds. Our original rent loss assumption, which reflected a degree of caution given the backdrop of broader economic uncertainty earlier in the year proved to be conservative and the performance of our portfolio has enabled us to lower our estimate as the year has progressed and the strength and flexibility of our balance sheet with over $2 billion of liquidity, including our recent forward equity sales provides us with additional flexibility to fund future investments. This morning, I'll review this progress and our confidence in sustaining that momentum into 2026. Toni Sanzone, our CFO, will focus on our results and guidance raise and touch upon aspects of our portfolio and balance sheet. And as usual, we're joined by our Head of Asset Management, Brooks Gordon, to answer questions. Starting with the transaction environment and investment volume. Lower interest rate volatility has helped keep net lease cap rates relatively steady this year, and that sense of stability has positively impacted our transaction activity, both in the U.S. and Europe, specially sale leasebacks, which have comprised a large majority of our investments to date. Our continued strong pace of investment activity, adding close to $660 million of investments during the third quarter and about $170 million so far in the fourth quarter brings our year-to-date investment volume to $1.65 billion at a weighted average initial cap rate of 7.6%. We continue to structure leases with attractive rent escalations, the significant majority of which were fixed bumps averaging 2.7% for our investments year-to-date. When factoring in rent escalations and a weighted average lease term of 18 years, our average initial cap rates in the mid-7s translate to average yields in the mid-9% range. By transacting at these levels, we continue to generate very attractive spreads to our cost of capital. Warehouse and industrial represents over 3/4 of our investment volume year-to-date, although we continue to invest in a diverse range of property types. And while the large majority of our investment volume was in the U.S., where we continue to see a significant number of opportunities at attractive spreads, we also continued to grow our investment volume in Europe relative to the last couple of years. The investment we've made over the last 27 years to steadily build and develop our European platform continues to serve as a key competitive advantage there. Today, our European team consists of over 50 people across our offices in London and Amsterdam, which has built strong broker and developer relationships and has the local expertise necessary to successfully execute across Europe. Moving to our pipeline and capital projects. Our near-term pipeline remains strong with several hundred million dollars of transactions currently in process at cap rates and weighted average lease terms consistent with where we've been transacting year-to-date. We expect many of those deals to close in the fourth quarter, although some may spill over into next year depending on where they are in the closing process, which would set us up for a strong first quarter. Our near-term pipeline includes close to $70 million of capital projects scheduled for completion in the fourth quarter. We also have approximately $180 million of additional capital projects underway, the large majority of which will deliver in 2026. While capital projects are something we've been doing for a long time, it's an area we can allocate more capital to often with higher returns compared to acquiring existing assets. Over time, we've built up a dedicated in-house project management team with deep real estate expertise and strong local connections to development resources. We have a long track record of build-to-suits, expansions, renovations and development projects. Historically, capital projects have averaged around 10% to 15% of our annual investment volume, and we believe we can expand that proportion. Turning now to our capital sources. Since our last earnings call, we've made further progress with our strategy of funding investments with accretive sales of noncore assets this year, including operating self-storage properties. Currently, we're in the market with the second half of our self-storage portfolio and have closed further sales since quarter end. We're confident we'll close additional sales during the fourth quarter but we're also maintaining a degree of optionality on the timing and execution of certain storage sub portfolios. And while we expect asset sales to fund our fourth quarter investment activity, the approximately $230 million of forward equity we recently sold gives us additional flexibility as well as enabling us to get ahead of our funding needs for 2026. So let me pause there and hand the call over to Toni to discuss our results and guidance. ToniAnn Sanzone: Thanks, Jason. AFFO per share for the third quarter was $1.25, representing a 5.9% increase compared to the third quarter of last year. Our strong results continue to benefit from both the pace and volume of our investment activity as well as the internal rent growth generated by our portfolio. We've raised and narrowed our full year 2025 AFFO guidance, driven largely by higher investment volume and lower expected rent loss within the portfolio and we currently expect AFFO to total between $4.93 and $4.99 per share for the year, implying 5.5% year-over-year growth at the midpoint. As Jason mentioned, given the investments we've completed to date and our outlook for the remainder of the year, we raised our expected 2025 investment volume to a range of $1.8 billion to $2.1 billion. As we continue to fund our investment activity this year with proceeds from dispositions of operating and noncore assets, we're also revising our expected disposition volume to total between $1.3 billion and $1.5 billion which has increased to include additional sales of operating self-storage assets. And based on the successful execution we've had to date, we expect to generate overall spreads of approximately 150 basis points between our investments and dispositions for the year. On the expense side, G&A continues to track in line with our expectations to fall between $99 million and $102 million for the full year. Property expenses are expected to total $51 million to $54 million, with a minimal increase to the lower end of the range. And tax expense is expected to be between $41 million and $44 million, representing a marginal reduction at the midpoint. Turning now to our portfolio, which continues to generate strong internal growth. Contractual same-store rent growth for the quarter was 2.4% year-over-year. comprised of CPI-linked rent escalations averaging 2.5% for the quarter, while fixed rent increases averaged 2.1%. For the full year, we expect contractual same-store rent growth to average around 2.5%. Based on current inflation levels and further supported by the higher fixed increases we are achieving on new investments, our contractual same-store growth is expected to remain strong in 2026, likely surpassing the 2.5% growth we expect to see this year. Comprehensive same-store rent growth for the quarter was 2% year-over-year and is expected to track in line with our contractual rent growth for 2025 and at around 2.5% despite the uptick in vacancy flowing through the back half of the year. Portfolio occupancy declined to 97% at the end of the third quarter, which we view as temporary in nature and was factored into our earlier guidance. Of the 3% total vacancy at the end of the third quarter, around a quarter has since been resolved or is in the final stages of closing and another half is in process and well underway to being resolved. Hellweg added minimally to our third quarter vacancy following planned store takebacks in September, and our asset management team continues to further reduce our exposure through re-leasing and dispositions. Hellweg now represents our 14th largest tenant, down from 6th largest a quarter ago, and we expect it to be out of our top 25 next year. We've experienced minimal rent disruption this year, enabling us to further reduce the rent loss assumption embedded in our guidance to $10 million, down from our prior estimate of between $10 million and $15 million. Currently, we have visibility into total rent loss of about $7 million for the year, representing about 45 basis points of ABR, which includes the downtime on the Hellweg assets we took back. The balance of our reserve includes ongoing caution towards Hellweg, which remains current on rent, but is still navigating a challenging turnaround, and we hope for that to be conservative with only 2 months of the years remaining. Other lease-related income totaled $3.7 million for the third quarter, down from $9.6 million in the second quarter and is expected to total in the mid-$20 million range for the full year. Turning to our operating properties. So far this year, we've completed sales of 37 operating self-storage properties and 1 student housing property and converted 4 operating self-storage properties to long-term net leases. Factoring in the additional sales we expect to close before year-end, we estimate operating property NOI for the fourth quarter will total between $7 million and $9 million, reducing further in 2026. Moving now to our balance sheet and capital markets activity. Our balance sheet remains strong and extremely well positioned to fund our continued growth, further bolstered by our equity and debt capital markets activity this year. Since the start of the third quarter, we sold approximately 3.4 million shares subject to forward sale agreements through our ATM program at a gross weighted average price of $68.5 per share all of which remains outstanding, resulting in gross proceeds of approximately $230 million available to fund future investment activity. And on the debt side, as previously announced, Early in the third quarter, we enhanced our liquidity position with the opportunistic issuance of USD 400 million bonds priced at a coupon rate of 4.65%, which was used to repay amounts outstanding on our credit facility. Our weighted average interest rate for the quarter was 3.2%, and we continue to believe we have one of the lowest cost of debt in the net lease sector through our mix of U.S. dollar and euro-denominated debt. Our debt maturities remain very manageable. We have a EUR 500 million bond maturing in April of 2026, and our next U.S. dollar bond maturity isn't until October of next year. We currently expect that we would refinance these bonds with issuances in the same currencies at or near their maturities. We ended the third quarter with liquidity totaling about $2.1 billion, comprised of availability on our credit facility, cash on hand and held for 1031 exchanges and unsettled forward equity. With dispositions expected to fund investment activity for the remainder of this year, we have a great deal of flexibility in accessing the capital markets. Taking into account our free cash flow of over $250 million annually, in addition to our unsettled forward equity, we expect to be well ahead of our funding needs for new investments as we enter 2026. Our key leverage metrics remained within our target ranges at quarter end. Net debt to adjusted EBITDA, inclusive of unsettled equity forwards was 5.8x. Excluding the impact of unsold equity forwards, net debt to adjusted EBITDA was 5.9x. In September, we increased our quarterly dividend by 4% year-over-year to $0.91 per share, equating to an attractive annualized dividend yield of 5.4%. Our dividend continues to be well supported by our earnings growth as we maintain a healthy year-to-date payout ratio at approximately 73% of AFFO per share. And with that, I'll hand the call back to Jason. Jason Fox: Thanks, Toni. In closing, the investment volume we've completed year-to-date and lower rent loss assumption have enabled us to again raise both our full year investment volume and AFFO guidance ranges. We've repeatedly raised our guidance this year and have consistently executed strong investment volume since mid-2024, completing well over $2 billion of new investments over the trailing 12-month period. We have the infrastructure, expertise and team in place to continue performing at these levels. As we look ahead, we have an active deal pipeline that extends into the first quarter of 2026. We're not seeing anything in the transaction environment that would take us off our current pace of activity. Given where our debt and equity is pricing, we view all the elements as being in place to continue generating double-digit total shareholder returns in 2026. Through a combination of AFFO growth that would put us in the top tier of net lease REITs and our dividend yield. That concludes our prepared remarks. So I'll hand the call back to the operator for questions. Operator: [Operator Instructions] Our first question comes from John Kilichowski with Wells Fargo. John Kilichowski, your line is open. Please go ahead. Jason Fox: You might be on mute, John. Operator: We'll move on to the next question. Our next question comes from Anthony Paolone with JPMorgan. Anthony Paolone: Now that you guys are rounding the corner on the operating self-storage asset sales, can you maybe give us a sense as to what the menu of noncore and other internally generated capital sources, maybe as we start to think about deal activity next year and maybe perhaps how to help fund it? Jason Fox: Yes, sure. I mean, certainly, when we think about next year, equity is going to be a much bigger picture and part of that story than this year, and we're not currently teeing up a disposition program, anything close to what we did this year. So dispositions should revert back to a more typical run rate. We do have a couple of operating properties left, but apart from the possibility of some self-storage sales slipping into next year, we should be back at more normalized levels. Disposal will still be a source of incremental capital for us, but it won't be significant like it was this year. So the expectation is we're kind of back to normal core spread investing, typical the net lease company where issue equity and debt, keep leverage targets in mind and you use it to do deals and generate spreads. So that's kind of the plan going forward. I think the other thing maybe to note is, and Toni talked about this, that we do have lots of funding flexibility right now looking into 2026. Revolver at a little over $2 billion is mostly undrawn. She referenced, call it, $250 million of free cash flow and then as we talked about earlier, we have gotten a head start on equity needs. We have $230 million of forwards that we recently issued on the ADM. So we're in good shape, and we think we're ahead of the game there for funding for next year. Anthony Paolone: Okay. And then just a follow-up. Are you seeing any competition or greater competition on deals from some of the private net lease platforms that are out there in any part of your buy box? Jason Fox: Yes. I mean look, the net lease market has always been competitive, especially in the U.S., and we have seen a bit of a pickup in new competition. It's mainly the private equity players, as you mentioned, and they're finding that lease attractive. We really don't think we run into all that much. We don't always have full visibility on who we may be competing with and that's at least thus far right now. So I'd imagine we'll see incremental competition that comes up and that likely leads to some pricing pressures, but it feels manageable right now. And we certainly have a cost of capital to allow us to compete on price when needed. So I think that's -- I think it's okay. I think it's also worth keeping in mind that especially on sale leasebacks, experience and track record on execution matter quite a bit. So newer entrants may have a little bit more of a hurdle to cover there and our reputation and kind of history should be a real competitive advantage, too. Operator: Your next question comes from Smedes Rose with Citi. Bennett Rose: I wanted to ask you first just a little bit, if you could just give us an update or a reminder, I guess, on where you are on the Hellweg process in terms of leases that I think you had expected 7 to be terminated by this time of the year and then maybe I think 5 more to go. Is that still kind of the case and maybe where you are on stores that are expected to be sold versus released? Jason Fox: Yes, sure. Brooks, do you want to cover that? Brooks Gordon: Yes. So first, maybe just a broader status update. As Toni mentioned, they remain current on rent. We've reduced them down to our #14 tenant, and we're making good progress on our plan to reduce that. Specifically to your question, we're taking a number of actions to reduce our exposure there. We've sold 3 occupied stores in Q3, I expect a couple more over the next few months there. As you mentioned, we took back 7 -- the first 7 of the 12 in total, we're taking back. So of those 7, we signed leases with new operators at 2 and 1 is in process, that should be signed soon or are under contract to sell. Those will close in Q4 and into Q1 and then as I mentioned, we're taking back another 5 in 2026. We signed leases on 3 of those locations, 1 more in process and then 1 will be targeted for sale. So making very good progress on that strategy and we would look to reduce the exposure on top of that quite quickly. We're targeting out of our top '25 sort of towards the midyear of '26. And we think we have a path to get them out of the top 50 kind of by the end of 2026. So we expect the exposure to come down meaningfully going forward. Bennett Rose: Great. And then you mentioned in the fourth quarter, maybe having gone in a little too conservative around rent loss assumptions. And as you just think about next year, any thoughts on how you could sort of maybe assess that? I mean are you concerned about the underlying economy at all that would maybe drive you to be maybe more conservative than you have been historically? Or just any kind of thoughts on how you're thinking about that at this point? Jason Fox: Yes. Brooks, do you want to take that one as well? Brooks Gordon: Sure. I mean without kind of projecting forward any specific guidance, I think what's important to note is that our broader watch list and kind of credit quality has improved materially over recent quarters. Again, that's driven by resolutions on True Value and Hearthside and the progress we're making on Hellweg. And we continue to closely monitor that turnaround at Hellweg, and we'll continue to have caution there. That said, our broader credit watch universe has come down meaningfully. So we'll continue to take a conservative and cautious approach there with respect to credit broadly and how specifically but we expect to be able to drive strong earnings growth even net of that. Operator: Your next question comes from Michael Goldsmith with UBS. Kathryn Graves: This is Kathryn Graves on for Michael. So my first, you've completed the $1.6 billion of investments so far year-to-date. You raised investment guidance. Can you maybe just provide some color on the -- what's currently in your pipeline as far as the incremental volume increase? Anything just in terms of geographic split between Europe and U.S., property-type mix, industrial versus retail and any non cap rates that you're currently seeing in the pipeline as you build for 4Q? Jason Fox: Yes, sure. So near term, currently includes, I would call it, several hundred million dollars of identified transactions, most of them in advanced stages. We think many of those will close in the fourth quarter, although at this time of the year, it's always hard to predict and some may slip into next year, which would set us up for a strong start to '26. I think on top of that, which you can also factor in and we included in our sub is about $70 million of capital projects that are scheduled to complete this year. These are the build-to-suits and expansions that we regularly do. You probably would also note that we have -- in addition to that $70 million, we have another $180 million that are in construction much of that, probably most of that would close in 2026. In terms of geographies, I mean, one of the things that we've -- maybe worth noting is more activity in Europe, while year-to-date, North America still makes up about 75% of the deals that we've done. The third quarter, we saw the split closer to 50-50 between North America and Europe. And I think the themes that we're seeing in Europe are probably similar to those in the U.S., where rate stability has led to a tightening of bid-ask spreads and sellers who may have been on the sidelines for a while now are willing to transact, and that's kind of translated into more activity, and that's both in the U.S. and Europe, but I think it's maybe most notable that we've seen more deal flow in Europe over the last, call it, 1 quarter, 1.5 quarters compared to the prior years. In terms of property type, we continue to see the best opportunities in industrial, and that includes both manufacturing and warehouse. I think that's reflected in our deals completed to date, and it also makes up the bulk of our pipeline as well. I think you asked about kind of pricing as well. And we continue to target deals in the 7s, and we've been transacting on average in the 7s, and that's been the case for pretty consistently throughout 2025, and it's also largely where the pipeline is right now. So cap rates have mostly remained unchanged year-to-date. But as I mentioned earlier, I would expect to see some tightening as we head into 2026, especially if rates kind of stay at the current levels in that 4% zone and certainly increased competition could factor into that as well, but that kind of remains to be seen. So overall, I think the pricing still works for us very well, and we always want to make sure we remind people that we're achieving kind of mid-7 initial cap rates that equates to an average yield and kind of the 9s which we still believe that's among the highest in the net lease sector and certainly provides really interesting spreads relative to how we're funding these deals. Kathryn Graves: Got it. Thank you for the comprehensive answer. That's super helpful. And then my second -- same-store rent growth looks like it ticked up about 10 basis points this quarter. And I know you talked about the expectations for the remainder of the year. But just thinking through the roughly 50% of rent currently tied to CPI. How should we think about the sustainability of that like mid-2% growth if inflation moderate? And then should we also sort of expect in the future to see more fixed rent bumps in future acquisitions going forward? Jason Fox: Yes. Let me take the second question, and maybe Toni can just comment on how we kind of look on a on a kind of go-forward basis of the CPI impacts on our same-store. In terms of should we continue to expect to see inflation, I think since we saw the inflation spike a couple of years back, it's gotten a little bit more difficult as we're negotiating kind of rent structures and sale leasebacks. It's been a little bit more difficult to get inflation, at least in the U.S. Year-to-date, it looks like about 1/4 of our deals have CPI-linked increases. And a lot of that is in Europe, and that's where it's still customary to get those increases in Europe, and we would expect to continue to see that. But I think with CPI increases or inflation changes have also impacted is our fixed increases and the levels at which we're able to negotiate those. I think historically, we've probably been closer to 3% on average. And now we're typically seeing new deals with fixed increases in the maybe 50 to 100 basis points above that. Year-to-date, the deals that we've done have averaged a fixed increase of 2.7% and the pipeline is fairly consistent with that. So while we're not getting as much inflation on new deals, our same store is still quite strong and it should remain that way. Toni, I don't know if you have any views into moderation of inflation, kind of the timing of our bumps and how that could flow through. ToniAnn Sanzone: Yes. I think it's helpful to just think through the way that our leases work, and we've mentioned this historically. The CPI-based leases specifically have a bit of a look back. So they're looking at inflation really in this kind of last quarter of the year, if you will. So we have a pretty reasonable line of sight into what next year same-store could look like, especially just given how many of our leases bump in January or in the first quarter. So even with CPI stabilizing kind of at its current levels are decreasing slightly, we do still expect our contractual same-store to be even north of where it is this year. And some of that, as I mentioned, is supported by the fixed increases being higher than what they've been historically but also with the expectation that CPI stabilizes. So again, north of 2.5% is our expectation for next year. Operator: Your next question comes from Greg McGinniss with Scotiabank. Greg McGinniss: My apologies if I missed it, but did you provide the disposition cap rate achieved on the self-storage assets? And do you expect to fully sell out next year, early next year at similar cap rates? Jason Fox: Brooks, do you want to cover that? Brooks Gordon: Yes. Sure. So we were not going to speak to kind of active transactions. But as we mentioned on our Q2 call, we've thus far transacted just inside of a 6% cap rate on the storage assets. In total, I'd expect it to be right around 6%. Some will be a little higher, some a little lower. It really depends on exactly the mix this year. And with respect to the full platform, as Jason mentioned, we're in the market with the balance of it, we do retain a bit of flexibility in terms of the exact timing -- I mean what sub-portfolios transact. But over the medium near term, we'll be exiting the full operating storage platform. Greg McGinniss: Is there any difference in terms of the operations or occupancies of those assets that would lead you to believe that maybe cap rates might be different geography, something like that? Brooks Gordon: Each sub portfolio is different. And as I mentioned, some will trade a little higher, some will trade a little lower. But on average, we would expect the total self-storage exit to be in and around a 6% cap rate. Greg McGinniss: Okay. And then I appreciate the color you guys provided on your thoughts on acquisitions. And you've certainly been busy over the last couple of quarters, some guidance Q4 may slow down a little bit, but I'm just trying to clarify whether or not you expect to generally maintain this level of investment pace in 2026. Jason Fox: Yes, sure. Look, it's hard to predict since the macro certainly factors in and at this point, we typically only have visibility out maybe 60 to 90 days. But our intention is certainly to keep the pace and I think you can look at what we've done. I referenced earlier that if you go back on a trailing 12-month basis, we've been well over $2 billion, and there's not a lot that we're seeing right now that's a catalyst to change that dynamic. And the infrastructure team is in place here with lots of liquidity including meaningful free cash flow, we referenced the equity forwards that we've raised already and improved cost of capital that work. So we should continue to see good activity. We can lean into pricing and kind of feed that net lease growth algorithm. So we do feel good, but it's hard to predict exactly where things will go. Operator: Your next question comes from Mitch Germain with Citizens JMP. Mitch Germain: Congrats on the quarter. It seems like operating storage assets are going to be dwindled down. How should we think about the remaining operating properties. I think you still have a couple of hotels, maybe one other student housing asset. Is that -- are those also sale candidates? Jason Fox: Yes. Brooks, do you want to take that? Brooks Gordon: Yes, you're right. So we own 4 operating hotels. So that includes 3 of the former net lease Marriotts that we still own. One is the Hilton in Minneapolis, we'll sell that when the time is right, that could be in 2026, something we're evaluating. The 3 Marriotts are all slated for either sale or redevelopment. We're evaluating both paths. They're all operating normally in the meantime. I'd say the first is one in Newark, which we're still -- in our final evaluation phase there, but towards mid-'26 would seek to trigger redevelopment into warehouse there. The others are great locations in Irvine and San Diego, but we're being patient there. And then you mentioned we have one remaining student housing property in the U.K., something we're evaluating from a sale perspective, again, that could be a near-term sale candidate, something we're evaluating now. Mitch Germain: Great. That's helpful. And then maybe Brooks will have you, the rent recapture on your retail leases a little bit lower than the rest of your portfolio. Is that Hellweg and is that kind of how we should expect the leases that you're looking to release going forward? Brooks Gordon: No. Actually, this is totally unrelated. These are just 2 AMC theaters. So we only own 4 movie theaters total. We'll bring that number down to 0 as quickly as we can, but it's a very, very small piece of ABR, if you look at the actual contribution there. So we rolled those rents down to keep those theaters open and operating. Operator: Your next question comes from Jason Wayne with Barclays. Jason Wayne: Just on the move-outs that led to the sequential drop in occupancy. So those have been known for a few quarters. I know you said that many of those have been resolved or nearly resolved by now. So just wondering kind of the strategy you think about managing occupancy when you're aware of some known vacates. Brooks Gordon: Yes. So they can pick up a bit Yes, Vacancy did tick up a bit, as Toni mentioned, just to recap, the largest addition or 2 warehouses, formerly to Tesco that we had discussed previously. That's about 50 basis points of occupancy. Also 2 former True Value warehouses for about 45 basis points and a couple of Hellweg for -- or several Hellwegs for about 20 basis points. All of those are in process of being resolved and should be closing imminently. If you step back and look at our total vacancy, we really do view this as a temporary spike. Of the total, roughly 30% of the vacant square footage has either already closed or is closing imminently. And then another 50% of that is in active negotiations or diligence. So we'd expect the vacancy rate to get back to a normal place kind of over the next quarter or 1.5 quarters time frame. So periodically, we'll get a bigger building back vacant. We work very proactively to resolve those, and that's why these resolutions are well on their way. Jason Wayne: And then yes, just on a couple of debt raises expected next year. Just wondering what kind of pricing you're seeing in the U.S. and Europe right now? Jason Fox: Sure. Yes, we have 2 bonds coming due next year. I think the expectation is that we would probably repay each of those in kind of the same currency. In terms of where we're seeing pricing, I think, in the U.S., you can kind of think of it as low 5s. And in Europe, it's probably maybe 100, 125 basis points below that. So kind of think about it high 3s and around 4% is roughly where they are. Operator: Your next question comes from Eric Borden with BMO Capital Markets. Eric Borden: I just wanted to talk a little bit more about the cap rate expectation going forward. I know you mentioned you expect maybe some compression just given where the 10-year sits today. But just curious if there's any difference or bifurcation between cap rates in the U.S. versus cap rates in Europe? Jason Fox: Yes, sure. I mean over the last couple of years, cap rates, obviously, it's a pretty wide range depending on a lot of the specifics of the transaction and in Europe geographies matter as well. But I think on average, we've been roughly in line between the U.S. and Europe. Maybe this year, we've seen a little bit of tightening in Europe, attribute that to rates stabilizing a little bit earlier there than over here. But it's also important to note, and I just mentioned it that we can borrow meaningfully inside of where we can borrow in the U.S. So we're still generating better spreads in Europe. But yes, I think they're roughly in line. Maybe it's 25 basis points delta between the 2. Eric Borden: Okay. Great. And then can you just remind us of your hedging strategy and like how movements in exchange rates impact AFFO per share? And then if you have any thoughts or indications on the impact positively or negatively in 2026? Jason Fox: Sure. Toni, do you want to cover that? ToniAnn Sanzone: Yes. I think just a big picture in terms of our strategy. We continue to hedge our European cash flows. First, naturally, we do that with our expenses. So if you think about our interest expense is denominated in euro and certain of our other property expenses. That really reduces our gross AFFO currency exposure to less than 20% of AFFO for the euro before hedging. So if we focus on that, we've implemented a cash flow hedging program beyond that to further reduce our exposure on the vast majority of the remaining net cash flows. So really material movements in the currencies are really not expected to have an impact on positive or negative. I'd say over the course of this entire year, we saw pretty meaningful movements in the euro and that maybe added about $0.02 to our total AFFO this year, relative to where we started the year from an expectation standpoint. I wouldn't want to go as far as to predict what next year would look like from an FX rate and movements there. I would just say that our strategy should continue to be effective from a hedging standpoint so that we wouldn't see any material movement to the bottom line from an AFFO perspective. Operator: Your next question comes from Daniel Byun with Bank of America. Keunho Byun: I appreciate the update on your potential rent loss forecast. I was wondering if you could touch on how that compares historically for portfolio and whether it's more weighted towards Europe or the U.S. Jason Fox: Brooks, do you want to take that? Brooks Gordon: Sure. So as Toni mentioned, with respect to rent loss forecast, there's a degree of caution embedded in that. We've continuously brought that down throughout the year. I think in terms of a good way to think about credit loss in any given year, as we've discussed in the past, kind of the spread between our contractual and comprehensive same-store that number will move around, but we expect that on average to be something like 100 basis points for a round number. We think out of that 100 basis points about 30 to 50 could relate to credit with the balance being the kind of portfolio activity. So that kind of 30-ish basis points is a good kind of average credit loss assumption. And that matches up closely to what our actual data suggests from the last 20-plus years. So that's kind of a good rule of thumb. Again, that's going to move around in any given period, but that has been our history. With respect to geographic concentration, I don't have that data directly in front of me, but I would expect that to broadly track our overall portfolio ABR allocation of kind of 2/3 U.S. Keunho Byun: I guess for my second question, I think you just mentioned the escalators are trending in the high 2s. Which sectors delivered the strongest rent escalations in Q3? And where are you seeing pressure, if any? Jason Fox: Yes. Toni, I don't know if you have any details around that. ToniAnn Sanzone: This is on the new deals you're referencing? Keunho Byun: Correct. Jason Fox: Oh, on new deals? Let me take that out, that you meant just in the same-store growth of the portfolio. I mean most of what we've been doing this year has been industrial, and that's a mix of both manufacturing and warehouse. And I think one of the maybe drivers of our ability to achieve higher negotiated rent bumps within these leases is the fact that it's in an asset class that the market for those assets tend to have higher expected market rent growth compared to say retail, where a lot of those leases, especially with the investment-grade retailers, they tend to be flat. And if they're not flat, you see them in maybe the 1% to 2% range on average. So yes, there is a bit of a driver behind the mix that more of what we're doing is industrial. So yes, I think that's a theme. Operator: [Operator Instructions]. And our next question comes from Ryan Caviola with Green Street. Ryan Caviola: With acquisitions in the quarter across Europe, Canada and Mexico, could you provide any color on international competition? And has any of the private capital that has entered the net lease space competed on international deals? Or do they stay primarily in the U.S.? Jason Fox: Yes, sure. Yes, Europe historically has been less crowded. Certainly, there's not many, if any, pan-European public REITs. So it's more on the private side, and that's what it's been historically. I would say we are seeing a little bit of competition pop up there and much of those are U.S. funds that are looking to kind of enter in Europe. It's probably worth noting that that's easier said than done. I mean we've been on the ground in investing in Europe over 2.5 decades. I mentioned earlier that we have a team of over 50 people on the ground there across our London and Amsterdam offices. We have deep relationships. We have a very good brand and track record across Europe. We know the various markets well. We also know to optimize leases and tax structures and have scale and all that stuff matters. So we have our advantages over there. That said, even with a little bit more competition, it's still a big fragmented market. I think activity levels are increasing with more opportunities opening up. So we still feel good about our prospects for more deal volume in Europe. Ryan Caviola: Appreciate that. And then -- just kind of going back to the U.S. I know there's been more of a focus on industrial and the acquisition front, but I did notice Dollar General assets have been consistent additions to the portfolio the last few quarters and the net larger deal in the fourth quarter of last year, now they're top 20, 10 and could you just update us on that relationship? And how you feel about the Dollar Store space in general and how much you'd like to grow that? Jason Fox: Yes, sure. I mean we do have a relationship with the company itself as a good sized landlord now. Those deals, and I think pretty much all or most Dollar General deals that are traded in the market come through the development pipeline. So we have relationships with a most of our deals that came through were from developers that you were recently built stores and I think we've been opportunistic there. Dollar General took a little bit of a credit hit mid last year when they reported on lower growth expectations and your stock price went down, but we took advantage of that. I think a lot of our peers are pretty full on Dollar General, maybe dollar stores more broadly. So I look at it as opportunistic pricing, and we've been in the layer in a really good credit, good concept, long leases. And so would we do a lot more? I don't know. I mean, they're top 20 now. Could they enter our top 10 at some point? Perhaps, but it's going to be more opportunistic based on pricing. Operator: And your next question comes from Jim Kammert with Evercore ISI. James Kammert: Are you able to provide any sort of visibility or details regarding, say, the '26 and '27 lease expirations. I'm just curious about maybe what percentage of that is kind of being actively discussed with the tenants today, if you will, versus I think you run at the last moment? Jason Fox: Yes. Sure, Brooks, do you want to take that? Brooks Gordon: Yes. So virtually all, if not all, of the 2026 and 2027 expiring ADR is actively being worked on. Our general process is that 3 to 5 years out, we're really engaging with and strategizing and then 3-ish years out, really engaging with tenants. So virtually, all that's active. 2026 is a pretty manageable year to 2.7% of ABR expiring. And so we're working on virtually all of that. James Kammert: Great. And you can kind of tease out as a related question, just looking at the average ABR per square foot, seems like a little lower in '26 versus '27. But I'm just trying to think about the organic. Is there any tilting towards industrial or retail across those next 2 years or getting too granular here? Brooks Gordon: Well, both years have reasonably similar breakdown in terms of property types, they're, call it, 60% warehouse and industrial. In 2026, we have a couple of warehouses, which we expect to be able to put new tenants at much higher rents. These are very high-quality warehouses in the Lehigh Valley, where rents are, call it, 40% or 50% below market. So we're working on those actively. The others often tenants have renewal options at continuing rent. So we don't necessarily always get a true mark-to-market opportunity. But so it will be a mix, but I think -- we think it's a very manageable year with some opportunities to push rents. Operator: Thank you. And at this time, I am not showing any further questions. I'll now hand the call back to Mr. Sands. Peter Sands: Thank you. And thank you, everyone, for joining us and your interest in W. P. Carey. If anybody has additional questions, please call Investor Relations directly at (212) 492-1110. Operator: And that concludes today's call. You may now disconnect.
Operator: Good morning, and welcome to the Camping World Holdings conference call to discuss financial results for the third quarter ended September 30, 2025. [Operator Instructions] Please be advised that this call is being recorded and the reproduction of the call in whole or in part is not permitted without written authorization from the company. Joining on the call today are Marcus Lemonis, Chairman and Chief Executive Officer; Matthew Wagner, President; Tom Kirn, Chief Financial Officer; Lindsey Christen, Chief Administrative and Legal Officer; and Brett Andress, Senior Vice President, Investor Relations. I will turn the call over to Ms. Christen to get us started. Lindsey Christen: Thank you, and good morning, everyone. A press release covering the company's third quarter ended September 30, 2025 financial results was issued yesterday afternoon, and a copy of that press release can be found in the Investor Relations section on the company's website. Management's remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These remarks may include statements regarding our business plans and goals, macroeconomic, industry and consumer trends, future growth of our operations, capital allocation and future financial results. Actual results may differ materially from those indicated by these remarks as a result of various important factors, including those discussed in the Risk Factors section in our Form 10-K, Form 10-Qs and other reports on file with the SEC. Any forward-looking statements represent our views only as of today, and we undertake no obligation to update them. Please also note that we will be referring to certain non-GAAP financial measures on today's call such as EBITDA, adjusted EBITDA and adjusted earnings per share diluted, which we believe may be important to investors to assess our operating performance. Reconciliations to these non-GAAP financial measures to the most directly comparable GAAP financial statements are included in our earnings release and on our website. All comparisons of our 2025 third quarter are made against the 2024 third quarter results, unless otherwise noted. I'll now turn the call over to Marcus. Marcus Lemonis: Great. Thanks, Lindsey. Leading our company on today's call are Matt Wagner, our President; Lindsey Christen, Chief Administrative and Legal Officer; Brett Andress, Senior Vice President of Corporate Development; and Tom Kirn, our Chief Financial Officer. On today's call, we're going to cover both the operational and financial highlights of the quarter, while providing some initial insights on the year ahead. Look, our mandate remains clear: improve revenue and earnings, while improving net leverage. I'm encouraged by our company's financial performance in the quarter, growing adjusted EBITDA by over 40% to $95.7 million. The team drove record volume on a year-to-date basis and sold nearly 14% of our new and used RVs in North America. This sales milestone further intensifies and proves out our thesis that consumers are focused on value and affordability across every single segment in the RV industry. Consumers build their monthly financial models around monthly payments, period. We anticipate entering 2026 with consumer sentiment and labor markets uneven and OEM new pricing rising on like-for-like models. While we see signs of resistance on the new side of the business, with our proven track record to address affordability and on used, I believe we can have another record year of combined new and used unit volume growth. I'm extremely confident in our ability to once again outperform the RV industry in 2026 and grow our earnings, thus reducing leverage. Our business has made tremendous strides on improving our net leverage position over the last several quarters, reducing net leverage by nearly 3 turns since the beginning of the year. We accomplished this through a combination of debt paydown, earnings improvement and cash generation. As we plan our cash flow for 2026, I believe it is appropriate to set expectations conservatively. Our company will continue to rely on our market-leading used sales, service and Good Sam businesses as our differentiators. Look, it's still early in our forecasting, and we see another consecutive year of earnings growth with an adjusted EBITDA floor of around $310 million. Now, this floor deliberately does not incorporate several sources of cost takeouts upside, used unit upside, M&A upside or upside that could come from our conservative new unit forecast. Now, I'm going to turn the call over to my teammate, Matt Wagner. Matt Wagner: Thanks, Marcus. While I appreciate the conservative approach to our 2026 outlook, we certainly have a plan to exceed this starting point through 3 -- through 4 sources, excuse me, of upside: SG&A, used RV sales, dealership acquisitions and new RV sales. Over the last 12 months, our team has made meaningful improvement to our cost structure, but we constantly reevaluate efficiency opportunities. We see $15 million of additional cost takeout opportunities next year through marketing technology, the launch of 2 additional CRMs and implementation of agentic AI across portions of our business. This estimate is not included in our preliminary models. The second potential driver of upside is used RV sales. I remain the most optimistic about the capabilities and scalability we've built into our used RV supply chain. Model year 2026 prices have a direct positive impact to our used industry outlook. If our used business exceeds our high-single-digit outlook, we expect to yield roughly $6 million of adjusted EBITDA for every 1,000 additional used units sold. We also see potential upside in the dealership acquisition space. While we are driving record volumes with fewer, more productive rooftops, we know there still exists significant white space in the North American RV market, and we are seeing a pipeline of activity percolating that we intend to pursue. We conservatively do not have any M&A activity embedded in our preliminary models. Finally, we are purposely modeling a conservative outlook on the new RV market, given the OEM prices passed along to dealers. Our track record of developing exclusive products tailored to consumer preferences and desired monthly payments suggest that we may yield additional upside beyond the current outlook. These 4 idiosyncratic sources create clear path to upside in 2026, but our long-term objectives remain clear. Our used RV sales, Good Sam and service businesses remain the bedrock of our company, and we believe they will enable us to achieve our mid-cycle adjusted EBITDA target of $500 million on today's store base. I'll now turn the call over to Tom. Thomas Kirn: Thanks, Matt. For the third quarter, we recorded revenue of over $1.8 billion, an increase of 5%, driven by unit volume increases in used in excess of 30%. New ASPs improved sequentially to just under $38,000, a decline of roughly 9% year-over-year, better than our initial expectations. ASPs benefited from a richer mix in the quarter, while this weighed slightly on our gross margin percentages. On a GPU basis, we were pleased with our gross profit performance. Within Good Sam, the business continues to post positive top line growth with the organization positioned for margin improvement in 2026 as we continue to make additional investments in our roadside business. Within product services and other, our core dealer service revenues and our accessory business continued to show stable margins. We reported adjusted EBITDA of $95.7 million compared to $67.5 million last year. SG&A as a percentage of gross profit improved 360 basis points year-over-year as we start to fully realize more of the run rate savings from earlier in the year and the sequential improvement in new ASPs. Lastly, as we think about the remainder of 2025, we expect our fourth quarter to experience impacts from the previously mentioned new unit trends, and we will be lapping a couple of important items to call out from last year. These include Good Sam loyalty breakage benefits of [ $4 million to $5 million ] experienced in Q4 of last year and [ $4 million to $5 million ] of F&I actuarial benefits that we experienced last year. That said, we ended the quarter with stronger unit sales per rooftop, improved fixed cost leverage and $230 million of cash on the balance sheet. We also have $427 million of used inventory owned outright, another $173 million of parts inventory and nearly $260 million of real estate without an associated mortgage. I'll now turn the call back over to Marcus. Marcus Lemonis: Thank you. We'll turn into the Q&A section. But before we do that, I think it's important to just sit with the improvement on the balance sheet in 2025. As we started the year, improving our cash position and deleveraging our business was really key initiatives for our management team. And as we head into 2026, continuing to improve our net leverage through performance, through operating efficiency, through improved sales is absolutely the focus for our team. So we'll turn it over for questions. Thank you. Operator: [Operator Instructions] Our first question comes from Joe Altobello with Raymond James. Joseph Altobello: First question, I guess, on new RV demand. Marcus, you talked about rising prices weighing on that. And I think at least some of the industry data during the summer seemed to indicate that retail was stabilizing. What have you guys seen so far, maybe September and October, that would indicate that that's starting to soften again? Matt Wagner: Joe, this is Matt. I would argue the fact that, yes, we saw some stabilization so much as we are seeing high-single-digit declines in the new RV industry up until that summer time frame, but we are still seeing declines year-over-year. So while it's not nearly as severe, we've obviously been outperforming this, and we feel like we've had more of a purview and line of sight into what's happening real time within the marketplace. And we've been speaking with all of you over the last few months suggesting that we had a line of sight on the 5% to 7% price increases on invoice prices. And we knew that there could be some opposition from consumers to be able to absorb that. However, we know through our very creative mechanisms of our exclusive products, brands that we oftentimes are able to buck trends that exist in the broader RV industry. And that's where we've been able to yield material market share gains over the last 2 years, leveraging that strategy. But as we sit here today and we think of the exit rate of new sales in September and we think of what's happening currently in October, there's a couple -- or a few factors really that have weighed on the consumer perhaps a little bit more than we anticipated. And when I think about them, the evolving job market that we're seeing more and more headlines, which naturally will just bleed into the psyche of different consumers, really the uncertainty resulting from the government shutdown, and then finally, when we think of the general inflation environment out there, we're seeing within certain price points, there's a dispersion of activity and customer demand where consumers are able to yield whatever they need in terms of a product and a relating price point to ultimately be able to afford this lifestyle. The RV lifestyle is alive and well, and we know that consumers want to participate in this lifestyle. And that's really where our used strategy has continued to take hold. Our September used results were very good, perhaps amongst the best comps year-over-year on a used same-store sales basis. That trend has also continued within October. So while we're very cautious and cautiously optimistic on our strategy on the new side of the business, we know that the used side of the business will continue to be our buoy, whereby we could satisfy consumer demand that still exists out there. Marcus Lemonis: Joe, the one thing that I think Matt and the team have done very well in acknowledging the potential resistance on the new side is, if you look at the stocking of used, we've become far better at that side of the supply chain. And part of the really intentional conservatism for '26 is that we really start to build out our cash flow and our inventory positions. And when we think about placing orders 3, 6, 9 months in advance on the new side, it was more judicious for us to build that model with a lower expectation, knowing that if we wanted to take on more new at any time, if we were wrong about our calculus, that would be easy to get inventory. But I think what I really appreciate about our strategy is, if we are right about our strategy, if the new is going to have a little bit of resistance, we're not going to be kicking the can on new aging into the next 12 to 24 months. And when we look back on what happened over history, we may have gone into the years with just because we were outperforming everybody else, a little bit of a delusion about what was happening, and we would go for it on the inventory side and then find out 18 months later that we have to discount our way out of stuff. So what you're hearing from us today is just a more tempered approach to stocking and to forecasting and that we know that if we outperform like we always do, it's easy for us to get more inventory. It's really hard to get rid of inventory that we miscalculated. Joseph Altobello: Very helpful. Maybe just a follow-up on that. If you look toward '26, the more bullish view was that lower rates would help to drive unit growth. It sounds like what you're saying is that the price increases we're seeing would offset any impact from lower rates and basically, affordability doesn't get any better next year. Matt Wagner: So Joe, a good way to think about it is, our combined average sale price is roughly in the range of about $36,000. If we're to add about $1,000 of cost and the interest rate drops for a consumer about 50 basis points, that would actually create the same exact monthly payment. So yes, there is the opportunity for consumers to be able to absorb more cost or more features with -- while paying the same money or less, depending upon the pricing and segment. However, we're not quite seeing that take hold just yet where the retail lending rates have really not materially changed in any capacity. But next year, there is a possibility that they could come down, in which case, this could be a more conservative outlook in the new space [ what ] we believe a very pragmatic view. Marcus Lemonis: Yes. When we look at -- Joe, when we look at the lack of predictability around what the Fed is going to do compared to previous years and decades and the lack of predictability on the tariff side, that's probably the 2 most imposing factors that are causing us just to be really conservative just because we don't know. When we went into '25, we never would have expected Liberation Day. And while we were able to make a lot more money by reacting to different things in the market, we just want to go in and set the expectation low and hope that our performance and our -- I guess, our track record of idiosyncratically operating comes to fruition. I think our track record proves that. We don't want to have any missteps. Operator: Our next question comes from James Hardiman with Citi. James Hardiman: So I like the sort of framework that you've given us with respect to 2026. I just want to make sure we're on the same page from a starting point perspective. The Street is at about $280 million for this year with 1 quarter left. I don't know if you'd sort of disagree with that number meaningfully. But that would sort of assume, call it, a $30 million expansion, right, to get to that $310 million floor that you've laid out. If that's all right, sort of how are you thinking about the building blocks of getting there? It sounds like overwhelmingly sort of the used business driving that extra $30 million. And then, I don't know, maybe order of magnitude of the 4 upside drivers that you laid out, like which of those are you really -- I guess, the $15 million of cost saves are pretty straightforward. But which of those are you most excited about? At the end of the day, the Street is looking at more like, I don't know, $100 million of EBITDA growth, which it sounds like is not all that realistic as we sit here today. Marcus Lemonis: Well, we're hopeful that we can have that sort of upside growth. But as we mentioned earlier, we just really don't know what's happening in the macro, and I think that's caused it. When I think back over the 20 years, the fourth quarter, quite frankly, has rarely, if ever, been a quarter where we've made money. And in this particular year, we're still dealing with high floor plan rates, and we're still dealing with other tariff issues around pricing. I will be candid with you and tell you that the optimistic nature that I have on the fourth quarter is that we will still grind hard to try to get anywhere close to breakeven, which would be really a big size improvement over like even the last decade of averages. It's a little early in the quarter for us to predict where things are going to land. As Matt mentioned earlier, we have seen resistance on the new side. Nothing that alarms us, but it is a resistance where we're starting to comp year-over-year-over-year growth. On the used side, we're continuing to see performance there. I have sort of laid down the gauntlet with the team on wanting to make sure that we're going into 2026 with, again, clean inventory, no excuses in 2026. So I've been a little bit more aggressive in pushing them to liquidate out of inventory, and that's probably a little dangerous of a word, liquidate, sell-through a little inventory just to make sure we go in a little cleaner. Thomas Kirn: This is Tom as well. We also noted a couple of laps as well. We had -- last year, we had kind of a onetime benefit on the Good Sam Club side. It was our first year really with experience on the new loyalty program, and we had some adjustments that were in that [ $4 million to $5 million ] range in the fourth quarter. And then, on the F&I side, we always go through with our actuaries and review cancellation rates and estimates on certain products and all the products we sell. And in the last couple of years, we've had a benefit from that because we've seen continued utilization of those products. And when we looked at things in the third quarter of this year, we started to see a little bit of an uptick in those cancellation rates. And so, [ that's where ] we called out the benefit that we got last year in the fourth quarter. I don't know that we'll necessarily see that same benefit this year. Marcus Lemonis: Yes. Again, we're taking that conservative approach. But on the upside... Matt Wagner: I mean, just as well, James, when we're thinking of Q4, this is really a setup time period for us where there could be some additional OpEx that has to flow through our balance sheet -- our income statement really to set the stage nicely for next year to truly yield those 4 upside opportunities that I laid out in the prepared remarks. Most specifically, we're making quite a bit of investments in different agentic AI functions, as well as enterprise AI functions, which we do view this as an opportunity for us to yield even greater cost savings potentially than the $15 million that I laid out earlier. And that's really going to be by means of just looking at different components of our business that will not only help the consumer experience, but really our employees to yield more efficiencies of actually being able to get to a customer quicker, be able to sell them quicker and be able to be much more intelligent about all of these complicated products that we sell throughout our entire industry. And that's really been, in many ways, a handicap of this industry at large. We don't necessarily have as much insight as we need to in the product, the repair event cycle time. So we have been aggressively and quietly pursuing this in the background, and we haven't spoken as boldly about all of these different AI initiatives because this has been a test-and-see environment. We know that all these AI implementations can quickly spiral out of control in terms of AI actual usage and different advancements in what we're going to be pulling on these LLMs. So by means of that, we've been setting the stage nicely. We know that we'll be able to make some nice implementation guidelines set out here pretty quickly, and we know we'll be able to take advantage of this opportunity that's before us. Marcus Lemonis: Over the next several years -- and I really applaud our team's very aggressive and progressive approach to looking at how AI can create staffing efficiency, and that's really top to bottom. And when you think about the efficiency that AI has already started to create in portions of our business, where we're able to spend a little less and convert a little better, we're able to take care of our customers a little faster and avoid other things. But I think the next 12 to 24 months could create significant, maybe more than I've seen in 20 years, significant upside to staffing efficiency and more importantly, a better customer experience through all of the learnings that we have over 2 decades. When we compare what we have that nobody else has, that is lots of data. And as Matt puts that data to work in the way that he is exceptionally skilled for, I think the SG&A upside opportunity plus the revenue and conversion opportunity could be unmatched to anything we've seen in years past. James Hardiman: Got it. That's all really good color. And then -- so if I think about -- it sounds like if you did, at best, flat EBITDA in the fourth quarter, so we're maybe looking at closer to, I don't know, $269 million, $270 million number, and then -- for this year, and then, call it, $310 million for next year, how do we think about leverage in the context of year-end '25 and '26? And then, specific -- maybe more specifically, there was some discussion about reengaging M&A. Sort of what's the decision criteria around that in the context of leverage? Marcus Lemonis: As a management team, we talked about it in our prepared remarks that we've seen a significant improvement in our overall net leverage. We have not seen the kind of cash on the balance sheet that we showed at the end of third quarter in a long time. And as we continue to sell properties and sell down the mortgage and use some of our free cash flow to pay down debt, we know that those are parts of the building blocks to deleveraging the business. As a team, we want to get back into the neighborhood of 4 and below. And so, as we think about capital allocation in 2026, yes, we are investing a significant amount in AI. That's going to unfortunately partially go through OpEx, but there is some CapEx associated with some of the things that we're doing as well. And as we look at the capital allocation, our goal would be to get into that 4 or below neighborhood by the end of '26. That's a very lofty goal, but it's a goal that we're committed to. And we know that when we do that, we have to make tough choices about staffing, about acquisitions, et cetera. And so, the only acquisitions that we're truly looking at are ones that we believe are going to be accretive, ultimately accretive to not only the earnings profile, but the leverage. In looking at small dealerships, we know that we can buy dealerships at 1x, 2x, 2.5x, clearly accretive to our business. But as we start to look at other bolt-ons inside the RV industry, any kind of bolt-on, we are probably going to have to be a little more aggressive, still staying inside of the dilution versus accretion. We think it will still be accretive. But we need to start to build a bigger business with bigger tentacles reaching different parts of the industry. Operator: Our next question comes from Patrick Scholes with Truist. Charles Scholes: My first question concerns market share. I know year-to-date, you were tracking 13.5% and you had previously given a medium-term target of 20%. For next year, 2026, do you have a target to reach for market share percentage? Marcus Lemonis: Just for clarity's sake, we have been very clear over the last 2 years that 15% was our goal. Charles Scholes: I'm sorry. Okay. Marcus Lemonis: That's okay. But because we started to accelerate from the 11.3%-ish that we were a year ago, we moved our own goalpost, and maybe that's our greed in just wanting to dominate the space more. Matt Wagner: That's certainly a fair observation. Well, Patrick, it was really about 4 months ago, we woke up and realized that we were on a clear-cut trajectory to hit that 15% a lot quicker than we anticipated. I would anticipate over the next year that a very realistic goal is to achieve another 50 basis points to 100 basis points of market share improvement on a combined basis. And a lot of this is really going to hinge upon the creativity that we're able to deploy on the new side of the business to yield even more market share gains, which has been compounding substantially over the last 2 years. But we're trying to be as realistic as possible, understanding that market share gains on the new side could continue to be a little bit more difficult, whereas on the used side of the business, we see a very clean and clear path for us to continue to achieve that compounded growth. Marcus Lemonis: As a reminder, the used business is essentially double the size of the new market. And when we look at our own penetration of used, the amount of white space that we believe exists, not only in the affordable categories, but all the way up through motorhomes, is unbelievable. And we've been very thoughtful in how we've allocated capital in the last 12 months to growing that used business, and quite frankly, don't see any barriers of any kind that would prevent us from continuing to grow that used business as much as high-single digits to low-double digits every single year for the next several years. Yes, we are very good at it, but B, the market is much bigger. And if the consumer is going to continue to be under pressure for the foreseeable future, we will absolutely allocate the bulk of our working capital towards where we know that business will take us and the margins that come with it. Charles Scholes: Okay. And then, a follow-up question related to where you talked about setting the stage for a return to measured and accretive M&A, certainly laid out improvements in your business and wanting to add stores and a better balance sheet. Regarding potential M&A targets, with those targets, are you seeing some financial stress in potential targets where they might be more willing sellers at this juncture because of that financial stress? Brett Andress: Yes, Patrick, it's Brett. So what I would say is, it's a bit of a barbell when you think about how that pipeline is unfolding. I think we have several opportunities on the distressed end, as you can imagine, in this industry backdrop over the last couple of years. And on the other end, there's still a good amount of, I'd say, high-quality, very good performing opportunities out there. So we feel good about that. I would tell you that when we talk about the word measured on the M&A, I think the bite size and the priority is going to be at least on that smaller end and where the white space is very, very clear to us, given the consolidation that we've done in the footprint in the last 12 to 18 months. Charles Scholes: Okay. And just one -- I got a question from an investor right now. You didn't put out any guide points that we kind of think about -- you talked about sort of flattish EBITDA. But with those... Marcus Lemonis: No, no. We didn't say flattish. Charles Scholes: No, no, no. I apologize. You didn't. But sorry, I think you said -- well, anyway, with those guide points not provided anymore, would there be -- if you were to give them, excuse me, guidepost, any material changes or updates in those -- from those previous guideposts as we think about the rest of the year? Marcus Lemonis: What we decided to do rather than providing guideposts and having people sort of figure out what the calculus was, we established the most conservative, what we believe, number that we could hurdle of $310 million on the EBITDA side. And then, Matt outlined and outlaid all of the building blocks, those 4 specific building blocks, and certain numbers attributable to those that he believed we would be able to achieve on top of that floor. I think there's one thing that we want to make sure that everybody takes away from this. The single biggest driver in us having a very ultra-conservative approach is our reluctance to be aggressive on the new side. And so, when we think about the outcome of new in 2025, the band of possibilities in 2026 on the new side is wide. And we happen to be stocking and forecasting towards the lower end of that band, knowing that in a matter of 60 to 90 days, if things pan out the way we hope they do, that we'd be able to stock more inventory. We want to set an expectation that we know we can hurdle, that we can build our cash flow around and we can build our leverage targets towards. And I think that's probably a bit of a shift for us. That shift largely happens because when we entered 2025, we did not expect this administration to create the kind of unpredictability around the economy that we dealt with. And we don't know what next year looks like. We don't know if there's a new Liberation Day of some kind. And that's why we just are sitting in this number hoping that it doesn't look like that. Brett Andress: And Patrick, I think I believe part of that question related back to 2025 and the guideposts that we had previously out there. I would point back to Tom's commentary around 4Q, our evolving view on the new market going into the year-end. I would tell you the biggest change, while we didn't formally update those, would be to that kind of that new volume assumption that we had made for that full year for 2025, and that would be the biggest driver, I would say, as you think about 4Q. Operator: Our next question comes from the line of Craig Kennison with Baird. Craig Kennison: I wanted to start on price. Can you just remind us of the average price increase that OEMs have pushed through for model year 2026? Matt Wagner: So Craig, on average, it's panning out to about 5% to 7%. There's a handful of outliers that exist out there just as well, as there's a handful that we're able to keep prices down. But across the blended portfolio or bag of goods, it's roughly that 5% to 7% price increase. Craig Kennison: Is that a like-for-like comparison? Or is there some change in content? Matt Wagner: That's like-for-like. Great question. And so much as we look at a specific basket of goods that we've been tracking now for going on 15 years, where we modify those goods based upon the like-for-like nature of it, so if there's something that materially changes from year-to-year, we extract that altogether. So we feel this is the most clean pure view of roughly where we're settling in. However, just as well, I mean, there's always going to be certain segments where, for whatever reason, there's going to be a chassis price increases in certain segments that are just going to be unavoidable or where there's going to be a chassis change altogether, which might significantly modify features and price points. So sometimes we have to remove these assets from our basket of goods. We're still playing a game, though, where we have roughly like 10% to 12% of the consumers that exist out there, up and down all the different [ types of ] price point segments. So we tried to distill it down to a very simple number, but in reality, it's far more complex. Marcus Lemonis: Yes, Craig, as we built out our conservative model, we anticipated that those 5% to 7% increases would stick for 12 months. But you and I have been around this industry for 20 years, and the manufacturers are going to need to spur demand. And if they feel like the price increases aren't going to do that, it wouldn't surprise me if, in the spring or the summer of 2026, there tended to be some reprieve on that. We're not factoring that into any of our assumptions, but it's highly possible. The offset to that, and Matt talked about all the data that we've been collecting for several decades, is that when those price increases happen on the new side, they do bolster the value of used units, not only the inventory we have in stock, but our ability to meet the customer where they want to be on a monthly payment. And so, as we're very scientifically and surgically issuing certain marketing tactics to drive the purchase of used, we're going to identify those segments on the new side that are maybe experiencing the most friction and lean into that on the used side to help mitigate that floor plan or that segment in our business so we can outperform everybody else. Craig Kennison: And maybe just following up on contract manufacturing, you've been able to lean into that strategy to keep your prices in check. I'm curious what your mix looks like for model year '26 versus model year '25. Matt Wagner: As of this moment, we're leaning in a little bit more for '26 compared to '25, and we'll probably end up 2025 with all of our new sales, about 40% or so being derived from our exclusively branded products and contract manufactured products. We are going to have additional segments roll out that we believe satisfies different consumers that have either been avoiding to buy in the short term because of price increases or that we believe we're offering different feature sets floor plans we'd be able to induce additional consumers to actually come into the lifestyle. So we still feel very confident. However, we're really tempering back expectations because there's a lot of unknowns. Marcus Lemonis: I think Craig, Matt misses sometimes patting himself on the back on the innovation side. And I want to make sure that the market doesn't believe that the only reason that our market share on new has grown and the only reason that our unit volume has grown is because we're just selling cheap products. That's just not the case. And we saw a nice ASP improvement in Q3 and hope to see it again in Q4. I think the real reason that we've been really outhustling everybody is, the contract manufacturing opportunity provides a sandbox for innovation, provides a sandbox for testing out new segments, new floor plans and new ideas. And when you look at 2025's results, a giant portion of the outperformance on new came from the innovative ideas across the board. I actually think that what's happened is that's now accelerated. And in '26, you could expect more of that from our company. Private label started as a way to advertise the same kind of floor plan as everybody else at a lower price. It's turned into something much different. And the R&D side of that part of our business has evolved into something that has given us the ability to outperform everybody else, not just on price. Operator: Our next question comes from Noah Zatzkin with KeyBanc Capital Markets. Noah Zatzkin: I guess, first, I know this has been touched on, but maybe if you could kind of rank order the size of the 4 opportunities above and beyond kind of the $310 million floor? And within that, if you could just maybe touch on how you're thinking about M&A? Is it possible that you kind of get back to the 10 to 15 kind of run rate of acquisitions? And if so, like how meaningful could that be within the upside? Matt Wagner: No, I tried to thoughtfully rank those 4 in sequential order in terms of either order of magnitude or order of opportunity in terms of additional upside. However, embedded with each one of those 4 between the cost savings that exist between different implementation of marketing technology and agentic functions between our used RV sales, M&A activity or new RV sales, there's obviously going to be some additional elements that could come into play here over the next few months that would lend itself to this order of events or magnitude to actually shuffle out of order one way or the other. But we do feel confident in these numbers that we laid out here that they're relatively conservative. So when we say $15 million of cost savings in terms of SG&A, there's always the opportunity for more, depending upon the opportunity of these different agentic functions, marketing technology, CRM launches, et cetera. Brett Andress: Yes. And Noah, I would say, on the M&A pipeline, our confidence and our line of sight into returning to that 10-plus door growth per year, I would say, the activity in the pipeline would support that today. I would also note, it's probably going to lean at least initially a little bit smaller on the door size, just given the opportunity set. But you're normally looking at an EBITDA opportunity anywhere from $500,000 incremental to $2 million. It really depends on the size. I mean, every dealership is different, but I would [ err ] towards the smaller size just initially in the modeling. Noah Zatzkin: Got it. Really helpful. And then, maybe if I could just touch on -- new gross margins in the quarter were maybe a bit softer even with the kind of maybe better-than-expected new ASPs. So just what kind of happened there? And then, how should we think about new gross margins going forward? Matt Wagner: Purely a byproduct of mix where -- we've spoken about this previously, but as average sale price goes up historically, our gross margin typically will be a little bit more pressured, which is why we saw that gross margin figure remain relatively elevated or at least in a nice suitable range as the ASPs came down. And it's just the very nature of the RV industry. If you think about -- and you're a consumer that's shopping for a $120,000 Class A gas, you're going to have a higher willingness or likelihood to travel outside of your local area to buy that asset to yield perhaps $5,000 of savings, in which case, the higher-end price points in the RV industry are generally much more competitive, where you're competing much more on a national or regional at a minimum level, in which case, there's going to be more people that will actually compete for that same deal. Whereas in the travel trailer space, that consumer largely remains within a 50 to 75-mile radius and lives within a 50 to 75-mile radius of the dealership from which they'll actually transact with, where as I said a Class A gas, that could be upwards of about 150 to 175 miles. So the dealer management areas just become totally different scale size. So when you look at our ASPs improving, part of that comes to the detriment of that gross margin profile, albeit it was still very healthy, [ plus ] sitting right around or just shy of 13% front-end gross margin on the new side, while coming out of season and while generating a higher ASP, we felt very good with that number. Operator: Our next question comes from Tristan Thomas-Martin with BMO Capital Markets. Tristan Thomas-Martin: I think you guys have kind of mentioned a couple of times the bands of your assumption of new RV retail demand next year. Can you maybe -- maybe I missed this -- let us know what those are in terms of the industry and kind of your own expectations, what's embedded in that $310 million number? Matt Wagner: Tristan, we believe it's conservative to estimate that as the RV industry has trended this year, low-to-mid single digits down year-over-year, that we anticipate that trend line and that slope to continue at the relatively same rate heading into next year. So, as such, given the material market share gains that we've been able to post over the last 2 years, we're also suggesting that new on our side could be potentially down low-to-mid single digits. As we've maintained, though, if you look at the collective sum of new and used sales combined, we are still very confident that we'll post additional gains and another record volume year when you look at the summation of the 2. I don't want to go too far down this rabbit hole of the new side, but we also know that this is a big portion of our business, but we know that used has become an even more material portion of our business. In fact, for the first time over the last 2 months, we were able to hit a 50-50 split between new and used sales. So when we think of the amount of gains that we made on the used side, we're really just setting the stage to offset any sort of new shortcoming or shortfall next year by means of continuing to pump the used business. Marcus Lemonis: Tristan, the silver lining in all of this, because we always try to find it in our own business, is that we don't control the OEMs pricing and we don't control the rates in the environment. But nobody really cares because we have an obligation to make more money and sell more units and delever our business. And the silver lining for me is that as we look back at the violent swings that have happened in this industry over the last 10 years, we know that for investors to continue to want to be invested in our business, we have to take out some of those swings. And our used business, our service P&S business, our Good Sam business provide that road map. We aren't just leaning into used because we're concerned about the new. We're leaning into used because we want to eliminate these wild swings in earnings, and we believe that the trough of earnings is behind us. Every single time that we can grow our used business, we further substantiate a floor in our business, and that's kind of the theme of this call. We have to give people a floor. Matt also mentioned on the call that mid-cycle at $500 million-plus isn't something that's outlandish. It is something though that will require the new business to be more stable. What does that mean? You need interest rates to be lower than they are today, and you need pricing to really settle out at a payment range that people can afford. This move to used is structural. It's not temporary. It's philosophically, I think, what our management team believes makes sense. Tristan Thomas-Martin: Okay. Got it. And then, just because you mentioned the $500 million-plus mid-cycle target, I think it's on the same store count as today. Can you maybe just go over some of the other building blocks that gets us from the $310 million to $500 million? Brett Andress: From $310 million to $500 million, it really has to do with increased industry volume, right? So I think if you think about the $500 million, you're looking at an industry that's in the 400,000 range. That's down previously from prior estimates of 425,000 to 450,000, and that's really a testament to our market share gains. And then, from there, there's a slight increase in assumed ASP over the next, call it, 1, 2, 3 years, whatever you want to pick for your mid-cycle time frame, that would drop down to really SG&A percent of growth in that mid-70s. Those are really the building blocks outside of it, and really it's based on historical trends and not any assumptions that we haven't built in the model before. Marcus Lemonis: And the math model is pretty simple. If it goes to 400,000 and we maintain some level of market share, we'll be selling north of 80,000 new units. And I don't know where that is in terms of like is it 82,000 or 84,000, just north of 80,000 units. Those things help because everything else flows with it. Service flows with it. P&S flows with it. And so, as we see that new business stabilize, we'll be in pretty good shape. Operator: Our next question comes from Scott Stember with ROTH Capital. Scott Stember: Can you talk about what you're seeing on the financing front? Have you seen rates coming down, given the recent drop in short-term rates? And what does the credit profile of the consumer look like? Has it deteriorated at all? Brett Andress: Scott, it's Brett. So when you think about where the 10-year has been really over the last 1 to 1.5 months, it's kind of been hanging sustainably below that 4%. We've seen a handful, a select handful of retail bank moves within them. But when you think about -- and this just goes back to the conversations that we always have with our lenders, thinking about their appetite and their propensity to take advantage of those lower rates and pass them on to the consumers. This time of year, I think you're possibly going to have a little bit more of a time lag, I would expect, as you get into a more retail-heavy period like 1Q, January, February, March, April. I think that's when we'll start to see the fruition of a lot of the rate cuts that are out there. So right now, I think the setup for retail lending rates to come down is very constructive. It's just a matter of does it happen in November or does it happen in January, February around show season. Scott Stember: Got it. And the credit profile? Brett Andress: Yes. No, credit profile has been very stable for us when we think about our F&I trends over the last couple of months, couple of quarters. The consumer credit profile has been stable and so have the approval rates. And that's really how we judge credit availability in those 2 contexts. Scott Stember: Got it. And then, just last question, just putting some finer points to '26. What would you predict the new and used margins or the ranges should be for '26? Matt Wagner: I would anticipate that our new margins should be within that historical range still that we suggested earlier of like that 13% to 14% range even. And then, on the used side, I would factor in somewhere within that like 18% to 20% range. I mean, there's going to be some months, some quarters where we might have to get a little more aggressive, in which case, we could veer towards the lower end of that spectrum. And then, once we're in peak periods and we feel like we've optimized certain inventory levels, we could push it closer to 20%. But I would say throughout the summation of the year, I mean, that's obviously somewhat of a wide band. But when you look contextually and historically, it's really pretty tight, 18% to 20% on the used side. Operator: Our next question comes from Bret Jordan with Jefferies. Patrick Buckley: This is Patrick Buckley on for Bret. Looking at the parts and service decline versus the continued momentum in used, I guess, is there a goal or target moving forward for what customer pay service growth and margin should be? Thomas Kirn: I think what we're seeing -- this is Tom. I think what we're seeing right now is kind of that trend that we saw in Q2, where as we build used inventory, we have to reallocate that technician time to reconditioning the units and getting it frontline ready. So, as you've seen that sequential increase in new vehicle inventory on our balance sheet quarter-to-quarter, we've had to allocate more of that time to the internal work that doesn't necessarily flow through that PS&O line. It bolsters rather our used volume and our used margins. So I think heading into next year, I do believe that at this point, we see that -- we feel like we have a lot of initiatives out there to continue to grow. And Matt talked about use of agentic AI and some other things that we're thinking about in service. When we think about some other programs that we're looking at in the online marketplaces and trying to kind of continue to bolster our margins with some other programs on the parts and accessories side, I do think that we have some upside opportunities there to grow from where we are today. Matt Wagner: And Patrick, we'll be the first to acknowledge that there's been a lot of noise in that revenue line item over the last few years, more than a few years, even at this point, of either divestitures or different acquisitions or different movements in different categories. However, we believe that we're at a point now where we have a nice, clean baseline. And the entire focus of this line item now is to really induce more usage of RVs. And we could oftentimes do that by means of obviously, service and the reconditioning to ensure that people have assets that are ready to be on the road again, but more importantly, having all the retail products and install items that these consumers need to actually enjoy this lifestyle more and more frequently. And as Tom referenced, we obviously are diving quite deeply into the Amazon marketplace. We've been very effective at working with different partners like [indiscernible] and Lippert and Dometic and Camco, where those are the 4 largest names within the RV aftermarket space. And it's through those relationships, partnerships that not only do we think we could gain more market share in the parts business, especially, but also yield that additional upside when we actually install those items within our service channel. Marcus Lemonis: I do want to have one big takeaway on the P&S. It really does prove out how strong the base of our business is. And while it may go up or down 1% or 2%, the same consumer pressures that people may feel on price, they feel on any money leaving their wallet. And what I'm really proud of what this team has been able to do is to hold the line on that revenue line in the face of a consumer saying, I can't afford things. They're still able to induce people to come in for the proper maintenance and all the other items. But in certain cases, much like a lawyer may have to, you sometimes have to discount rates to make it affordable for people. When you look at the stability and the strength of that particular segment, regardless of what's happening in the macro, it really is that and Good Sam are the 2 differentiators of our business that nobody is able to or nobody will ever be able to penetrate. And that for me is what we're trying to do on the used side as well, just to build a very strong foundation. So the P&S business is just fantastic. It's just resilient. Patrick Buckley: Got it. That's helpful. And then, on the Good Sam Club, it does seem like there's been a bit of a slowdown there. Is that decline at all related to less usage? Matt Wagner: No. So, a few things to note, Patrick. We had announced maybe about 1.5 years ago that we were migrating our Good Sam memberships to a loyalty program. By means of that introduction, we actually created a whole new free tier, and we don't report the free tier in those numbers because we've only historically reported a paid membership. So we didn't want to mislead people by means of bolstering this free tier. But we do have nearly 1 million additional members that are part of our free tier that are not reported in numbers. I call attention to that because through a free tier, you're also earning points when you shop at our facilities, however, not as many points compared to the paid memberships, never mind, an elite membership. And if you look quarter-to-quarter at this line item, we've actually seen a stabilization where we're able to actually offset now any sort of detraction or any sort of depression of that membership growth. And we do believe now we're at this inflection point of being able to stack on gains now because we've been able to stabilize it. Never mind the gains that we yielded within the free tier of the loyalty program. Marcus Lemonis: I think that's the remainder of our questions. Operator: Yes. This concludes our question-and-answer session. And I would like to turn the conference back over to Marcus for any closing remarks. Marcus Lemonis: Great. Thank you so much. We hope you heard the confidence in our ability to deliver these results, and most importantly, as Matt laid out, the building blocks for a much better performance than the floor we've set out. So we look forward to delivering better results and talk to you soon. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, ladies and gentlemen. Welcome to Masco Corporation's Third Quarter 2025 Conference Call. My name is Sylvie, and I will be your conference operator for today's call. As a reminder, today's conference call is being recorded for replay purposes. [Operator Instructions] I will now turn the call over to Robin Zondervan, Vice President, Investor Relations and FP&A. You may begin. Robin Zondervan: Thank you, operator, and good morning, everyone. Welcome to Masco Corporation's 2025 Third Quarter Conference Call. With me today are Jon Nudi, President and CEO of Masco; and Rick Westenberg, Masco's Vice President and Chief Financial Officer. Our third quarter earnings release and the presentation slides are available on our website under Investor Relations. Following our remarks, we will open the call for analyst questions. Please limit yourself to one question with one follow-up. If we can't take your question now, please call me directly at (313) 792-5500. Our statements today will include our views about our future performance, which constitute forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We've described these risks and uncertainties and our risk factors and other disclosures in our Form 10-K and our Form 10-Q that we filed with the Securities and Exchange Commission. Our statements will also include non-GAAP financial metrics. Our references to operating profit and earnings per share will be as adjusted, unless otherwise noted. We reconcile these adjusted metrics to GAAP in our earnings release and presentation slides, which are available on our website under Investor Relations. With that, I will now turn the call over to Jon. Jonathon Nudi: Thank you, Robin. Good morning, everyone, and thank you for joining us. I want to start today with a few reflections on my first 100 days as President and CEO of Masco. Over the last 3 months, I've had the privilege of meeting with our teams, customers and shareholders. I've toured manufacturing sites, participated in strategy reviews and listened to feedback related to both our strengths and opportunities or confirm what I believe to be true when I took this role. We have a strong foundation, industry leading brands, innovative products and incredibly talented and dedicated people. Our product portfolio is focused on the right categories and we have industry-leading capabilities. We've shown resilience in navigating dynamic environments while continuing to deliver value for our customers, consumers and shareholders. I've been especially impressed by the market leadership across our business units. Delta Faucet company has demonstrated incredible agility in the face of a dynamic geopolitical and macroeconomic environment, very strong partnership with our largest retail customer drives significant value for them and for us. Hansgrohe continues to be a global leader with customers in over 100 countries, and Watkins Wellness is winning with strong innovation, even amid broader category headwinds. There's real momentum here and also a real opportunity. In the coming months, we will focus on unlocking those opportunities with continued strong execution, greater speed and strategic investments in the capabilities that set us apart. I'm proud to be part of a team that delivers at a high level. I'm incredibly excited for the opportunities ahead. Now let's turn to our third quarter performance and updated outlook for 2025. Please turn to Slide 6. We continue to navigate a dynamic geopolitical and macroeconomic environment during this quarter. While the near-term market conditions remain a headwind to our business, our teams continue to focus on execution to grow market share and drive long-term shareholder value. For the quarter, our net sales decreased 3% in local currency, and excluding the Kichler divestiture, sales decreased 2%. Operating profit was $312 million, and operating profit margin was 16.3%. Earnings per share for the quarter was $0.97. Now turning to our segments. Plumbing sales increased 1% in local currency. North American plumbing sales increased 1%, driven by favorable pricing. Delta Faucet delivered strong performance again this quarter, particularly at e-commerce and trade. We recently relaunched our iconic Newport Brass brand, showcasing the brand's timeless design and enduring quality. This relaunch helps shape and expand our luxury portfolio represents an important growth initiative for our business with an addressable market of $1.8 billion. Another important growth initiative for Delta is in the water filtration category with a market of $1.2 billion for under-counter water filtration products. Delta's new product introductions in this category continue to outperform our initial expectations and our tankless reverse osmosis water filtration system was recently named the winner of the Good Housekeeping 2026 Kitchen Award. International plumbing sales were in line with the prior year in local currency. We saw growth across many of our European markets, while the China market was increasingly challenged. Operating profit for the segment was $204 million. Operating margin was 16.4% and included higher costs such as tariffs, commodities and inventory-related reserves. Turning to our Decorative Architectural segment. Sales decreased 12% in the quarter or 6% excluding our divestiture of Kichler. Operating profit for the segment was $128 million, and operating margin increased 100 basis points to 19.1%. Within our Paint category, overall paint sales decreased low single digits. DIY paint sales decreased mid-single digits as demand for DIY paint remained soft across the industry, impacted by low existing home turnover. In PRO Paint, sales increased low single digits. This continues the trend of multiyear growth for our PRO Paint. We remain tightly aligned with The Home Depot as we both prioritize and invest in strategic initiatives that allow us to capitalize on the sizable growth opportunity in the PRO Paint market. We also continue to develop new products at Behr that serve the needs of our customers. Most recently, we've launched Kilz original water-based primer and Behr Premium plus Ecomix, a plant-based interior paint. These launches demonstrate our commitment to introducing innovative and sustainable products with quality that our customers can trust. Turning to capital allocation. We generated strong free cash flow during the quarter and maintained a solid balance sheet. We remain committed to our capital deployment strategy and returned $188 million to shareholders this quarter through dividends and share repurchases. I'm proud of how our teams continue to work diligently to implement various mitigation actions in response to the near-term macroeconomic uncertainty, the geopolitical environment and rising costs. We are focused on remaining agile as we continue to execute effectively in this rapidly changing environment. Turning to our expectations for the full year. We now anticipate adjusted earnings per share for 2025 to be in the range of $3.90 to $3.95 per share compared to our previous expectation of $3.90 to $4.10. Our updated range includes the impacts from our third quarter results as well as higher tariffs and our expectations for softer industry demand resulting from the ongoing macroeconomic and geopolitical uncertainty. While uncertainty remains for the near term, we are focused on positioning ourselves for growth over the mid- to long term. The structural factors for repair and remodel activity are strong, including the age of the housing stock, consumers staying in their homes longer and near record high home equity levels. We have the right portfolio mix and our innovative new product introductions are outperforming our expectations. We continue to gain market share in key growth areas, including e-commerce, luxury faucets and showering and PRO Paint, and we are building strategies to further accelerate growth opportunities. Our high-performing teams have a history of leadership in navigating dynamic environments. When that leadership is combined with the strength of our brands, innovative products and unmatched customer service, we believe we are well positioned to continue to deliver long-term value for our shareholders. With that, I'll turn the call over to Rick to go over third quarter results and our 2025 outlook in more detail. Rick? Richard Westenberg: Thank you, Jon, and good morning, everyone. Thank you for joining. As Robin mentioned, my comments today will focus on adjusted performance, excluding the impact of rationalization charges and other onetime items. Turning to Slide 8. Sales in the third quarter decreased 3% or 2% excluding the impact of our divestiture of Kichler and favorable currency. Our divestiture of Kichler in the third quarter of 2024 resulted in a decrease in sales by 3% year-over-year in the third quarter of 2025, while currency represented a 1% increase in sales. In local currency, North American sales decreased 6% or 2% excluding the divestiture impact. International sales were in line with the prior year in local currency. Gross margin of 34.6% in the quarter was impacted by higher tariffs and commodity costs. SG&A decreased $16 million, primarily due to our divestiture. SG&A as a percent of sales improved 20 basis points to 18.4% in the quarter. Operating profit was $312 million in the quarter, and our margin was 16.3%. Operating profit was impacted by lower volume and higher costs, primarily related to tariffs, commodities and inventory-related reserves. Note that the temporarily elevated tariffs of 145% on China imports added approximately $15 million to the overall tariff impact in the third quarter, primarily in the Plumbing segment. These impacts were partially offset by pricing actions and cost savings initiatives. Our EPS was $0.97 per share in the quarter. Turning to Slide 9. Plumbing sales increased 2% in the third quarter or 1% excluding the favorable impact of currency. This growth was largely driven by pricing, which increased sales by 3%, partially offset by lower volume. In local currency, North American plumbing sales increased 1% in the quarter. This performance was primarily driven by Delta Faucet, which delivered growth in both the e-commerce and trade channels. In local currency, international plumbing sales were in line with the prior year. Hansgrohe continued to see growth in many of its European markets, including its key market of Germany. This growth was offset primarily due to an increasingly challenging market in China. Segment operating profit in the third quarter was $204 million, and operating margin was 16.4% Operating profit was impacted by lower volume and higher costs such as tariffs, commodities and inventory-related reserves, partially offset by pricing actions and cost savings initiatives. Turning to Slide 10. Decorative Architectural sales decreased 12% in the third quarter or 6% excluding the divestiture of Kichler. Performance in the quarter was driven by lower volume in our paint business as well as our builders hardware business, which also was unfavorably impacted by timing of shipments. In the quarter, total paint sales decreased low single digits due to lower volume. PRO Paint sales were up low single digits and DIY Paint sales decreased mid-single digits. Given the persistent softness in the overall DIY paint market and the favorable inventory timing we experienced in the fourth quarter of last year, we continue to anticipate our total paint sales for the full year to decrease mid-single digits. Excluding the impact of the prior year inventory timing benefit, we would anticipate full year DIY Paint sales to decrease high single digits. In our PRO Paint business, we continue to expect sales to increase mid-single digits for the full year. Operating profit in the third quarter was $128 million, primarily impacted by lower volume, partially offset by cost savings initiatives. Operating profit margin increased 100 basis points to 19.1%. Turning to Slide 11. Our balance sheet remains strong with gross debt to EBITDA at 2x at quarter end. We ended the quarter with $1.6 billion of liquidity, including cash and availability under our revolving credit facility. Working capital was 18.5% of sales at quarter end. Working capital continues to be impacted by tariff-related dynamics, including higher material costs and pricing, increasing our working capital balances. Given our strong cash generation, we returned $188 million to shareholders in the third quarter through dividends and share repurchases, including the repurchase of $124 million in stock. As it relates to capital allocation, we now expect to deploy approximately $500 million towards share repurchases or acquisitions in 2025, slightly higher than our previous expectation of at least $450 million. This increase is driven by a cash tax benefit from the recently enacted tax legislation. Now let's turn to Slide 12 and review our full year outlook. The market environment remains volatile and tariff uncertainty persists. The guidance that is being provided today includes the impact of currently enacted tariffs in effect in October, which now includes new tariffs on copper, antidumping duties on glass and increases to global reciprocal tariffs, particularly on Vietnam, Thailand and the European Union. As a result of these additional tariffs, we now estimate that the total annualized cost impact of all incremental tariffs enacted this year to be approximately $270 million before mitigation, up from $210 million as of our second quarter earnings call. Of the $270 million annualized cost impact, approximately $140 million continues to be related to the incremental 30% China tariffs. And the remaining $130 million is driven by the global reciprocal tariffs, the 50% tariff on steel, aluminum and copper and the glass antidumping duties. Of this approximately $270 million total annual cost, we expect a 2025 in-year impact of approximately $150 million before mitigation, up from $140 million as of our second quarter call. Our teams continue to actively work to mitigate these additional costs through a combination of levers. These include cost reductions, continued efforts to change our sourcing footprint and pricing where necessary. We anticipate that these mitigation actions will mostly offset the direct cost impact of the currently enacted tariffs in 2025. It is important to note that our guidance does not attempt to estimate the impact of potential future tariffs or any changes in existing tariffs. Turning to the overall market. Our expectation continues to be that the U.S. and international repair and remodel markets will decrease low single digits in 2025. For Masco, we expect our sales in 2025 to decrease low single digits, impacted by the 2024 divestiture of Kichler, which will reduce sales by approximately 2% year-over-year. We anticipate currency will have a favorable impact of approximately 1%. Excluding the impact of our divestiture and currency, we now anticipate Masco's overall sales to be down low single digits versus our prior guidance of roughly flat year-over-year, given continued industry softness with lower volumes partially offset with pricing. As a reminder, fourth quarter sales will face a challenging year-over-year comparison due to the favorable inventory timing impact we experienced in our paint business in the fourth quarter of last year. We now anticipate total company operating margin to be approximately 16.5% in 2025 versus our previous guide of 17%, driven by slightly lower volume, impact of additional tariffs and higher costs. In our Plumbing segment, we continue to expect 2025 full year sales to be up low single digits. We now anticipate the full year Plumbing margin will be approximately 18% versus our previous guide of 18.5%. In our Decorative Architectural segment, we continue to expect 2025 sales to decrease low double digits or mid-single digits, excluding the impact of our divestiture. We also continue to anticipate the full year Decorative Architectural margin to be approximately 18%. Finally, as Jon mentioned earlier, our 2025 EPS estimate is $3.90 to $3.95 per share. This continues to assume a 211 million average diluted share count for the year and a 24.5% effective tax rate. With that, I would like to open up the call for questions. Operator? Operator: [Operator Instructions] And your first question will be coming from Stephen Kim at Evercore ISI. Stephen Kim: It's Steve. We will have -- we do have a tariff question, but I wanted to start off actually on the paint side. There was a competitor who talked about a price increase going in Jan 1. I was wondering if you could sort of talk about how that might influence your outlook for pricing as we get into the new year on dec arc. And maybe you can talk just generally about how given the relationship you have with depot, how you think about pricing relative to competitor actions? Jonathon Nudi: Steve, it's Jon. Thanks for the question. We certainly have a unique relationship with Home Depot. It spans 40-plus years, incredibly strong. As you mentioned, we do have a relationship, it's essentially price cost neutrality over time. As we look at our dec and particularly our paint input costs, we see some upward pressure, but not significant. So at this point, again, we'll continue to have private conversations with our retail partner, but I wouldn't expect to see significant pricing on paint as we move into the coming year. Stephen Kim: Okay. That's very helpful. Appreciate that. Aatish, do you want to jump in on the tariff? Aatish Shah: Yes. I just want to clarify on the tariffs. When all is said and done kind of longer term impact to Plumbing margins from tariffs, like, how do you see that given that price action will mostly mitigate tariffs dollar for dollar? It's kind of like more of a longer-term question on Plumbing. Richard Westenberg: Yes, sure. Well, from a tariff perspective, as we've all realized here, it's a relatively volatile and dynamic environment. And so based off of the current tariffs enacted as of October, we articulated it's about a $270 million annualized impact. And we're tackling that on a number of fronts from a mitigation standpoint. First and foremost, from a sourcing footprint standpoint, particularly sourcing out of China, where our largest exposure exists to other markets, also reducing cost and sharing that tariff impact with our suppliers. And third is pricing, as you alluded to. Those are levers that we continue to pull. And our objective is to not only offset the dollar cost of the tariffs, but ultimately, the margin implications over time. So obviously, we've got to track and monitor the situation closely. But based off of where we sit today, our expectation is that we'll continue to work towards mitigating. As we mentioned in our comments, we've mitigated a large part of the tariffs, not all, but a large part of the tariffs here in this calendar year. And certainly, our objective as we move into 2026 is to mitigate further as well as start working to build margin. So we're continuing to focus on the mitigation and working to restore our margins over time. Operator: Next question will be from Matthew Bouley at Barclays. Matthew Bouley: I wanted to ask one, I guess, kind of zooming into the plumbing margins, and I guess, the 3Q results, specifically. I think you guys have previously signaled that there would be some of that impact from the 145% tariffs. And so I mean, I guess that played out. But the question is, was there anything else that was effectively a surprise versus your own expectations? Did any of those incremental tariffs that were coming in the summer end up sneaking into the quarter there as an impact? Or just any other cost that ended up surprising you? Richard Westenberg: Sure, Matt. It's Rick. As it pertains to our Q3 results, I would say it was impacted really by 3 drivers. One is tariffs, as you articulated. There were incremental tariffs since our Q2 call as you articulated. But those -- that took our in-year impact from $140 million to $150 million. But that incremental $10 million of in-year impact is really going to be a Q4 event. So those were new tariffs since our Q2 call. And so that factors into our updated guidance for the year, but that's really a Q4 dynamic. As you also alluded to, within the tariff realm, we did experience that elevated tariff impact on the 145% on China imports. That was about a $15 million impact in Q3 specifically. And that was, as we alluded to in Q2, something that we anticipated, but did manifest itself in Q3. The second driver is with regards to overall softness in the industry. And so we do believe that the industry, both North America and international is going to be down low single digits. We're really coming in from an industry perspective on the lower end of that range. And so that was a bit of an impact as we flow through Q3 as well as the calendar year outlook. And then fourth, we're incremental -- I'm sorry, third was incremental cost, both with regards to commodity inputs, particularly on copper, that continues to be elevated as well as the inventory-related reserves, which really was an update in our assumptions based off of market conditions that we -- as we generally review our reserves on a quarterly basis, we just had a higher than typical adjustment in the quarter. So that would be really the drivers behind our margin performance in the quarter. Matthew Bouley: Okay. Got it. I guess secondly, I wanted to touch on the builders' hardware business since, I guess, paint and coatings is only down low single digits, overall. I think I heard you say there were some unfavorable inventory timing. I'm wondering if there was maybe a pre-buy there earlier in the year or just kind of more elasticity related to price increases in that category. So presumably, it would have been a fairly large move in that business to impact the segment as it did. So just any more color on exactly what's going on there. Richard Westenberg: Sure, Matt. It's Rick. Yes. So as it pertains to the builders' hardware business, it was impacted by softness in sales as we saw really across the industry. But as we mentioned in our opening comments, there was a bit of a shipping timing dynamic. It was really due to a planned shipping process change in the quarter. So we curtailed our shipments during the quarter in order to infatuate the change, so it is something that we noted in our talking points, but we do not believe that it would be a significant impact for the calendar year overall. Operator: Next question will be from Michael Rehaut at JPMorgan. Michael Rehaut: Great. First question, I just wanted to clarify on the margins -- Plumbing margins for the third quarter. The -- given that some of that was already anticipated the 145%, was the delta perhaps versus expectations a little more driven by the inventory-related reserves? Or were there other factors also at work? Because I think the overall more recent tariff changes, I think you said was more of a 4Q event? Richard Westenberg: Yes. Sure, Mike. You're right. As it pertains to our expectations coming into the quarter, we did have contemplated the elevated China tariffs. So that was part of our expectation. I'm not sure it was fully contemplated all in Q3 in terms of external expectations, but certainly, we had contemplated that internally. As it pertains to development since our second quarter call, I would say there were 2. One is the inventory-related adjustments that we alluded to. And second is just softer sales, particularly in certain markets like China that came in, from an industry perspective, lower than we had anticipated. Michael Rehaut: Okay. Perfect. And then in terms of the overall full year sales guidance, I believe last quarter, you had consolidated sales still down low single digits similar to what you have in this updated guide. But it seems like perhaps you're now kind of talking towards the lower end of that guide or lower end of that down low to single-digit range. Just wanted to make sure I also have that right. And again, just to kind of -- and I apologize, if you kind of hit on this earlier, but just to be clear, which segment that's really coming from, if part of that is the builder hardware or maybe a little bit softer trends in plumbing as you just alluded to, international or North America, just a little bit more granularity around that. Richard Westenberg: Sure, Mike. Yes, your observation is directionally correct. Ultimately, we see the industry coming in a bit lower, kind of on the lower end of our range. As expressed in EPS, we are coming in at the lower end of our range that we publicized in our due to earnings call, and part of that is driven based off of lower industry expectations. And it's relatively across the board, I would say that it does impact the Plumbing segment, as we mentioned, particularly China, but also impacts our builders' hardware as well as our DIY Paint. So not dramatic changes, but the industry is a bit softer, really at the lower end of our expectations. As it pertains to our underlying performance, I would classify that as pretty solid, meaning that we're continuing to perform in line or in many categories better than the overall industry. It's just the overall industry softness that continues to be relatively weak. Operator: The next question will be from Mike Dahl at RBC Capital Markets. Michael Dahl: Some clarifying questions on tariffs. I guess just to be clear on China. It seems like you're still at, call it, $450 million to $500 million of underlying cost of goods sold. So there's been discussions in the last couple of days about the tariffs getting reduced by maybe 10%. Is it right to think about that as a $50 million annualized impact if that came to fruition in terms of that $140 million going to something more like to $90 million to $95 million? And then the second part of the question would be, if you could just break out what's like within that other $130 million, can you just specify what the global reciprocal bucket is versus the steel, aluminum, copper and the antidumping? Richard Westenberg: Sure, Mike. Your math on the first question is directionally correct. As we've articulated in the past, our annual import exposure from China is $450 million on a 30% tariff from China that represented about $140 million of impact. So hypothetically speaking, if there were a change in tariffs, whether it's plus or minus, you can extrapolate from there. As it pertains to your second question, we're not going to provide a detailed breakdown in terms of the composition of our exposures in the "other bucket". It's really a composition of reciprocal tariff, Section 232 tariffs on steel, aluminum and copper as well as the glass antidumping duties. And part of it is it's a dynamic environment. And so as we continue to modify our sourcing footprint, as we move out of China into other markets, and we continue to manage and work aggressively to mitigate our tariff exposure, those underlying exposures will change and update over time. What we will do and we will continue to do is provide the investment community with an overview in terms of the financial implications split between China and pretty much everything else as we've done this quarter. And then from an annualized perspective, as we've articulated, we have a $270 million annualized exposure -- or I'm sorry, impact. $140 million is China, $130 million is everything else. And we'll continue to provide updates if and as things change in our quarterly reviews. Michael Dahl: Okay. Understood. That's so helpful. My second question is just specifically on paint. I understood that you've got the comp dynamic. The fourth quarter, it still implies like a pretty big step down in margins in the fourth quarter versus what's been really solid like 2Q, 3Q performance despite the top line challenges. So I'm just wondering if there's anything else there in the fourth quarter aside from just comping against that load-in that would be driving that margin down so much? Richard Westenberg: Yes, nothing particularly of note. What I would say is the biggest driver on a year-over-year basis in terms of top line and margin. I know you're talking about Q4 specifically in regards to the unfavorable comparison relative to the impact of the channel -- favorable channel inventory build that we experienced in Q4 of 2024. So that is really the biggest driver from a year-over-year basis. Operator: Next question will be from Sam Reid at Wells Fargo. Richard Reid: Wanted to touch on plumbing price in a little bit more detail, the 3% you reported. Could you just characterize kind of where that landed relative to your expectations? I know you had obviously larger price increase in the market. So just curious kind of what you got on a realization standpoint versus what you were expecting to get? And then as you look to the fourth quarter, does the guidance contemplate any step-up in plumbing price sequentially? Just wanted to maybe understand that Q4 dynamic as well on price in plumbing. Jonathon Nudi: Sam, this is Jon. Maybe I'll start, and then Rick can jump in as well. I would say that pricing and plumbing primarily played out according to plan and what we expected. If you think big picture, obviously, significant increase in tariffs versus what we thought at the beginning of the year. And the team, particularly at Delta, which is the most impacted business, have done really a remarkable job of mitigating tariffs. And it really starts with making sure that we optimize our footprint. We've been doing that over time. We have a 40% or 45% reduction versus 2018. We'll continue there, working with our suppliers on concessions, looking at our own cost structure and making sure that we optimize that. Then ultimately, as the last resort, we will take pricing. And we did take pricing throughout this year. I would say it's executed according to plan, and we'll continue to look at our -- what we need to do as we move into the coming year as well. In terms of Q4, I'll let Rick cover that. Richard Westenberg: Yes, Sam, in terms of sequentially, as you would expect, our mitigation actions take hold over time, really from a pricing, cost reduction and sourcing standpoint. But you'd expect that our pricing being one of the levers to continue to get increased traction over time. And I guess I'll leave it at that. Richard Reid: That helps. And then one more plumbing-related question here. You called out strong Delta performance in 2 channels, e-commerce and trade. I might have missed, but how did Delta perform in home center? And perhaps can you talk through kind of how you trended in home center relative to the broader category? Jonathon Nudi: Yes, absolutely. So Delta in particular had a very strong quarter driven by e-commerce, where we saw nice growth. Our wholesale channel grew kind of low single digits. And we saw relatively flat, maybe slightly down performance in retail. And as we look to the coming year, we're excited about the plans we have coming, and we believe that we'll be driving even stronger results in retail as we hit 2026, but no major bogeys from a plumbing standpoint and, again, strength in e-commerce, wholesale and then relatively flat in retail. Operator: Next question will be from John Lovallo at UBS. John Lovallo: There's a couple of factors impacting the back half. One of them, you talked about on the inventory side. Just wanted to get a little bit more clarity, if I could, on the lower employee-related costs that are not expected to repeat in the back half. So curious what was the third quarter impact of that and what's the expected fourth quarter impact? Richard Westenberg: John, you're referring to a comment that we made in the Q2 call, correct? John Lovallo: Correct. Yes. Richard Westenberg: Yes. So from an employee related, yes, you're correct. We did have a favorable benefit in Q2. We continue from a cost perspective to be very disciplined on cost, particularly given the current environment and managing people costs as well as other costs that continues to be a priority for us. So we didn't have a repeat of the onetime item, so to speak, that we benefited from in Q2. But suffice it to say, we're continuing to drive efficiencies, cost reductions, et cetera, throughout the business just to drive operational efficiencies. John Lovallo: Okay. And then maybe just a follow-on to that, maybe outside of some of the tariff mitigation actions, what are some of the cost savings initiatives being taken in both segments to help kind of lower the cost basis? And what do you expect for the impact of that on a go-forward basis? Richard Westenberg: Yes. So John, we continue -- I know you've heard us talk about before, leverage our Masco operating system to continue to drive productivity and efficiency. And so that is productivity in our plants, supply chain efficiencies, procurement cost savings. I know we talk about tariff mitigation, but we also are working on driving cost efficiencies throughout our sourcing footprint. We talk about automation, VA/VE. And in this year, in particular, we're looking at more austerity measures as it pertains to the headcount and discretionary spend. So really a combination of all those factors. And it's not isolated to a particular segment. It's really across our businesses. Operator: Next question will be from Trevor Allinson at Wolfe Research. Trevor Allinson: You mentioned seeing some input cost inflation, more input cost inflation you expected in Plumbing, call that metals. Can you put some numbers around what inflation rates you're seeing in your plumbing business in the third quarter and what you're expecting for the fourth quarter? Richard Westenberg: Sure, Trevor. It's Rick. So yes, we are seeing some upward pressure, particularly on the copper input. And as you may recall, in Q2, I believe it was at a record high at least on the COMEX. So it continues to be a headwind for us from an overall input perspective. We can going to manage it from a cost standpoint. But ultimately, it's -- to answer your question, it was a low single-digit inflationary impact in Q3 in Plumbing, and we expect a similar low single-digit inflation for the calendar year for the Plumbing segment. Trevor Allinson: Okay. That's helpful. And then a question on DIY Paint. Obviously, it's been weak for some time now after being very robust during the pandemic. Now we've had several years of DIY Paint declines. Can you talk about where you think we are in terms of pull forward versus deferral? And do you think DIY Paint is a category that can get back to growth in fiscal '26? Jonathon Nudi: Yes. Trevor, this is Jon. We really like our DIY Paint business. Obviously, the strength of Behr over time. DIY Paint correlates heavily to existing home sales. And as you know, existing home sales are near 3 decade lows right now. And if you think about it, it's pretty simple when you go to sell a house, you typically paint it, when you have buy a house, you typically paint it again. So without existing home sales moving at the pace that they have historically, that's really put a dent on the market. We expect the long-term fundamentals to get better for sure as existing home sales free up and start selling at more historical rates. I think consumer confidence in interest rates will help with that. And at the same time, we're excited about our PRO business. When you think about the upside that we have there. We have a relatively low share. We've grown nicely over time. And it's approaching nearly 50% of our business at Behr. So again, we think that we can continue to drive DIY. And at the same time, we think there's a significant opportunity on PRO as we work with our retail partner to really maximize that. Operator: Next question will be from Susan Maklari, Goldman Sachs. Susan Maklari: My first question is going back to Delta, you cited the strength that you're seeing in e-commerce and the wholesale channel there. Can you talk a bit about what is driving that strength, the outlook, the ability to sustain that? And what that could mean for volume and price mix in the Plumbing segment next year if the macro does stay tougher? Jonathon Nudi: Yes. So this is Jon. Maybe just a little color on Delta. As I mentioned, really pleased with that team and is also we're driving. I think it starts with -- they do a great job of building the Delta brand as well as the Brizo brand and all the different brands portfolio and really making them stand for something with end consumers. Innovation has been a big part of the Delta story. So our vitality rate, which is new products launched over the last 3 years at 25%, which we think is industry leading, and we'll continue to drive that and drive even more innovation as we move forward. And then really developing great capabilities from an e-commerce standpoint, we believe that we're growing share in that channel at a pretty significant rate just due to the capabilities and really the customer insight that we have with different retailers and different e-commerce customers in that channel. So the team is really firing on all cylinders. We would expect that momentum to continue as we move into fiscal '26. Susan Maklari: Okay. And then turning to capital allocation. You mentioned that you are increasing the outlook for returning cash to shareholders by $50 million for the year. Can you talk a bit about the timing of that? And also, what you're seeing in terms of other uses of cash, such as the M&A environment and the potential there? Richard Westenberg: Sure, Sue. It's Rick. Yes, as you mentioned, we did increase our expectation for cash available for share buybacks or M&A activity from about $450 million to $500 million. A big component of that was the favorable cash tax benefit from the recently enacted tax bill. So that was a favorable impact, and we are increasing our cash available for share buybacks and M&A accordingly. What I would say is as it pertains to in terms of timing, through the first 3 quarters of the year, we've returned just over $350 million to shareholders. And so you could envision that about $150 million remains for the fourth quarter. As it pertains to M&A activity, no change in terms of our overall capital allocation framework and our strategy in that regard. We continue to cultivate a pipeline of opportunities, focused really on bolt-on opportunities and nothing to report at this time, but it's certainly something that we look at as part of our overall growth algorithm. To the extent we do not have an opportunity this year, you would expect us to utilize that cash for ongoing share repurchases. Operator: Next question will be from Phil Ng of Jefferies. Margaret Grady: This is Maggie on for Phil. I guess, first, just maybe to ask the Plumbing pricing question a little differently. It was kind of surprising to see a similar pace, that 3% in 3Q similar to 2Q, just given the tariff mitigation efforts and the magnitude of pricing you have out there. So are you seeing more pressure from competitive dynamics or just pricing fatigue from customers? Maybe just walk us through some of the puts and takes there? Richard Westenberg: Sure, Maggie. It's Rick. So I think Sam asked a similar question from a sequential standpoint. So our price, as you articulated, was about 3% favorable from a Plumbing segment perspective, and that is as our pricing continues to gain traction in the market. So I'm not going to get into specifics on Q4 at this point. But suffice it to say, we're gaining traction. As it pertains to the overall dynamics, it's something that we're monitoring very closely. As Jon articulated, there's a number of levers that we pull with regards to our tariff mitigation and to address our margin headwinds, which are sourcing footprint changes, cost reductions and as necessary pricing. So we will leverage the pricing component of that, but it's something that we do in a very targeted way, and we look for a balanced approach overall. But I guess the bottom line is we continue to see pricing as a favorable impact on a year-over-year basis, but it's largely going to be driven based off of our need to mitigate the tariff impact as well as our assessment of the overall market dynamic. Margaret Grady: Got it. And are there any nuances to call out between channels in terms of realization or acceptance by channel? And then thinking ahead, you have this January price increase announced out there. What have you seen this year that's kind of influencing how we should think about realization on that in 2026? Richard Westenberg: Yes. So Maggie, we're not going to comment with regards to specific channel pricing performance. That's just something that we manage with our customers. As it pertains to anything that might be out there as it pertains to future pricing, I'm not going to really comment on that either. That's something that would be kind of in development. And so again, I would just take a step back and just look at it from a standpoint of pricing continues to be one of the levers that we've deployed in terms of mitigating our tariffs as well as other impacts such as commodity inflation, et cetera, and that's something that we're going to continue to focus on and execute against. Operator: Next question will be from Adam Baumgarten at Vertical Research Partners. Adam Baumgarten: Just on the timing-related issues in builders hardware, which is obviously a headwind in the third quarter. I think you mentioned that maybe it wouldn't be much of an impact for the full year. So would that imply that 4Q, those shipments kind of go through and therefore, the full year won't be as impacted? Richard Westenberg: Yes. And directionally, that is correct. So it was a Q3 adverse impact. But for the overall year, we don't expect it to be a significant impact. So I guess that would be a fair conclusion. Adam Baumgarten: Okay. Got it. And then just in plumbing, just on China. You talked about that being a headwind. It seemed like maybe a bigger headwind than it's been in prior quarters. If you can maybe kind of walk through what you're seeing on the ground over there? Jonathon Nudi: Yes, Adam, for sure. So the market itself has been challenged. And I think, obviously, you read about the housing market and what's happening in China. But at the same time, I think local players have become much stronger as well. So between those 2 things, the market itself is challenging, and I think the competitive situation is challenging as well. I'll tell you that we feel like we are holding up at least as well and probably better than our other major global competitors that are in that market. We still like that market. It's a significant market for us. And we think over time, we'll be able to get back to growth, but it has been a bit more of a headwind, certainly in Q3 than what we had seen through the first half of the year. Operator: Next question will be from Keith Hughes at Truist. Keith Hughes: Just a question of the inventory reserves you discussed in plumbing. Is that -- are you writing off obsolete inventory? Or what specifically is going on? And how much of a dollar hit is that? Richard Westenberg: Yes, Keith, it's Rick. So as part of our normal process, we review our balance sheet reserves on a quarterly basis as you anticipate. We make adjustments quarter-to-quarter based off of the assumptions in place at the time. And it's really driven based off, this quarter based off of the overall market environment and really the slow pace of the industry sales, et cetera. And so we do have adjustments, as you would expect, kind of quarter-to-quarter. This quarter was bigger than typical. So we've called it out, particularly given it hit our Plumbing segment and one of the drivers in terms of our margins. Although we wouldn't expect this to occur kind of on a regular basis, it was something that was -- we felt appropriate to call out for Q3. As it pertains to overall magnitude, I'm not going to give you a specific dollar amount, Keith, but I could dimension it a little bit for you. And I would say, on a year-over-year basis, if we look at whether it's operating profit or operating profit margin, it represented about 1/4 of the performance impact on a year-over-year basis. That helps? Keith Hughes: Okay. And is there a cash offset to this that comes or is this a noncash element. Richard Westenberg: This will be noncash. Operator: Next question will be from Eric Bosshard at Cleveland Research. Eric Bosshard: Two follow-ups. On the DIY Paint, I understand the softer sales, the down 7% to 9% and the market overall -- R&R market, that's not that bad, but you're linking that to housing turnover. I'm curious if strategically, there's anything different to do in this business to drive better growth. Obviously, you're having success with the PRO initiative in Depot. But on the DIY side, is there anything strategically different to do to stimulate better performance? Jonathon Nudi: So this is Jon. Good question. I think at the end of the day, I think the biggest thing we can do to drive our business continue to drive a better brand. And Behr paint has amazing quality, and we offer great value as well. And I think we can get even tighter in terms of our communication of why we have such a great proposition for our consumers. I think the other thing we can do is continue to innovate. As I mentioned in the prepared remarks, we're launching some innovation we're excited about some plant-based paint that's obviously very much in trend with younger consumers and millennials, and we think that will be a positive for us as well. We are with the right partner that obviously continue to do well in market. We continue to work with them to make sure we maximize our sales. I think, for us, though, again, I think getting tighter on our messaging from a brand standpoint really around value and quality because we think by far, we've got the best proposition in the industry. Eric Bosshard: Okay. And then for Delta, your comments were optimistic about retail '26 growth. I'm curious if there's anything in the business or from a market share perspective that informs that or if this is more function of lower rates and at some point, consumers will spend money. Just trying to figure that out. Jonathon Nudi: Yes, great question. As you would likely imagine, we have a good sight line into 2026 in terms of our plans with our major retailers. And without going into the details, we feel really great about where we're going to be from a distribution standpoint. We feel really good about our innovation that we're launching as well. And we would fully expect to have a very strong year at retail in 2026 as a result of those plans that are in place. Operator: Next question will be from Rafe Jadrosich at Bank of America. Rafe Jadrosich: I wanted to just get a little bit of a better understanding about the timing of when tariffs like hit your P&L and the cadence of the mitigation. So obviously, you have to work through some of the inventory that maybe came in pre-tariffs. Like how much of that of the impact is being like in your P&L today? And how do we think about that going forward? And then sort of same question on like the mitigation that you're planning, how do we think about the cadence of that? Richard Westenberg: Yes. Rafe, it's Rick. So as it pertains to the cadence of the tariff impact, as we've articulated in prior calls, that we fully expect most of that impact -- we know that most of the impact is going to occur in the second half of the year. And so that's why, as you saw in Q3, the tariff impacts really get kind of traction in our P&L. We did see some in Q2, but the vast majority is in Q3 and Q4. As articulated, we did have incremental or additional tariff impact in Q3 given the temporarily elevated China tariffs at 145%. So that translated into a $15 million additional tariff impact in Q3. Now that is hopefully onetime in nature as it pertains to the tariff dynamics. As you think about on a prospective basis, that's why we give the annualized tariff impact and our annualized tariff impact is $270 million. So you can think of that as a run rate basis on a calendar year basis. We saw, again, most all of that in the second half, thus the $150 million in the second half of the year, inclusive of the $15 million that I talked about. But $270 million is how we think about it going forward. I would caution, of course, that, obviously, we continue to be in a dynamic environment from a geopolitical standpoint. And so that estimate of $270 million is based off of really a static picture of not only the tariff environment, but our footprint. And we'll continue to provide updates in terms of our exposures as well as our tariff impact as we move quarter-to-quarter. Rafe Jadrosich: Got it. Okay. And then would you -- are you -- is the plan to fully mitigate in 2026? And then of those, you listed a few things that you're shifting supply chain pricing, like how do we think about the timing of that and when you would be planning to fully mitigate? Richard Westenberg: Yes. So with regards to mitigation actions, those are all underway, and we're pursuing them very aggressively and expeditiously. And so each exposure has a different time line. But ultimately, we would expect to, as we said before, offset a large part of the tariff impact this year, not all, but a large part. And really, our goal is to ultimately offset the tariff impact, not only from a dollar perspective but also from a margin standpoint, based off of the tariff environment as we see it today, and we would expect and we'll provide more color on that in our February call in terms of our expectations for 2026 specifically. But one of the largest levers of our tariff mitigation strategy is our sourcing footprint, and that takes some time. It continues to be an exercise that the team has done an excellent job in terms of reducing our exposure specifically to China. As mentioned earlier in the Q&A section, our exposure to China is $450 million, but that's down 45% from levels of 2018. And we continue to be on that glide path and accelerate that. So we'll provide an update in terms of what that looks like in 2026 in our February call. But suffice it to say, we're continuing to really execute towards the tariff mitigations and offset the dollar amount as well as margins over time, and we'll provide further updates in February. Operator: Next question will be from Collin Verron at Deutsche Bank. Collin Verron: Just one for me. I guess on the plumbing side of the business, can you just talk about how long you think this soft demand environment will really last here? And I guess like if you're looking out over the next 6 to 12 months, like what specific factors would you be looking for that would get you a little bit more excited about the demand environment? Jonathon Nudi: Collin, this is Jon. I'm relatively new to this industry, as you know, but it's been consistent as I go out and talk to our customers, channel partners, suppliers. I think everyone feels like the rebound will come, the crystal ball. We don't have a crystal ball, we can't tell you when that is. But all the macro factors remain incredibly positive. If you think about what drives R&R activity. I mean it's really about home equity levels. We know that they're at record highs right now. We know the age of the housing stock in the U.S. is ripe for renovations, remodels. In fact, over the next few years, something like 20 million more homes will become into that prime point to be remodeled. That's 20 to 40 years of age. And then I think it's about consumer confidence and interest rates. So I think if we see interest rates continue to tick down, consumer confidence in their economy increase, we'll see consumers tap into their home equity funds and start those remodels that they've been deferring. So we're very confident about the long term. Obviously, we don't have a crystal ball. I can't predict exactly when that will happen. As we sit here, we're not going to talk too much about 2026 or certainly give guidance, but I think we would expect to see a gradual improvement in our markets as we move forward into the coming year. Operator: Our last question comes from Anthony Pettinari at Citi. Anthony Pettinari: I just had 2 quick ones on Plumbing. I guess first, how would you characterize the performance of kind of your best brands. You talked about the strength in Delta, I'm just wondering how Brizo and Hansgrohe, are they still kind of outperforming the good, better? Or is there like any change in that dynamic? And then, I guess, just second question, sauna, wellness, smaller part of the business, but I'm just curious how that category is performing in what's obviously been kind of a tough market? And do you see the growth opportunity there organically or inorganically maybe different than you did 6 months ago, 12 months ago? Jonathon Nudi: Yes. Absolutely. In terms of plumbing, we really like the way our brands are performing. When you look at upper premium and luxury, we've got brands like Brizo as well as Newport Brass, Axor, which is our global luxury brand. And really, we see a bifurcation in terms of the market. We're seeing the upper income consumers hold up relatively well. And actually, we're growing the fastest in upper premium and luxury, so really like the performance there. From Hansgrohe growth standpoint, really like the way that they're performing around the world. Germany in particular, the home market, they're growing nicely, taking a tremendous amount of share. And really, we believe, growing share in most markets around the world. I mentioned China is definitely the soft spot for Hansgrohe and that's something we'll continue to work out for sure. So I really like the way they're performing around the world from a Plumbing stand point. In terms of Watkins, that's been a business that, again, we're really excited about the long-term opportunity for. When you look at Wellness very much being on trend from a consumer standpoint, the low household penetration of our categories. If you think about hot tubs, only has 5 or 6 household penetration in North America. Sauna is only 1% household penetration. And if you listen to what's happening in culture and society, you see and hear a lot of buzz around both of these and particularly saunas are on fire, right? So we think there's a tremendous opportunity for us. We're the market leader in hot tubs in North America, we continue to push our advantage there. We're a leader in sauna. I think that's an area that we'll continue to drive as we move through the future. We think there's a lot of tremendous upside for that business for the short to long and long term as well. Operator: At this time, we have no other questions registered. I would like to turn the call back over to Robin Zondervan. Robin Zondervan: We'd like to thank all of you for joining us on the call this morning and for your interest in Masco. That concludes today's call. Have a wonderful day. Operator: Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines.
Operator: Thank you for standing by, and welcome to Generac Holdings Inc.'s Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Director of Corporate Finance and Investor Relations, Kris Rosemann. Please go ahead. Kris Rosemann: Good morning, and welcome to our third quarter 2025 earnings call. I'd like to thank everyone for joining us this morning. With me today is Aaron Jagdfeld, President and Chief Executive Officer; and York Ragen, Chief Financial Officer. We will begin our call today by commenting on forward-looking statements. Certain statements made during this presentation as well as other information provided from time to time by Generac or its employees may contain forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements. Please see our earnings release or SEC filings for a list of words or expressions that identify such statements and the associated risk factors. In addition, we will make reference to certain non-GAAP measures during today's call. Additional information regarding these measures, including reconciliation to comparable U.S. GAAP measures, is available in our earnings release and SEC filings. I will now turn the call over to Aaron. Aaron P. Jagdfeld: Thanks, Kris. Good morning, everyone, and thank you for joining us today. Home standby and portable generator shipments grew sequentially in the quarter, but were below seasonal expectations as a result of a power outage environment that was significantly below our long-term baseline average and the lowest third quarter of total outage hours that we've experienced since 2015. On a year-over-year basis, overall net sales decreased 5% to $1.11 billion. Residential net sales declined 13% as compared to the prior year quarter with softness in home standby and portable generators, partially offset by strong growth in sales of residential energy technology solutions. Global C&I product sales also increased 9% during the quarter, led by growth in the domestic telecom and industrial distributor channels as well as international markets, which included the first shipments of our large megawatt generators to data center customers. Our significant momentum in the data center market has continued with our backlog for these products now doubling to over $300 million over the last 90 days, with even greater opportunities developing in our growing sales pipeline. Now discussing our third quarter results in more detail. Third quarter home standby shipments and activations increased sequentially from the second quarter, but shipments decreased at a mid-teens rate on a year-over-year basis as a result of the significantly weaker outage environment in the current year period as well as the strong prior year period that included the benefit of multiple landed hurricanes. The historically low outage activity in the quarter was broad-based with all regions declining as compared to the prior year and resulted in portable generator sales also declining on a year-over-year basis. Home consultations for home standby generators also increased sequentially from the second quarter, but declined year-over-year during the third quarter. Although the seasonally higher levels of IHCs that we would have normally seen did not materialize this year, home consultations held a solid baseline level with the ratio of home consultations to outage hours at the highest level since we began tracking these metrics more than a decade ago. We view the relative resilience of the home standby category as further evidence of continued growing awareness for these products and the underlying demand we continue to see as representative of a new and higher baseline level following the elevated outage environment of 2024, despite the very low level of outages seasonally in the third quarter. Our expanded investments in our marketing and lead generation capabilities as well as our solid execution and optimization of promotional campaigns also provided important support for the home standby demand during the quarter. Importantly, close rates improved substantially on a sequential basis and came in better than expected during the quarter with strong momentum continuing here in the month of October. We remain focused on initiatives to support ongoing improvements in close rates such as further increased awareness of financing alternatives and optimize sales tools and training for our partners. We also attribute the recent improvement in close rates to a significant change in our approach to distributing leads to our dealers through the implementation of an enhanced data-driven process that allows our dealers to select or pull which leads they prefer to pursue as opposed to the previous push approach, which distributed leads directly to specific dealers based on certain criteria. The new lead process allows a wider pool of dealers with higher close rates, the ability to select which leads they believe they have capacity to address. We believe the resulting improvement in close rates will further optimize our customer acquisition costs and lead to a broader distribution of sales leads across our residential dealer base. Our residential dealer network continued to expand during the quarter as our dealer count reached nearly 9,400, an increase of approximately 100 from the prior quarter and an increase of nearly 300 dealers over the prior year. We view this continued strength in contractor interest in the product category as evidence of the growing underlying demand for backup power solutions despite the softer outage environment. In addition, our aligned contractor program, which targets contractors that purchase our products through wholesale distribution, has also continued to grow and provides for incremental engagement, training and installation bandwidth through this important distribution channel. Also during the third quarter, we began the initial shipments of our next-generation home standby generator product line, which represents the most comprehensive platform update for the category in more than a decade. The new product rollout will continue in the fourth quarter with our first shipments of the higher end of the product range, including the market's first 28-kilowatt air-cooled home standby generator. This new product line features the lowest total cost of ownership available driven by reduced installation and maintenance costs as well as introducing industry-leading sound levels and the best fuel efficiency of any residential generator on the market today. The next-generation platform, together with our new Field Pro application also offers a number of important benefits for our channel partners, including significantly lower commissioning times and improved remote diagnostics, enabling operational efficiencies for their businesses and greater uptime and cost savings for their customers. Moving to residential energy technology solutions. Sales of these products and services outperformed our expectations once again and grew at a significant rate during the quarter, led by shipments of energy storage systems in Puerto Rico. Our team continues to execute extremely well alongside our partners on this energy grant-related program, which is expected to drive continued strong residential energy technology sales growth into the fourth quarter. Our ecobee team continued to drive that business forward and delivered another profitable quarter with significant gross margin improvement and operating leverage as a result of continued strong sales growth and disciplined cost control. Additionally, ecobee's installed base grew to approximately 4.75 million connected homes with increased energy services and subscription sales supporting a growing high-margin recurring revenue stream. We expect ecobee to deliver positive EBITDA contribution for the full year, a key milestone for the strategically important part of our business. As we begin launching new energy storage, microinverter and home standby products that are integrated with the ecobee's platform during the second half of this year, we are intent on delivering a premium feature set and user experience, which we believe will be an important differentiator for our growing residential energy ecosystem. We also made significant progress in our solar and storage product development efforts during the third quarter as we began shipping PowerCell 2, our next-generation energy storage system and introduced PowerMicro, our solar microinverter that will begin shipping by the end of this year. As we close out 2025, we are focused on leveraging these new products as well as our distribution and marketing capabilities to drive market share gains and significant sales growth in the future. As appropriate, however, we intend to recalibrate our investment levels to reflect the completion of our energy grant program in Puerto Rico and to adjust for a broader market environment that is likely to contract in 2026 as a result of the substantial reduction in federal incentives for solar and storage technologies. Although we see this market contracting in the near term, we believe that the secular trends of rising power prices and declining component costs are creating a situation where the economics of residential solar and storage technologies will provide for an attractive long-term market opportunity regardless of the level of government incentives. Now let me provide some additional commentary on our commercial and industrial product categories, where we continue to see year-over-year sales growth, which accelerated during the third quarter. In particular, sales to our domestic industrial distributor customers increased at a solid rate in the period as we further reduce the lead times for our C&I products. Our teams have been working hard to increase production rates over the last 18 months by bringing our new facility in Beaver Dam, Wisconsin online earlier this year. And as a result, we have successfully brought our lead times down to more historically normal levels. In addition to our operational execution in the quarter, our efforts to further develop our distribution partners, both owned and independent, have helped to expand our share of the domestic backup power generation market over the last several years. In addition to the growth in our industrial distribution channel, shipments to national telecom customers also grew at a robust rate in the third quarter compared to the prior year as part of the ongoing recovery for this important channel during 2025. We continue to expect the growing dependence on wireless communication and additional infrastructure required enhanced reliability to provide a solid backdrop for secular growth in sales of C&I products to our telecom customers into the future. Mobile product shipments to national and independent rental customers outperformed our prior expectations and increased on a sequential basis, which we view as signaling the beginning of a recovery for this market. We anticipate favorable momentum to continue building in the coming quarters for our mobile products, and we continue to believe we are well positioned for long-term growth given the mega-trend around the infrastructure-related investments needed both domestically and internationally that leverage our global portfolio of mobile products. Internationally, total sales increased 11%, driven by continued strength in C&I product shipments in Europe and the first shipments of our large megawatt generators to a data center customer in Australia. International sales continue to benefit from the favorable impact of foreign currency, which we expect will continue in the fourth quarter. Additionally, international EBITDA margins expanded at a strong rate from the prior year due to favorable sales mix. Our initiative to penetrate the large and rapidly growing data center market continued to gain momentum with initial shipments in international markets beginning during the third quarter. And as we saw our global backlog of large megawatt generators for this important end market doubled to more than $300 million over the last 90 days. The first domestic shipments of these new large output generators began here in the month of October, and we are projecting strong sequential growth in sales to the data center end market during the fourth quarter. The large majority of our backlog is expected to ship in 2026, providing a meaningful tailwind for overall C&I product growth in the coming year. Importantly, we continue to develop a robust pipeline of new opportunities within the data center market that represents significant upside for our C&I product in 2027 and beyond. Data center power demand is forecasted to grow at a significant rate for the foreseeable future. And the high uptime requirements of these facilities drives backup power needs in excess of site electricity consumption. Third-party estimates suggest that global data center power demand will cumulatively grow by more than 100 gigawatts over the next 5 years, with the potential for incremental annual capacity additions to double by the end of this decade. Additionally, further global market opportunities exist for large megawatt generators within our traditional end markets, in particular, providing backup power for large manufacturers, cold chain distribution centers, health care facilities and other critical infrastructure that have higher backup power requirements. Given the existing supply constraints within the high end of the C&I backup power generator market, large megawatt generators represent a massive opportunity for Generac as a long-standing well-known participant in the C&I backup power markets. In addition to our highly competitive lead times, we believe that our strong reputation as an engineering-driven organization that is uniquely focused on backup power with a customer-centric approach and world-class service capabilities will allow us to gain share in the data center backup power market as well as our traditional end markets. Given the momentum in our sales pipeline and the significant incremental market opportunity we see in the future, we have been actively exploring further investments to aggressively expand our competitive positioning and increase our capacity and capabilities for these products. We expect to undertake several important capacity expansion-related projects and investments during the fourth quarter to position Generac as a significant producer of these products well beyond 2026 and to support what we believe could be a potential doubling of our C&I product sales over the next 3 to 5 years. In closing this morning, our third quarter results and our lower residential sales outlook reflect a historically weak power outage environment. However, the mega-trends that support our future growth potential remain intact as lower power quality and higher power prices will be an ongoing challenge given the more frequent and severe weather patterns as well as broader electrification trends. And at the same time, the massive increase in data center power demand is expected to further stress the already fragile power grid by amplifying the growing electricity supply/demand imbalance. Additionally, we're entering a period of unprecedented growth for our C&I products as the expansion of our product line to include large megawatt generators has allowed for our entry into the rapidly growing data center market. As a leading energy technology company, we believe Generac is uniquely positioned at the center of these mega-trends that have the potential to drive substantial and sustainable growth in the years ahead. I'll now turn the call over to York to provide further details on third quarter results as well as our updated outlook for 2025. York? York Ragen: Thanks, Aaron. Looking at third quarter 2025 results in more detail. Net sales during the quarter decreased 5% to $1.11 billion as compared to $1.17 billion in the prior year third quarter. The combined effect of acquisitions in foreign currency had an approximate 1% favorable impact on revenue growth during the quarter. We believe looking at consolidated net sales for the third quarter by product class, residential product sales decreased 13% to $627 million as compared to $723 million in the prior year. As Aaron discussed in detail, a significantly lower power outage environment as compared to the prior year resulted in a decline in home standby and portable generator shipments. This was partially offset by robust year-over-year growth in sales of energy storage systems and ecobee home energy management solutions. Commercial & Industrial product sales for the third quarter increased 9% to $358 million as compared to $328 million in the prior year. Core sales growth of approximately 6% was driven by an increase in shipments to our domestic telecom customers, together with a strong growth in Europe and initial shipments of our new large megawatt generators to a data center customer in Australia, partially offset by continued weakness in shipments to national rental accounts. Net sales for the other products and services category increased approximately 5% to $129 million as compared to $123 million in the third quarter of 2024. Core sales increased approximately 3%, primarily due to growth in ecobee and remote monitoring subscription sales and other installation and maintenance services revenue, partially offset by a reduction in parts and accessory shipments given the lower outage environment. Gross profit margin was 38.3% compared to 40.2% in the prior year third quarter, primarily due to unfavorable sales mix, together with the impact of higher tariffs and manufacturing under absorption, partially offset by increased price realization as a result of price increases implemented earlier in the year to address the impact of incremental tariffs. Operating expenses increased $20.2 million or 6.7% as compared to the third quarter of 2024 as a result of certain legal and regulatory charges in the current year as disclosed in the accompanying reconciliation schedules. Excluding these items, which are not indicative of our ongoing operations, operating expenses decreased $0.6 million or 0.2% from the prior year. Adjusted EBITDA before deducting for noncontrolling interests, as defined in our earnings release, was $193 million or 17.3% of net sales in the third quarter as compared to $232 million or 19.8% of net sales in the prior year. This margin decline was primarily driven by the previously mentioned unfavorable sales mix and the operating expense deleverage on the lower sales volumes. I will now briefly discuss financial results for our 2 reporting segments. Domestic segment total sales, including intersegment sales, decreased 8% to $938 million in the quarter as compared to $1.02 billion in the prior year, including approximately 1% sales growth contribution from acquisitions. Adjusted EBITDA for the segment was $166 million, representing 17.7% of total sales as compared to $212 million in the prior year or 20.7%. International segment total sales, including intersegment sales, increased approximately 11%, $185 million in the quarter as compared to $167 million in the prior year quarter, including an approximate 3% benefit from foreign currency. Adjusted EBITDA for the segment before deducting for noncontrolling interest was $27 million or 14.8% of total sales as compared to $20 million or 12.2% in the prior year. Now switching back to our financial performance for the third quarter of 2025 on a consolidated basis. As disclosed in our earnings release, GAAP net income for the company in the quarter was $66 million as compared to $114 million for the third quarter of 2024. The current year quarter includes an unfavorable Wallbox fair market value mark-to-market adjustment of $5.7 million and a loss on refinancing of debt of $1.2 million related to our Term Loan A and revolver amend and extend transaction that closed in July 2025. Our interest expense declined from $22.9 million in the third quarter of last year to $18.5 million in the current year period as a result of lower borrowings and lower interest rates relative to prior year. GAAP income taxes during the current year third quarter were $11.8 million or an effective tax rate of 15% as compared to $33.5 million or an effective tax rate of 22.7% for the prior year. The decrease in effective tax rate was primarily driven by favorable discrete tax items in the current year quarter related to certain return to provision adjustments that did not occur in the prior year. Diluted net income per share for the company on a GAAP basis was $1.12 in the third quarter of 2025 compared to $1.89 in the prior year. Adjusted net income for the company, as defined in our earnings release, was $108 million in the current year quarter or $1.83 per share. This compares to adjusted net income of $136 million in the prior year or $2.25 per share. Cash flow from operations was $118 million as compared to $212 million in the prior year third quarter. And free cash flow as defined in our earnings release was $96 million as compared to $184 million in the same quarter last year. The change in free cash flow was primarily driven by an increase in inventory levels during the current year quarter and lower operating income, which was compounded by a decline in inventory levels during the prior year quarter. Total debt outstanding at the end of the quarter was $1.4 billion, resulting in a gross debt leverage ratio of 1.8x on an as reported basis. With that, I will now provide comments on our updated outlook for 2025. As discussed by -- as discussed in detail by Aaron, the extremely low outage environment in recent months has resulted in lower demand for home standby and portable generators and a reduction in our full year 2025 outlook for overall net sales growth. We now expect consolidated net sales for the full year to be approximately flat compared to the prior year, which includes an approximate 1% favorable impact from the combination of foreign currency and acquisitions. This updated outlook compares to our previous guidance of plus 2% to 5% net sales growth over the prior year. Looking at product classes, we now project full year 2025 residential product sales to decline as compared to the prior year in the mid-single-digit percent range, while C&I product sales are expected to increase as compared to the prior year, also in the mid-single-digit percent range. The resulting sales mix shift is projected to have an unfavorable impact on gross and adjusted EBITDA margins for the year as compared to our prior guidance. Specifically, we now expect gross margin percent for full year 2025 to be approximately flat to slightly down compared to the full year 2024 levels. This represents a nearly 1% decrease from our prior expectation of approximately 39.5% as a result of the previously mentioned unfavorable sales mix and lower manufacturing absorption given the lower residential production volumes, together with incremental new product transition and C&I plant start-up costs that are transitory in nature. Additionally, this gross margin guidance assumes that current tariff levels that are in effect today stay in place for the remainder of the year. Looking at our adjusted EBITDA margin expectations for the full year 2025, given the factors impacting our gross margins, together with additional operating expense deleverage on the lower sales volumes, we are reducing our guidance for adjusted EBITDA percent to approximately 17%. This is compared to our previous guidance range of 18% to 19%. Additionally, as a result of higher use of cash for primary working capital and capital expenditures, free cash flow conversion from adjusted net income is now expected to be approximately 80% for the full year 2025 as compared to the previous guidance range of 90% to 100%. This would still result in approximately $300 million of free cash flow in fiscal 2025, which provides for near-term optionality to allow for additional investments to drive future growth as part of our disciplined and balanced capital allocation framework. As is our normal practice, we're also providing additional guidance details to assist with modeling adjusted earnings per share and free cash flow for the full year 2025. For full year 2025, our GAAP effective tax rate is now expected to be between 20% to 20.5%, down from our prior guidance of 23% to 23.5% due to the lower realized third quarter tax rate. Specifically for the fourth quarter 2025, our GAAP effective tax rate is expected to be approximately 25%. Importantly, to arrive at appropriate estimates for adjusted net income and adjusted earnings per share, add-back items should be reflected net of tax using this 25% effective tax rate. We now expect interest expense to be approximately $70 million to $74 million for the full year 2025, assuming no additional term loan principal prepayments during the year. This compares to our previous guidance of $74 million to $78 million and contemplates lower interest rates and outstanding borrowings than previously assumed. Our capital expenditures are now projected to be approximately 3.5% of forecasted net sales for the full year 2025, a 0.5% increase from prior guidance as a result of incremental CapEx investment for data center capacity expansion expected in the fourth quarter of 2025. Depreciation expense, GAAP intangible amortization expense and stock compensation expense are expected to remain consistent with last quarter's guidance. Our full year weighted average diluted share count is expected to be approximately 59.4 million to 59.5 million shares as compared to 60.3 million shares in 2024. Finally, this 2025 outlook does not reflect potential additional acquisitions or share repurchases that could drive incremental shareholder value during the year. This concludes our prepared remarks. At this time, we'd like to open up the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Tommy Moll of Stephens. Thomas Moll: I want to start on the data center market opportunity, Aaron. What all have you learned thus far in terms of the competitive dynamics there, the size of the opportunity? I think last quarter, you framed it at about $5 billion, the deficit next year. And then just in terms of the types of customers where you're seeing some traction, what's the nature of the conversation with hyperscale at this point? And any orders there in the backlog number that you gave us? Aaron P. Jagdfeld: Yes. Thanks, Tommy. So I mean, obviously, this is just a really unique opportunity for us. The structural deficit of the supply side of backup power for this particular market is as you would imagine, with the foot rate that's ongoing here to put these data center facilities in the ground. Every single conversation we have with a developer, with a hyperscaler, and edge data center provider, all of those conversations are almost the same in terms of just the difficulties in bringing these facilities online because of some of the constraints. The constraints being in the electrical side of the buildings, transformers, switchgear, generators. All of those components are in heavy demand as you expect. And this is, I think, just from a structural standpoint, it feels like this is going to continue for some time. We don't have in our backlog today any orders reflected from any hyperscalers, but we continue to have very productive conversations there. And we're very optimistic as we work to get added to the approved vendor list for these hyperscalers. They are very eager to have additional supply coming to the market. They're very eager to have us be a supplier to the market. Again, I think our brand, we're a trusted brand. We've been in the C&I backup power market for over 50 years. And so our expansion into this product line is kind of a -- it's a natural evolution. And it's not some fly-by-night supplier coming into the market. It's somebody who's well known, well capitalized and somebody who is going to be very aggressive, as I said on the call in the prepared remarks. We see a unique opportunity here for us to do something that is kind of generational with the company and with this part of our business. And as I said in the prepared remarks, we will have -- we've got a number of balls in the air here that by Q4 -- here in Q4, we're going to have to pull the trigger on a number of things. We've taken up our CapEx guide range slightly. That's part of the front end of this. That's everything from facilities to equipment. Our M&A funnel has also expanded where we think we could add capabilities and additional capacity through acquisitions. So we're looking at -- basically, we're not leaving any stone uncovered here, Tommy. It's a -- again, we have to be aggressive. We have to lean forward and we will capitalize on this in a way that I think -- the market certainly wants us to succeed. Every conversation we've had is to that effect, and we will succeed. This is going to be an area that's right in our wheelhouse. I feel very comfortable and very confident that we can execute on this. Our first shipments, I watched them go out of our factory in Oshkosh, Wisconsin last week, 1.5 weeks ago. Our first shipments went out internationally to a customer here earlier in the month and things are rolling. We've got products online, and we are looking at how can we aggressively expand our capacity with -- by leaning forward with investment in this area of our business. Operator: Our next question comes from the line of George Gianarikas of Canaccord Genuity. George Gianarikas: Now I know you're not talking about 2026 just yet, but if you could just sort of help us work through all the moving parts here? Clearly, outages have been weaker. There is a pull from data center generators and there's this -- the roll-off potentially of what's happened so far in Puerto Rico. So how should we sort of think about 2026 broadly with all the moving pieces at play? Aaron P. Jagdfeld: Yes. George, thanks for the question. Yes, just kind of -- and again, not giving guidance here, but I think to answer your question, let's start with just from a product category standpoint, our residential products and kind of being down a level deeper there with home standby and portables. Yes, it was a crappy season, I mean, let's be honest. The weather was really nice everywhere. We've been doing this a long time. We have not seen many 3Qs where we just didn't have outage activity. Like we planned the business around normal baseline outage and we got nowhere near normal. I mean we were literally 75% to 80% below normal for the quarter, just in raw outage hours. And that's without, obviously, any major events happening either. And obviously, we're comping against majors last year. So just -- it looks bad. It feels bad, but it's temporary. I mean we've been through this before. The weather patterns, we don't know what happens with weather. It comes and goes and these outage -- structurally, nothing's changed there. I mean just you've got -- in fact, I would point to all the structural things from a mega-trend standpoint that we've been talking about only continue to point to less reliability in the grid going forward. So -- and what's really remarkable, I would just put this out, like -- and we said this in the prepared remarks and people can call what they want. But those product categories, home standby and portals were up sequentially over Q2. So like we're holding that baseline of growth that we achieved last year. It's amazing to me that the underlying kind of -- the underlying strength of that category. We just didn't see the seasonal lift that we would normally see. So fast forward to 2026 for that category, it's going to grow well, right? I mean if we return, again, the assumption there, returning to baseline level of outages, now we're going to go to easy comps. Now we're going to have the opportunity to grow that category, and I would also point out, we continue to grow dealer base, right? Our dealer count went up. We added over 100 in the quarter, which I think is indicative of a healthy market. We continue to see lead demand, lead flow. Our customer acquisition costs continue to improve. We've been continuing to use data to refine our lead algorithms and our processes there in a way that we believe is going to impact and had -- we actually saw favorable impact to close rates in the quarter, and we think that's going to accelerate into 2026. So improved close rates next year, broader dealer counts, a return to normal baseline outages. And we also won shelf space for portable generators coming off of last season's hurricanes. So we've got expanded presence at retail. Those are all -- that's all a really good setup for the categories, those product categories next year. So I would put that in the plus column for next year. It's going to grow very nicely. We also have pricing, the effective pricing. We'll get a full year of that next year. So all of those things are good things for our residential products. Energy technology is a subset of that. Inside of that, obviously, Puerto Rico, the energy grant program there goes away after this year. We haven't heard that it's going to continue at least at this point. There's a chance it could, but we're not banking on that at all. And obviously, structurally, I think everybody knows that market is going to contract in 2026, the market for solar and storage. And that's on the back of the loss of -- primarily the loss of the 25D tax credit, incentive tax credit for homeowners. That said, when you look at longer term, look at your electricity rates. And George, I know you follow this. I know a lot of folks follow this. Electricity prices are up. They're up in many cases, in many areas, they're exceeding the rates of inflation and they're only going higher. We're just getting started. That is before we see this wave of AI power demand really impact pricing for electricity rates. And as rates go up, electricity prices go up, as the cost of these technologies continues to come down for storage and solar. And I would also say that as interest rates come down. Structurally, you can say, okay, the market is going to be off. The overall market is going to contract by 20% to 25% next year. I mean, I think it's conceivable that we're not going to claw all that back, but we've got growth with ecobee. And I think we have these other elements that longer term are still a really good setup for solar and storage. We've got a lot of new products just hitting the market. So we feel good about -- it's not going to feel good in terms of the results next year for that segment. I don't think it will be off 20% to 25%. It will be off something because of the loss of the DOE grant program. But again, I think we've -- long term, we feel good about where we're going with that product category. We feel good about the new products, feel really good about ecobee. Ecobee has been an outstanding performer for us within that part of our business. We feel good about that. And then you move to C&I. And that is just a tremendous story in terms of -- we've got great visibility now. That $300 million of backlog that we've amassed. It's doubled in the last 90 days. Most of that is 2026. As we said before, structurally, we think we can probably go to $500 million from a capacity standpoint in '26. So we still have opportunity to take that pipeline and convert more in '26 to the degree that we have customers who may need product and may need to get their hands on gen sets next year, we think we can provide them. And in fact, we think we can probably go north of $500 million to some degree by stretching capacity, by making some of the investments we're making right now. I think there's a little bit of upside there for '26 beyond the $500 million. But what we're focused on right now, George, is beyond 2026. We're focused on growing that business, growing our capacity in a way that, again, it's just as I mentioned before on the previous question, it's just unique, it's generational. It's -- I don't think we'll ever see this opportunity again, and we've got to go after it aggressively. Operator: Our next question comes from the line of Mike Halloran of Baird. Michael Halloran: I think you mentioned it briefly in there, Aaron, but maybe just on the new product launches on the clean energy side, I know early days, how is that tracking? And then maybe more importantly, could you just frame up what you mean or what the latest thought process is in terms of getting back to breakeven in those product categories? And what kind of that iterative process looks like as we work through the remainder of this year, early thoughts on '26 as far as how much of that loss you can reclaim? Aaron P. Jagdfeld: Yes. Thanks, Mike. So again, long term, we feel really good about that set of products for us and the market opportunity there, given the structural challenges around energy prices, and I think -- and continued need for resiliency, right, with that side of the business. We're building out an energy ecosystem. '26 is going to be tougher. We mentioned in our prepared remarks, we used the word recalibrate. We're using that word a lot internally here on how to make sure that as we get to the tail end of our product introduction cycle here with those products, we can ramp down some of the R&D spend associated with that. Now that will shift over into some -- there'll be some hypercare efforts. Those new products are just hitting the market now. Our first shipments of PowerCell 2 -- we're here in Q4. We're kind of on a limited launch schedule. We're looking to expand it in 2026. PowerMicros will start shipping here at the end of this year. So I don't have a ton of data points to offer for the market on the success or acceptance by the market of those products. I can only reiterate what we've been told over the last several years as we've been working on developing these products and that as the market feels that it needs additional suppliers. It's a bit of a duopoly right now on the inverter side. And honestly, it's kind of a -- I want to say it's a monopoly on the storage side, but obviously, there's a supplier there in Tesla that has -- it provides the lion's share of the market opportunity or the market supply. So we think there's great opportunities for us to be successful. Our kind of north star there is still to be breakeven by 2027. That is our north star. It hasn't changed, even though the market is going to contract. That was our north star prior to the loss of federal support, 25D for these products. But we believe, I think given, again, the high -- the continued upward movement in retail electric prices, the continued downward movement in these technologies, the cost of these technologies and the potential for a pullback in interest rates. So we think it's a good setup. The paybacks on these systems will improve over time. They'll take a step back here in '26. But for us -- and again, we're going to recalibrate. And we do -- I want to say -- the last thing I want to say on this, we do need to see success in 2026. Even if it's -- we need to see at least share gains for storage and inverters or we'll have to recalibrate further. If we don't see that kind of success, it is not our intention to be in a money-losing business forever. We are not a start-up with unlimited capital backing from investors. We understand, and believe me, we treat this as our own money. We don't want to lose money on anything we do, but we see this as an investment in the future as an important market, as an important part of building out an energy ecosystem that we believe will provide a differentiated solution for us to be a market participant over the long haul. And we think it's an important thing for us to do. We're committed to it, but we need to see success and we need to see progress. And we're confident that, that will happen. Operator: Our next question comes from the line of Jeff Hammond of KeyBanc Capital Markets. Jeffrey Hammond: Just back on the data center, I think you said you think you could do $500 million or maybe better next year. So one, just as you start to get orders, are all of those kind of contemplated for '26? Or are people -- are those longer-dated orders? And then just in terms of like this new capacity you're considering, like what would that look like? Is it a plant? Is it expansion? Is it -- we got to double this thing as soon as we can? Aaron P. Jagdfeld: Yes. Thanks, Jeff. So just to clarify, so there's a $300 million we have in backlog. We said that the majority of that -- the vast majority of that is a 2026 shipping schedule. The $500 million or north thereof, that's capacity number. So just to be clear, we haven't subscribed that fully yet, but we have the opportunity to do that. I will say, and I think we said this on the last call, a lot of our conversations we're having today, in particular with hyperscalers, is about 2027 and beyond because they've already -- because of the long lead times for these products, many of them have already got their 2026 plans completed. So anything that -- any incremental above the $300 million that we've talked about here for '26, that's going to come as opportunistic things, maybe other suppliers who have delivery challenges. And so somebody needs a Plan B, we could be a Plan B. Perhaps somebody who wants to accelerate connecting a data center more quickly. We are having those types of conversations where they believe they'll have a facility that's ready to go sometime in the second half of 2026, but they maybe weren't planned to be online until early '27, but they want to move that up. And if we can supply generators, that's obviously an important consideration for bringing any of these facilities online in terms of just having the uptime requirements, that could be an opportunity. So we're going to continue to look to how do we improve our capacity numbers even for '26 above the $500 million we have now. But the substantial change, kind of maybe the second half of your question, the substantial change in capacity, what we're looking at there is how do we increase our capacity. Basically, how do we basically double it again? How do we increase that 50% to 100% more than where we're at today? How do we double that for 2027 and beyond, at least '27 certainly, '27, '28? And that's going to come through -- you kind of touched on it. We're going to need hard assets like facilities, right? These are big units. They take up a lot of room. So we're going to need facilities, we're going to need space. We have line of sight on a number of facilities that we are in negotiation on here in Wisconsin and in other parts of the U.S. We haven't signed anything yet, but we are in far along in negotiation and diligence around some of those physical areas where we can expand. Beyond that, we've got equipment ordered with some of the longer lead time elements that we know from the testing equipment to some of the material handling equipment for products of this size. Those lead times are also extended, as you would imagine. And we put those bets down here recently. And so we feel like we'll be able to bring that online in time to satisfy late '26, early '27 type of production time lines. We also, as I mentioned in the prepared remarks, we continue to look at our M&A opportunities. Are there other ways that we could accelerate even more quickly, more rapidly, not only in terms of raw capacity, production for these products, but also certain elements where we can -- are there other value streams we can capture in the unit? We don't make the engine. So structurally, we're in a bit of a disadvantage to some of our competitors who actually make the engine, not all of them do, but some of them do. So where else can we look to add value in these products? And is that an opportunity? Are there other critical components where we've heard of shortages? And can we look to acquisitions to put us in the market to be a more fulsome supplier, not only of the back of equipment, but maybe other elements around the backup systems that go into these facilities? So we're looking at all those things. We've had a very -- as you know, Jeff, you've followed the company a long time. We've got a very active M&A group here, team here. Nothing's changed there. We've done a lot of M&A over the last 15 years. We're very comfortable doing that. We've got an excellent team here that is working on a number of things that could provide us additional capacity and/or capabilities more quickly as we get into 2026. So all those things are on the table. I think the point that I want to make, I think, for you and for others is, we have a fantastic position financially, a great -- a really strong balance sheet. We produce a ton of cash flow. We're going to put that to work. We're going to put that to work in our C&I business in a way we have not put it to work before. We're going to put to work going after this opportunity because, again, we feel this is just a unique thing. And so we're going to be aggressive there. We're going to lean in and that's going to have a -- we believe a material impact to potentially double this business in the next 3 to 5 years, that C&I business. Operator: Our next question comes from the line of Brian Drab of William Blair. Brian Drab: This is sort of an easy segue to my question. You're talking about the capacity expansion and the idea that you don't manufacture the engine. I'm just wondering, Aaron, like what are the biggest challenges? What are your biggest concerns about adding this much capacity that quickly in terms of supply chain or just anything in terms of the manufacturing operation that's going to be challenging? I think people are looking for just that confidence that this capacity can come online smoothly. Aaron P. Jagdfeld: Yes. Thanks, Brian. It's great question. I would just point to -- we brought it online -- brought the product line online in our Oshkosh, Wisconsin facility very quickly. We finished our development earlier this year, produced our first lines. We made -- by the way, within our CapEx numbers this year, a bunch of upgrades to that facility to allow for the start-up of manufacturing in these products. It was part of getting to the $500 million or slightly north of capacity that's available for us in 2026. That's in our run rate -- our CapEx run rate this year. We've been working around the clock, and that's in terms of the test cell upgrades, the material handling upgrades, the physical upgrades. I mean we're moving walls, we're moving cranes. We're expanding. We're doing things there that are readying us for production. And as I said, we rolled some of the first units down the line a couple of weeks ago, got those out on trucks and shipping about 10 days ago, and we're building here in the fourth quarter. So I feel very comfortable that like the production side of this, we can do that. That's within our wheelhouse. The supply chain side, our engine partner there has a ton of capacity. And I don't feel like that's going to be a constraint for us, which I think is -- if you look at the market, the broad market today and the structural imbalance that we've talked about on this call and on the previous call is largely around the engine supply. And so coming into the market with an engine supply partnership like we have with Baudouin, we just -- who has a -- they've made a massive investment that they brought online in these, what they refer to as large bore diesel engines. We feel like we're in a really good position there to be able to supply the market with these types of products. Engines will not be a constraint. Then you move to the next large component, which is alternators. We're working with multiple alternator suppliers. They are all suppliers we know because we buy from them today for our C&I market. So it's not a new supply base. This is a very similar supply base to what we see in C&I, where we have great long-term relationships. So we're able to leverage those relationships to work with them to grow that business and to leverage, again, our expertise and our -- again, we're known commodities. They're not selling to somebody on some fly-by-night operation or some potential customer here, they don't know. We are not a credit risk. We're not a risk operationally. We're a known commodity. So I think those are all pluses. I think where the physical constraints are going to happen or the constraints are going to happen is physically, right? Just the amount of product that we can build because these things take up space. And then downstream, some of the packaging constraints that could happen. You've got a lot of the industry -- we build the unit up to a certain level and then the product is shipped to -- in our industry, what's known as a packager. The packager then provides the outer housing, the enclosure to the end customer spec and those are unique specifications. So they're really a lot of times, they're engineered to order. And so they're highly configured, and they're built to unique specifications for customers. We believe there's opportunities there for us to participate and work with some of the packagers. We've lined up a couple of partnerships there to make sure that we've got at least adequate capacity for the orders we have in-house today. But how do we grow beyond that? We don't want that to be a constraint our growth as we're going forward. So we're looking at ways to partner more deeply with those packages so that we can ensure that, that's not a constraint on our growth for this market opportunity. So there's a lot of things that I just said there, and there's a lot of things that we need to do execution-wise. But again, when I look at what this is, it's just not that far afield from what we do today and, again, or what we've been doing for the last 50 years in the C&I industry. And so I just feel like we're -- if there's a place where something is in our wheelhouse and where we can we have the opportunity to really have an impact, it's in this -- not only the data center end of it, but as I said, the traditional market for large backup power is also a great opportunity for us. We've got a lot of order activity, a lot of pipeline activity there that we're working through as we bring the first products to market on an order basis for that end of the market as well. So a lot of great things ahead for that part of our business. Operator: Our next question comes from the line of Mark Strouse of JPMorgan. Mark W. Strouse: Aaron, you mentioned earlier trying to get on the approved vendor list for some of the hyperscalers. Can you just give a bit more color on what that process really looks like? And is the time line for that kind of more measured in months or quarters? Or anything that you can share there would be great. Aaron P. Jagdfeld: Yes. Thanks. Yes, it's different for each hyperscaler. We are just -- I might just point out, I mean, we are the preferred supplier for 2 global co-locators already. So in terms of like what it means to be on the ABL, when we're talking about that, we're really referring to the ABL from hyperscalers. We're making really good progress with the co-locators, and we are already listed as a preferred supplier for 2 of them globally. So I feel really good about where we're at there. Back to the hyperscalers, I mean, if this is a baseball game, we're not playing baseball here in Milwaukee anymore, unfortunately. God here swept this, but for those that are fans of the game, 9-inning game, not an 18-inning game like the other night, but a 9-inning game, I would categorize our progress there. First of all, it is measured in months. I think, again, the hyperscalers that we're working with are pushing us to get through their gauntlet and it is a gauntlet. It's just a process. A lot of it is -- there's contracts, right? So you've got a lot of back and forth from a legal perspective. You have certificates of insurance. You have entity discussions, right? Like what's their org structure, energy structure. There are high-level management meetings. They want to be face-to-face, right? Every one of them has a little bit of different approach and there are different boxes to check for each one. We do not see any showstoppers in those processes. They just decide to get through. I would say this is a baseball game, back to their reference. We're probably something in the sixth or seventh inning with most of those hyperscalers, maybe a little bit different one to the other from -- each one is a little bit different, as I said before, but good progress. We hope to have better updates as we go forward here. I think the greatest evidence there will be the continued growth in that backlog and actually having a hyperscaler come in and with their trust, give us an opportunity to supply them with product, whether it'd be in '26 or what is more likely, as I said before, it's 2027 and beyond. Operator: Our next question comes from the line of Christine Cho of Barclays. Christine Cho: Just as a follow-up to Mark's question. I understand that your engines are actually coming from France, but are you finding that the Chinese ownership of the supplier is something that is brought up in your conversations with the bigger type of customers? And would you say that you need at least one hyperscaler contract in hand in order to feel comfortable in doubling the capacity? Aaron P. Jagdfeld: Yes. Great questions, Christine. So on the supply chain side, with our engine supplier, we've talked through with our customer base where we're getting our engines from. Obviously, I think if you look at the supply of any of these engines, by the way, from the competitive set, there are components that today are only available in some parts of the world like China. And so our reliance on the supply chain there, that's global in nature, but specific to certain areas of the world, like China in certain countries is not unique. The ownership structure there, I mean, it's something we've talked about. But again, where those engines are manufactured that -- our partner there has a global base of manufacturing that they are expanding by the way. It's not just going to be France. They've got facilities in India. They've got facilities that they're looking at in other parts of the world. So we believe that over time, it's something that will -- if it's a concern today, I think that's something that we're going to be able to mitigate. There are also potential structures -- ownership structures in the future that could look different, right, be the JVs or some other structure there, nothing is off the table. We don't want that to be a negative on our entry into this market. We don't think it is. And nobody has indicated that it's a showstopper at this point, but something that we want to continue to stay ahead of. I think as far as to answer your question about the doubling of capacity or potential doubling of capacity, yes, I would certainly feel better if we had a hyperscale commitment there, that would make me feel better about the long-term usage of that. But I would just say this, the way we're structuring the expansion of capacity there, I want to be clear that we feel it's something that if we needed to be repurposed for something else, we'll use it for that. It could be the next leg of growth in another part of our business, could be -- we lease quite a bit of outside storage space today that could come in-house if we needed to, convert some facilities. It's not ideal. But I think the added capacity that we're leaning into, we feel -- we're not getting to a point where, I would say, let's say, that hyperscale business doesn't come to us for whatever reason. And I don't think that will be the case. I think quite honestly, it will be the other way around. But I do think we'd be able to deploy that capacity to our benefit. It would take longer to use up, of course. And I feel more confident, to your point, if we had that commitment. But I do think that's something that we'll be able to talk about here in the months ahead. York Ragen: There will be growth in the traditional markets. Aaron P. Jagdfeld: For sure, growth in our traditional markets that we'll need for that as well. Operator: Our next question comes from the line of Keith Housum of Northcoast Research. Keith Housum: I appreciate it. Staying along the lines of the data centers, Aaron, perhaps you can touch on the pricing for these data center generators and like the margin profile and kind of thinking of how that might affect the margins going forward? Aaron P. Jagdfeld: Yes. Thanks, Keith. It's a great question. Pricing ASP on each unit, you're talking about a 3.25 megawatt unit or larger. And by the way, I mean, I would just note, I mean, today, our product line -- we've rolled out the first part of the product line up to 3.25 megawatts. The next part of the product line from 3.5 to 4 megawatts will roll out in 2026. But the ASPs on these products range from -- depends on the content, depends on the customer, but it can be anywhere from $1.5 million to $2 million per gen set. So pricing is -- and we're competitive on pricing across the market. I would say the margin profile domestically, margin profile is very similar to our C&I product set here in North America, maybe a little bit below that, but not dramatically so. Internationally, it's a little bit below that. The international markets are always -- when you look at our C&I products, gross margins are not quite as strong internationally and that's kind of a legacy -- that's just structural in terms of the international markets being, I would say, more competitive overall and us being a smaller player internationally. So I think that's what kind of leads to that. We're working -- we've made a lot of progress on that, by the way, in our ownership with Pramac over the last decade. They've improved their gross margins dramatically, which has been great, and we're going to continue to work on that. But gross margins for those products, I would just say this, I mean, the incremental impact to EBITDA margins is fantastic for the data center market in terms of the -- that overall impact on our C&I product margins. And if you just looked at the incremental impact on EBITDA margins, it will be positive. Operator: Our next question comes from the line of Sean Milligan of Needham & Company. Sean Milligan: I was just curious about the margin progression. I know you don't want to really give guidance for next year. But in terms of the framework, the back half EBITDA margins are kind of weaker than what were expected. So just gives and takes into next year, like does core resi HSB get better? Energy tech, you have some revenue headwinds and then the data center piece. Just trying to kind of think about what that all means for margins moving forward on the EBITDA side. York Ragen: Yes, Sean, it's York. So yes, I think if you looked at our updated guidance for '25, we're talking more like 17 -- approximately 17% EBITDA margins versus the, call it, 18% to 19% that we were previously guiding. So at the midpoint of the last guide, call it, 1.5% reduction. So maybe, obviously, the unfavorable mix with selling less -- bringing our home standby guidance down, given the outage environment, that's our highest margin product. So I'd say about 1/3 of that 1.5% decline is mix, which to Aaron's point, if you think about 2026 and you revert back to the mean with regards to outages, that mix, we should see a nice pop in home standby that should -- should it help claw back some of that mix decline. So I think on the mix side, there will be some recovery in '26. Obviously, the OpEx deleverage on the lower guide is probably the remainder of the 1.5% EBITDA guide. So obviously, as we are talking about a framework for '26 and growing home standby and portables and C&I, we're going to be able to leverage our OpEx structure. So we'll be able to improve our EBITDA margins from the 17% we're talking about in '25. There's probably some small price cost impact in that 1.5% decline for '25 that I would say is transitory in nature, which shouldn't repeat in '26. So that's a long-winded way of saying we should see some nice recovery in EBITDA margins off the 17% that we're talking in '25, some due to mix, some due to operating leverage, some due to some of these transitory costs coming through, new product introduction costs, plant ramp-up costs, et cetera, pricing. So should see a recovery in those EBITDA margins for '26. Operator: I would now like to turn the conference back to Kris Rosemann for closing remarks. Sir? Kris Rosemann: We want to thank everyone for joining us this morning. We look forward to discussing our fourth quarter and full year 2025 earnings results with you in mid-February 2026. Thank you again, and goodbye. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Abel Arbat: Good morning, everyone. This is Abel Arbat speaking from the Capital Markets team at Naturgy. And we thank you for joining our results call for the first 9 months of 2025. Next to me sits the Head of Financial Markets and Corporate Development, Mr. Steven Fernández; and the Head of Control and Energy Planning, Ms. Rita Ruiz de Alda. As usual, we will begin with the presentation and leave Q&A for the end. Please submit your questions in written form, through the webcast platform during the presentation and we will address those at the end of the presentation. So without further ado, I'm going to hand it over to Steven to start off on the presentation. Steven Fernández: Thank you, Abel, and good morning, everyone. As you have seen this morning, this presentation is basically divided into 3 main sections that we're going to go through. Firstly, we're going to review the results for the first 9 months of the year. Then we're going to give you a little update on the reestablishment of the company's free float following recent moves. And finally, we're going to give you some glimpses into the outlook for the remainder of the year 2025. If we move over to the results, the key highlights that we'd like to discuss basically, as you can see, we've had an overall robust operational performance amid a challenging and uncertain geopolitical backdrop. We are, as a result of that performance, on track to deliver on its 2025 guidance, building again on a track record of commitment and delivery. On the capital markets front, we have increased the free float for the company and subsequently, the share liquidity, positioning us to return to the MSCI indexes. As a reminder, the free float for the company has increased from 10% to almost 19% in record time and preserving value for shareholders. As a result of this effort, as I mentioned previously, liquidity has improved, and the monthly average trading volumes are up 2x versus the first half of the year. Our solid balance sheet also continues to provide flexibility and optionality. And we also remain committed to an attractive shareholder remuneration. As a reminder, the second 2025 dividend of EUR 0.60 has been approved by the Board, and it will be payable on November 5 on track for a minimum annual total DPS of EUR 1.7 per share. If we move over to review the results, what you can see is that average Brent prices were 14% lower in the first 9 months of the year compared to the same period last year, decreasing from $83 to $71 per barrel. In contrast, natural gas prices increased across key benchmarks. For example, the TTF was up 26%, the Hub up 58% and JKM up 17%. Hence, we have witnessed a decoupling of gas and oil indexes during the period. Geopolitics also weighed on energy markets during the first 9 months of the year, although volatility has thankfully gradually eased in recent months. Iberian electricity pool prices for its parts showed an increase from EUR 52 per megawatt hour in the first 9 months of 2024 to EUR 63 per megawatt hour in the first 9 months of this year, mainly driven by higher demand for gas-fired generation in the period, along with higher gas prices. As a result of this scenario, we take a quick look at the results for the period. EBITDA amounted to EUR 4.21 billion. Net income amounted to almost EUR 1.7 billion. A reminder that the dividend that we have paid so far this year amounts to EUR 1.1 billion and net debt for the group amounts to EUR 12.9 billion, which, by the way, does not include the proceeds from the bilateral sale and subsequent total return swap we have entered into. The results, therefore, maintained record levels while delivering on shareholder remuneration and maintaining a strong balance sheet. As we will review in the coming pages and especially with the help of Rita, during the third quarter of 2025, market trends and business dynamics have remained broadly in line with those that we had seen in the first half of the year. Moving over to the income statement. EBITDA remained in line with last year, although 2025 shows stronger underlying results as it does not include relevant extraordinary items contributing to it as 2024 did. And in terms of EBITDA contribution by business, 49% was generated by networks and 51% by energy management, generation and supply. In terms of activities, you also see a balance here with 54% of the EBITDA being generated by gas with the balance from electricity. And again, in terms of the geographical diversification, a little bit more than half of the EBITDA generated in Spain with the balance coming from all our other operations abroad. The group's diversification across businesses, activities and geographies continues to support its earnings resilience. And the way of its regulated activities provide us with cash flow predictability. So all in all, the earnings were [ 6% ] higher compared to last year in the period, reaching almost EUR 1.7 billion. If we turn over to the cash flow, free cash flow after minorities reached almost EUR 2.2 billion, demonstrating strong cash flow generation for the first 9 months of the year. In this period, the company invested EUR 1.2 billion, roughly of which 45% was allocated to networks, 35% to renewables and the balance of the business accounting for 20% of these investments. This growth -- this shows greater focus on the networks CapEx versus renewals compared to 2024 and is aligned with the company's financial discipline. Also note that EUR 169 million of hybrids were amortized during the period, which means only EUR 330 million of hybrids remain outstanding. We will continue to follow a strict financial discipline, deploying capital to ensure value creation on our investments. As a reminder, we believe in value over size. So all in all, strong cash flow in the period to back investments and shareholder remuneration, as you can see. But if we then turn over to the net debt, you can see that the balance sheet remains strong, actually stronger than we had anticipated. In April and July, Naturgy distributed its 2024 final dividend and first interim dividend for 2025, respectively, both of them in cash at EUR 0.60 per share for a total of EUR 1.1 billion spent year-to-date. In June, the company also completed a EUR 2.3 billion tender offer on our own shares. And already in August, we were able to undertake a successful placement and return 2% of its capital to institutional investors in addition to 3.5% to a financial institution with whom we have signed a TRS. This places net debt as at the end of September 2025 at EUR 12.9 billion with a comfortable net debt to last 12 months 2025 EBITDA of [ 2.4x ]. Moreover, as you have seen, in October, the company also managed to undergo a second placement of treasury shares amounting to 3.5% of the share capital, which will be reflected in the net debt figures as of the year-end. The cost of debt remains at around 4%, while the percentage of fixed rates has decreased to roughly 66% in the lower interest rate environment. So all in all, you can see we have a strong balance sheet with low leverage post recent capital market transactions and free float increase that provides the company continued flexibility and optionality. And with that, I'll hand the turn over to Rita, who will go over the businesses. Rita de Alda Iparraguirre: Thanks, Steven, and good morning, everyone. Starting with Networks on Page 10. Networks reported a total EBITDA of EUR 2,098 million in 2025, representing an 8% decline when compared to 2024. This decrease was primarily driven by one-off positive impact in Chile last year and the depreciation of several Latin American currencies, most notably the Argentine peso. In Spain, Gas Networks experienced a remuneration adjustments foreseen in the current regulatory framework as well as increased demand in residential segment due to temperature effects. As highlighted in our latest results presentation, a public consultation was launched in July targeting companies in the sector and marking the start of the regulatory review process for the 2027-2032 period. In line with the regulatory calendar, a draft proposal is expected to be published by year-end or early 2026. In electricity, EBITDA increased driven by higher regulated asset base and the publication of the 2021 and 2022 definitive remuneration as well as retroactive impacts. The CNMC has already published a second draft of the resolution of the new regulatory scheme for the 2026-2031 period and the companies in the sector have already sent validations. In Mexico, results mainly impacted by negative foreign exchange effects compensated by tariff updates in July. In Brazil, results were also affected by currency depreciation. In Argentina, EBITDA has improved following a substantial tariff increase implemented in 2024 to offset inflation. At the same time, we are observing a rising trend in FX volatility, largely driven by electoral milestones. As mentioned in July, a new tariff review was approved for the 2025-2030 regulatory period, in line with our strategic plan estimates. This new regulatory review provides visibility to 2030 and includes monthly inflation adjustments within a stable regulatory framework. In Chile, performance declined when compared to last year due to an extraordinary effect in 2024 as the partial reversal of the provision related to TGN conflict. As we already mentioned in the last presentation, this legal process is now officially closed due to an agreement between both parties. In Panama, results were negatively affected by lower demand due to temperature effects and increased operating expenses from higher maintenance activity to improve quality standards. In summary, comparison is affected by extraordinary impact in 2024 and currency depreciation in Lat Am. Now turning to energy management on Page 11. EBITDA reached EUR 718 million, which shows an increase versus 2024 of 18%, mainly due to higher margins on hedge sales. On average, European gas prices were 26% over 2024 levels. As mentioned during the strategic plan presentation, the group is fully hedged for 2025, having adopted an active risk management approach in the context of high volatility and uncertainty. The figures already reflect current market conditions for gas contracts in 2025, while negotiations with Sonatrach are still ongoing. The group is continuously evaluating new gas sourcing opportunities to complement our portfolio as we consider natural gas, a key enabler, for the energy transition. Finally, last week, the EU formally adopted a prohibition on the purchase import or transfer of LNG exported from Russia into the European Union. The prohibition will be effective starting in January 2027 in the case of long-term gas contracts, such as the one which Naturgy holds with Yamal. Overall, the period benefited from effective hedging and diversified procurement portfolio. Continuing with thermal generation, EBITDA reached EUR 523 million, 22% over 2024 EBITDA levels due to higher activity in Spain, partially offset by lower revenues in Lat Am. In Spain, the increase in results was supported by higher demand for ancillary services from our combined cycle fleet. Naturgy holds the largest CCGT fleet in Spain with 7.4 gigawatts, acting as a backbone to energy security of supply. In Mexico, production and margins remained stable. However, revenues from availability markets declined, mainly due to exceptionally high revenue base in 2024. Overall, CCGTs continue to play a key role to ensure system stability. Let's turn now to renewable generation on Page 13. Renewable generation reached an EBITDA of EUR 452 million during the period, slightly above 2024. Spain renewable generation production was 8% lower when compared to 2024, mainly due to lower wind and hydro generation, given the exceptionally high levels of hydro production in our basins during 2024. This negative impact was partially offset by the commissioning of new installed capacity and higher electricity prices. In the United States, results are higher when compared to 2024, mainly due to higher energy prices. The group completed construction of its second solar plant in Texas, which has recently started operations. In Lat Am, activity continues with impact due to currency devaluation in Mexico and Brazil. And finally, in Australia, performance benefited from the additional installed capacity added when compared to 2024. All in all, higher results in renewable generation due to commissioning of new capacity and selective growth prioritizing value over size. Last, moving to supply. EBITDA has been EUR 500 million, a 16% lower when compared to 2024. It is important to remember that in 2024, we had an extraordinary impact due to the positive ruling in favor of Naturgy regarding tariff subsidies. Leaving this aside, the business performed relatively stable when compared to last year despite incremental margin pressure and competition. As margins have shown resiliency supported by higher visibility on procurement costs, but negatively affected by regulated tariffs. In terms of electricity, the group has expanded its client portfolio in a highly competitive environment, leveraging on its integrated model and diversified generation mix, however, impacted by increasing adjustment services costs. I will now pass the floor back to Steven to update you on the free float and outlook. Steven Fernández: Thank you, Rita. So I'll take you really quickly to Slide 16. Naturgy has increased its free float to return to the MSCI indexes. On the 24th of June of this year, as I mentioned previously, we successfully completed a voluntary partial public tender offer to repurchase up to 9.1% of our share capital aimed at restoring the company's free float and enhancing share liquidity. The offer targeted 88 million shares, again, 9.1% share capital at a price of EUR 26.50 per share, totaling EUR 2.3 billion. All reference shareholders participated in the tender, reducing their shareholdings, as you can see in the right-hand side of the page. Aligned with the strategic plan '25-'27, our objective was to reintroduce the repurchase shares into the capital markets to improve free float and liquidity. And to this end, we executed a series of transactions this year. On the 4th of August, we completed an ABB of 2% of the share capital. We signed a bilateral sale and executed a bilateral sale for 3.5% of the share capital to an international financial institution. Both transactions were priced at EUR 25.9 per share, reflecting the tender offer price adjusted for the EUR 0.60 dividend paid on the 30th of July and thereby preserving shareholder value. On the 7th of October, just a couple of weeks ago, we also completed a second ABB for 3.5% of the share capital. Following these transactions, Naturgy's treasury shares now represent approximately 0.9% of the share capital and our free float has increased to almost 19% versus 10% in the previous year. Through the disposal of approximately 9% of our shares and the reduction of reference shareholder stakes, Naturgy has reaffirmed its commitment to enhance share liquidity and increased free float, which are, as you know, key steps towards inclusion in major stock indices, particularly those of the MSCI families, where on the following weeks, specifically on 5 November of this year, we'll hopefully have some good news. these transactions were overall executed swiftly and at a value-preserving terms for shareholders, hence, delivering a key strategic plan objective in record time. If we move over to Slide 17, and we look at the share price and the liquidity evolution, share price remains above the levels at which the tender offer was launched, considering the dividend of EUR 0.60 paid in July. And liquidity has substantially improved with monthly average daily trading volumes of around 2x the volumes in the first half of the year. So in essence, we have managed to increase the free float and liquidity, reducing the holdings of our reference shareholders as intended while preserving shareholder value. And all of this has been achieved in barely 4 months. If we look at the rest of the year now, in terms of the energy outlook for the -- the current market forwards are anticipating a generally less favorable energy scenario for the TTF in the last quarter compared to the first 9 months of the year, but still maintaining levels of around EUR 32 per megawatt hour. On the other hand, market forwards for Iberian electricity pool prices are pointing towards average levels of around EUR 72 per megawatt hour, above the 9M '25 numbers, but below the comparable period in the fourth quarter of last year. Finally, Brent prices are expected to remain just below $70 per barrel, while CO2 prices are expected to remain fairly stable. So in essence, the current energy outlook and market forwards are aligned with our expectations and the basis of our guidance for the year-end. Indeed, when you think about the guidance, we are on track to deliver our 2025 numbers. After the results presented today and the perspective for the remaining of the year, we are obviously in a position to reaffirm this guidance for EBITDA, for net income, for DPS at a floor of EUR 1.7 per share and improving our net debt outlook from an expectation of a little bit less than EUR 14.7 billion to approximately EUR 13 billion by year-end as a result not only of the good performance of the businesses, but also as a result of the placements in the treasury stock. Our short-term priorities, however, remain unchanged. If we look at them on Page 21, for networks, we are looking for a final regulatory framework for electricity networks in Spain. We are proactively engaging regulators for Nedgia, so that's gas distribution and negotiation of extension in concessions in Lat Am, Brazil and Panama. We are continuing to advance in our OneGrid initiative, which implements operational best practices across geographies. In energy management, we maintain gas procurement contracts aligned with market conditions, continue to assess, as Rita mentioned, new gas procurement opportunities as a key energy transition enabler. And we are proactively managing the risk both through physical and hedging alternatives. In thermal generation, we continue to look for capacity payments. We continue to play a key role in the security of supply through flexible generation in all the markets where we operate. And we are engaging in the initial discussions for PPAs extensions in Mexico. In renewables, we continue to look at selective renewable growth, and that's basically focused on repowering, hybrids and batteries. And we continue to execute our ongoing developments. In renewable gases, we continue to ambition leading the biomethane in Spain. We have more than 70 projects under development currently. We are promoting networks injection and adequate regulation. And as a result of that, you can imagine that we are actively engaging all authorities to make sure that this is a viable alternative for the energy transition. Finally, in supply, we continue to look to grow our client base and continue to evolve our operating model, deepening our excellence in client service and maintaining a balanced integrated position. As you can see from the slide, we remain fully committed to executing on our strategic plan. So finally, to conclude before opening up the floor for questions, we are proud, we are happy to report a strong performance achieved amid a backdrop of macroeconomic uncertainty. This resilience reflects the solid fundamentals of our businesses and the effective execution of our strategic priorities and the hard work of all people from Naturgy. We are on track to deliver our 2025 guidance, building on a strong track record of commitment and delivery. We have increased the free float and liquidity to return to the MSCI indexes, delivering a key strategic plan objective in record time and at value-preserving terms. We retain a strong balance sheet, providing the company flexibility and optionality. And we continue to deliver on our DPS commitment of a floor of EUR 1.7 through the payment of a second interim dividend of EUR 0.60 payable on the 5th of November. And with that, happy to conclude our presentation and open to answer any questions you may have. Abel Arbat: Thank you, Steven and Rita for the presentation. So let's start responding to the questions received through the webcast, and we're going to start touching on a few generic or more strategic questions before getting into the business questions. So the first set of questions relates to the current balance sheet flexibility and what are our strategic priorities around this. What would be the preferred route to deleverage at the moment, either deploying M&A, increasing shareholder remuneration, maybe additional share buybacks or a combination of the above? Steven Fernández: Thank you, Abel. I mean, it's a wonderful problem to have. A company with a solid balance sheet that provides flexibility, and I highlight optionality. So the best way to answer this question is we have a strategic plan that goes from '25 to '27. We're going to stick to this plan. We're going to meet the targets in this plan. This plan does not contemplate inorganic growth, and it contemplates investments that have been disclosed to the market that provide shareholders in Naturgy with value creation. If market conditions change and we are in a position to identify more organic growth opportunities that continue creating value for shareholders, and obviously, accelerating that organic growth could be an option. Alternatively, if opportunities present themselves for inorganic growth that makes sense, that could also be an optionality that we will explore. But I think the most important point is, again, to highlight our strategic plan does not contemplate external growth and it contemplates organic growth that focuses on delivering value as opposed to gaining footprint or size. Abel Arbat: Thank you, Steven. And in this context, would the company consider any further measures to increase the liquidity similar to the ones that we have executed in recent months? Steven Fernández: The company has a treasury stock position right now of 0.9%. Look, I mean, we're in no rush to deliver that to the market. We'll do that when and if the conditions are right at a time of our choosing. What I would say is that having done the bulk of the work, that 0.9% is not really going to move the needle. Abel Arbat: Thank you, Steven. Then there are a few questions around our portfolio of businesses. And if we think that there is anything that we consider noncore or that do we have any plans for portfolio optimization in Lat Am. Again, I think that Steven already mentioned that the plan is only based on organic growth, but do you want to... Steven Fernández: So the plan does not contemplate disposals or sizable disposals. We have taken quite a bit of time to review our existing portfolio, are satisfied with the positions that we have. We see potential in the countries where we operate in Lat Am, and we have no intentions at this stage in rotating assets. Abel Arbat: Perfect. Moving on to a more specific question around free cash flow. There's a question around the positive working capital contribution in the 9 months 2025 and whether or not do we expect any reversal of that positiveness into Q4? Rita de Alda Iparraguirre: The evolution of the working capital in the company is normally influenced by seasonal demand patterns, fluctuations in energy prices and also the negotiation of gas contracts with our suppliers. In this case, working capital evolution is strongly affected by balanced regularizations with our gas procurement suppliers in 2024 and 2025. We could expect partial reversal of our working capital in the future according to contract agreements. Abel Arbat: Okay. Thank you, Rita. Moving now on to various questions on each of the businesses. And I'm going to start with Networks and Networks Spain and particularly Spanish electricity networks. There are a number of questions around the second regulatory proposal, how it compares versus the current one, what's our opinion on its attractiveness, the treatment on OpEx and so on and so forth. So perhaps we could give high-level view on the topic. Rita de Alda Iparraguirre: Yes. Well, as probably everyone knows, the CNMC has already published a second draft of the resolution of the new regulatory framework covering the 2026-2031 period and companies in the sector have already submitted their comments. The published proposal introduces a shift to a TotEx-based remuneration model, along with an adjustment factor linked to increasing contracted power. The second proposal reduces OpEx cut, but still fails to incentivize efficiency and instead penalizes the most efficient operators. Moreover, the proposed methodology does not incentivize reaching the investment volumes outlined by the ministry, which are necessary to achieve decarbonization goals. We expect a final resolution before the end of the year. Abel Arbat: Thank you, Rita. So Again, a number of questions on how this proposal on electricity distribution in Spain could affect the upcoming regulatory review in gas distribution. So could we share our views on the Spanish gas networks' upcoming regulatory review? Do we have any visibility? Do we expect any changes in the current methodology and parametric formula? Rita de Alda Iparraguirre: Okay. So the CNMC indicated that the first draft of the remuneration methodology should be ready by the end of 2025 or beginning of 2026. From our point of view, continuing with the parametric model would be a sizable option to provide stability and predictability to the sector with appropriate adjustments to reflect the exceptional inflation of the current period. Furthermore, we see this new regulation as an opportunity to incentive new renewable gases, smart metering and also to bet for the decarbonization of the gas network. Abel Arbat: Thank you, Rita. Okay. So now moving on to Networks Lat Am. There are a few comments around the FX headwinds that we've experienced this year. And how this is expected to impact the company going forward and also with a view of the EUR 3 billion target by 2027. Rita de Alda Iparraguirre: So in terms of the developments in Lat Am networks, I would say that we have 3 main priorities. The first one that is the most important is obviously the negotiation of the concessions in Brazil in 2027 and Panama in 2028, as Steven mentioned before. Second, obviously, we are also -- one of our key priorities is to manage regulatory management that -- so we aim to obtain fair tariff reviews and also inflation updates to compensate for inflation -- for depreciation rates. In the case of Argentina gas, as I mentioned before, the new tariff review published this year includes monthly adjustment inflation, which is an important milestone for us. And additionally, we continue to focus on what we call OneGrid initiative, which consists of sharing implemented operational best practices across geographies in order to position Naturgy as best-in-class operations and continued efficiency gains. Abel Arbat: Thank you, Rita. We move now on to the questions around our liberalized activities. And in particular, there are a few questions on energy management. So perhaps starting on what's our expectation for energy management margins in Q4 and also what's our outlook for gas prices and spreads going forward? Can we comment on our hedging levels and the key drivers going forward? Rita de Alda Iparraguirre: So forecast for the upcoming winter indicates a moderate price environment for gas in Europe, mainly driven by adequate underground storage levels. We have an 83% storage levels currently in the European Union and the absence of major changes in the global LNG demand market, particularly due to declining demand from China in the last months. However, main price drivers will be more linked to winter temperature trends, demand requirements for power generation and potentially geopolitical developments we've seen in the past. In this context, the company will actively optimize both physical sales and financial hedging to manage its risk exposure and the underlying scenario. Likewise, negotiations with Sonatrach for 2025-2027 gas procurement prices are ongoing with -- to maintain gas procurement contracts aligned with market conditions. Abel Arbat: Thank you, Rita. Then a few questions on the recently approved ban of importing Russian gas into Europe. And the questions primarily relate to any contingency or breach of contract risk. Then there is also questions around the margin contribution from our contract from Yamal and possible replacement alternatives to that contract. Rita de Alda Iparraguirre: So yes, on Thursday, the European Council officially approved the 19th sanction package, which includes a ban on Russian LNG imports effective in January 2027 for long-term contracts. The European Commission is working to provide a legally sound and effective toolkit for companies to achieve the targets avoiding legal problems. While the contribution from the affected contract relevant for Naturgy is 35 [ kilowatt ] hour per annum. The impact is expected to be mitigated through our diversified gas portfolio and access to market purchases. As we mentioned during the presentation, we continue to assess new gas procurement opportunities as we are confident that natural gas and LNG constitute a key energy transition enabler in the future. Abel Arbat: Perfect. Thank you, Rita. Now a few questions on Spanish thermal generation, in particular, around the contribution of flexible generation or CCGTs in the context of higher demand and production in ancillary services. Do we expect this contribution to be sustained over time? What is the run rate that we expect for 2026? And if we can comment as well on our expectation for capacity payments and whether we have more visibility on this process? Rita de Alda Iparraguirre: Okay. So we expect more visibility on capacity payments and its design in the coming months. However, at the moment, there are no further indications on the matter. What is clear is that CCGTs continue to play a key role in the current environment, and we don't expect this to change in the near or medium term. The reinforced operating mode translates into higher demand and production in ancillary services that warranty the system stability and the security of supply. However, the launch of capacity payments, the incorporation of new batteries or the development of new infrastructure will obviously influence how restrictions are allocated in the future. Abel Arbat: Thank you, Rita. A question as well on data centers and what is our role? Do we see opportunities in the data center and how Naturgy is positioned to take advantage of the data centers build. Steven Fernández: So I mean, thank you, Abel, for the question. We are exploring opportunities that data centers present in Spain, namely through the procurement of energy and specifically on some of the sites that we have available, which are generating interest from international players with whom we are in the process of engaging discussions to see how we can work together. What I can tell you is that the model that we are pursuing is not one where the company will take up equity stakes in the data centers themselves or the data center projects themselves, but where the company will be in a position to provide access to the grid and provide electricity as demanded by the investors. Abel Arbat: Thank you, Steven. Now there's a question in renewable gases. What level of capacity is being developed? When we think these projects will start to see commercial operation dates? And what's our view in terms of what is needed for this business to take some speed and start gaining some critical mass? Can we comment on that, please? Steven Fernández: So look, what I would say is that this is a key area that we are developing right now, although admittedly not at the pace that we would like. We see renewable gases as a key solution for hard-to-abate businesses. They can already benefit from existing infrastructure. So we don't have to build brand-new infrastructure like in the case of hydrogen, for example. And by the way, when we say renewable gases, we mostly mean biomethane. So what the team has been doing so far is developing agreements and joint ventures with a number of other developers that provide us with access to good locations, good sites, which is our first process among a series of other processes, including the procurement of feedstock, et cetera. That will allow the company to jump-start its operations once we have adequate regulation that supports the development of biomethane in place. And therefore, the team is not only paying attention and spending time in identifying sites and signing agreements, but also in lobbying and explaining to the government and the regulator why it's important to develop a biomethane regulation that allows for the high-speed development and deployment of all the CapEx potential. So as a reminder, the strategic plan contemplates initial CapEx for biomethane, but the bulk of the CapEx, the way we look at it based on our assumptions, falls outside of the scope of the strategic plan. So it's highly unlikely that you will see very significant CapEx being developed or deployed before the end of year 2027. Abel Arbat: Thank you, Steven. Okay. So there are a few questions as well around the supply business. There is some margin construction in the recent quarter. So the questions relate around the outlook for energy prices and margins in gas and power supply in Spain and what are the repricing dynamics and so on and so forth. Rita de Alda Iparraguirre: Okay. So generally, the sector is experiencing, as you mentioned, high levels of competition and churn ratios in both gas and electricity. In the electricity segment, the group has expanded its client portfolio in a highly competitive environment. However, churn rates still remain high across the sector. In the gas segment, margins have remained resilient, supported by improved visibility on procurement costs, but negatively affected by regulated tariffs. Looking ahead, we expect margins in both gas and electricity to remain solid, leveraging on our integrated position. And we also anticipate maintaining or even growing our customer base, continuing the positive trend of serving electricity during the year. Additionally, the group is improving customer service and operational efficiency, thanks to the new digital platform. Abel Arbat: Okay. Thank you very much, Rita and Steven. I think that broadly concludes the questions received. There are a few more detailed and quantitative questions that the team will address subsequent to the call. And other than that, thank you very much for joining the results presentation, and we remain at your disposal for any additional questions you may have. Thank you so much.
Abel Arbat: Good morning, everyone. This is Abel Arbat speaking from the Capital Markets team at Naturgy. And we thank you for joining our results call for the first 9 months of 2025. Next to me sits the Head of Financial Markets and Corporate Development, Mr. Steven Fernández; and the Head of Control and Energy Planning, Ms. Rita Ruiz de Alda. As usual, we will begin with the presentation and leave Q&A for the end. Please submit your questions in written form, through the webcast platform during the presentation and we will address those at the end of the presentation. So without further ado, I'm going to hand it over to Steven to start off on the presentation. Steven Fernández: Thank you, Abel, and good morning, everyone. As you have seen this morning, this presentation is basically divided into 3 main sections that we're going to go through. Firstly, we're going to review the results for the first 9 months of the year. Then we're going to give you a little update on the reestablishment of the company's free float following recent moves. And finally, we're going to give you some glimpses into the outlook for the remainder of the year 2025. If we move over to the results, the key highlights that we'd like to discuss basically, as you can see, we've had an overall robust operational performance amid a challenging and uncertain geopolitical backdrop. We are, as a result of that performance, on track to deliver on its 2025 guidance, building again on a track record of commitment and delivery. On the capital markets front, we have increased the free float for the company and subsequently, the share liquidity, positioning us to return to the MSCI indexes. As a reminder, the free float for the company has increased from 10% to almost 19% in record time and preserving value for shareholders. As a result of this effort, as I mentioned previously, liquidity has improved, and the monthly average trading volumes are up 2x versus the first half of the year. Our solid balance sheet also continues to provide flexibility and optionality. And we also remain committed to an attractive shareholder remuneration. As a reminder, the second 2025 dividend of EUR 0.60 has been approved by the Board, and it will be payable on November 5 on track for a minimum annual total DPS of EUR 1.7 per share. If we move over to review the results, what you can see is that average Brent prices were 14% lower in the first 9 months of the year compared to the same period last year, decreasing from $83 to $71 per barrel. In contrast, natural gas prices increased across key benchmarks. For example, the TTF was up 26%, the Hub up 58% and JKM up 17%. Hence, we have witnessed a decoupling of gas and oil indexes during the period. Geopolitics also weighed on energy markets during the first 9 months of the year, although volatility has thankfully gradually eased in recent months. Iberian electricity pool prices for its parts showed an increase from EUR 52 per megawatt hour in the first 9 months of 2024 to EUR 63 per megawatt hour in the first 9 months of this year, mainly driven by higher demand for gas-fired generation in the period, along with higher gas prices. As a result of this scenario, we take a quick look at the results for the period. EBITDA amounted to EUR 4.21 billion. Net income amounted to almost EUR 1.7 billion. A reminder that the dividend that we have paid so far this year amounts to EUR 1.1 billion and net debt for the group amounts to EUR 12.9 billion, which, by the way, does not include the proceeds from the bilateral sale and subsequent total return swap we have entered into. The results, therefore, maintained record levels while delivering on shareholder remuneration and maintaining a strong balance sheet. As we will review in the coming pages and especially with the help of Rita, during the third quarter of 2025, market trends and business dynamics have remained broadly in line with those that we had seen in the first half of the year. Moving over to the income statement. EBITDA remained in line with last year, although 2025 shows stronger underlying results as it does not include relevant extraordinary items contributing to it as 2024 did. And in terms of EBITDA contribution by business, 49% was generated by networks and 51% by energy management, generation and supply. In terms of activities, you also see a balance here with 54% of the EBITDA being generated by gas with the balance from electricity. And again, in terms of the geographical diversification, a little bit more than half of the EBITDA generated in Spain with the balance coming from all our other operations abroad. The group's diversification across businesses, activities and geographies continues to support its earnings resilience. And the way of its regulated activities provide us with cash flow predictability. So all in all, the earnings were [ 6% ] higher compared to last year in the period, reaching almost EUR 1.7 billion. If we turn over to the cash flow, free cash flow after minorities reached almost EUR 2.2 billion, demonstrating strong cash flow generation for the first 9 months of the year. In this period, the company invested EUR 1.2 billion, roughly of which 45% was allocated to networks, 35% to renewables and the balance of the business accounting for 20% of these investments. This growth -- this shows greater focus on the networks CapEx versus renewals compared to 2024 and is aligned with the company's financial discipline. Also note that EUR 169 million of hybrids were amortized during the period, which means only EUR 330 million of hybrids remain outstanding. We will continue to follow a strict financial discipline, deploying capital to ensure value creation on our investments. As a reminder, we believe in value over size. So all in all, strong cash flow in the period to back investments and shareholder remuneration, as you can see. But if we then turn over to the net debt, you can see that the balance sheet remains strong, actually stronger than we had anticipated. In April and July, Naturgy distributed its 2024 final dividend and first interim dividend for 2025, respectively, both of them in cash at EUR 0.60 per share for a total of EUR 1.1 billion spent year-to-date. In June, the company also completed a EUR 2.3 billion tender offer on our own shares. And already in August, we were able to undertake a successful placement and return 2% of its capital to institutional investors in addition to 3.5% to a financial institution with whom we have signed a TRS. This places net debt as at the end of September 2025 at EUR 12.9 billion with a comfortable net debt to last 12 months 2025 EBITDA of [ 2.4x ]. Moreover, as you have seen, in October, the company also managed to undergo a second placement of treasury shares amounting to 3.5% of the share capital, which will be reflected in the net debt figures as of the year-end. The cost of debt remains at around 4%, while the percentage of fixed rates has decreased to roughly 66% in the lower interest rate environment. So all in all, you can see we have a strong balance sheet with low leverage post recent capital market transactions and free float increase that provides the company continued flexibility and optionality. And with that, I'll hand the turn over to Rita, who will go over the businesses. Rita de Alda Iparraguirre: Thanks, Steven, and good morning, everyone. Starting with Networks on Page 10. Networks reported a total EBITDA of EUR 2,098 million in 2025, representing an 8% decline when compared to 2024. This decrease was primarily driven by one-off positive impact in Chile last year and the depreciation of several Latin American currencies, most notably the Argentine peso. In Spain, Gas Networks experienced a remuneration adjustments foreseen in the current regulatory framework as well as increased demand in residential segment due to temperature effects. As highlighted in our latest results presentation, a public consultation was launched in July targeting companies in the sector and marking the start of the regulatory review process for the 2027-2032 period. In line with the regulatory calendar, a draft proposal is expected to be published by year-end or early 2026. In electricity, EBITDA increased driven by higher regulated asset base and the publication of the 2021 and 2022 definitive remuneration as well as retroactive impacts. The CNMC has already published a second draft of the resolution of the new regulatory scheme for the 2026-2031 period and the companies in the sector have already sent validations. In Mexico, results mainly impacted by negative foreign exchange effects compensated by tariff updates in July. In Brazil, results were also affected by currency depreciation. In Argentina, EBITDA has improved following a substantial tariff increase implemented in 2024 to offset inflation. At the same time, we are observing a rising trend in FX volatility, largely driven by electoral milestones. As mentioned in July, a new tariff review was approved for the 2025-2030 regulatory period, in line with our strategic plan estimates. This new regulatory review provides visibility to 2030 and includes monthly inflation adjustments within a stable regulatory framework. In Chile, performance declined when compared to last year due to an extraordinary effect in 2024 as the partial reversal of the provision related to TGN conflict. As we already mentioned in the last presentation, this legal process is now officially closed due to an agreement between both parties. In Panama, results were negatively affected by lower demand due to temperature effects and increased operating expenses from higher maintenance activity to improve quality standards. In summary, comparison is affected by extraordinary impact in 2024 and currency depreciation in Lat Am. Now turning to energy management on Page 11. EBITDA reached EUR 718 million, which shows an increase versus 2024 of 18%, mainly due to higher margins on hedge sales. On average, European gas prices were 26% over 2024 levels. As mentioned during the strategic plan presentation, the group is fully hedged for 2025, having adopted an active risk management approach in the context of high volatility and uncertainty. The figures already reflect current market conditions for gas contracts in 2025, while negotiations with Sonatrach are still ongoing. The group is continuously evaluating new gas sourcing opportunities to complement our portfolio as we consider natural gas, a key enabler, for the energy transition. Finally, last week, the EU formally adopted a prohibition on the purchase import or transfer of LNG exported from Russia into the European Union. The prohibition will be effective starting in January 2027 in the case of long-term gas contracts, such as the one which Naturgy holds with Yamal. Overall, the period benefited from effective hedging and diversified procurement portfolio. Continuing with thermal generation, EBITDA reached EUR 523 million, 22% over 2024 EBITDA levels due to higher activity in Spain, partially offset by lower revenues in Lat Am. In Spain, the increase in results was supported by higher demand for ancillary services from our combined cycle fleet. Naturgy holds the largest CCGT fleet in Spain with 7.4 gigawatts, acting as a backbone to energy security of supply. In Mexico, production and margins remained stable. However, revenues from availability markets declined, mainly due to exceptionally high revenue base in 2024. Overall, CCGTs continue to play a key role to ensure system stability. Let's turn now to renewable generation on Page 13. Renewable generation reached an EBITDA of EUR 452 million during the period, slightly above 2024. Spain renewable generation production was 8% lower when compared to 2024, mainly due to lower wind and hydro generation, given the exceptionally high levels of hydro production in our basins during 2024. This negative impact was partially offset by the commissioning of new installed capacity and higher electricity prices. In the United States, results are higher when compared to 2024, mainly due to higher energy prices. The group completed construction of its second solar plant in Texas, which has recently started operations. In Lat Am, activity continues with impact due to currency devaluation in Mexico and Brazil. And finally, in Australia, performance benefited from the additional installed capacity added when compared to 2024. All in all, higher results in renewable generation due to commissioning of new capacity and selective growth prioritizing value over size. Last, moving to supply. EBITDA has been EUR 500 million, a 16% lower when compared to 2024. It is important to remember that in 2024, we had an extraordinary impact due to the positive ruling in favor of Naturgy regarding tariff subsidies. Leaving this aside, the business performed relatively stable when compared to last year despite incremental margin pressure and competition. As margins have shown resiliency supported by higher visibility on procurement costs, but negatively affected by regulated tariffs. In terms of electricity, the group has expanded its client portfolio in a highly competitive environment, leveraging on its integrated model and diversified generation mix, however, impacted by increasing adjustment services costs. I will now pass the floor back to Steven to update you on the free float and outlook. Steven Fernández: Thank you, Rita. So I'll take you really quickly to Slide 16. Naturgy has increased its free float to return to the MSCI indexes. On the 24th of June of this year, as I mentioned previously, we successfully completed a voluntary partial public tender offer to repurchase up to 9.1% of our share capital aimed at restoring the company's free float and enhancing share liquidity. The offer targeted 88 million shares, again, 9.1% share capital at a price of EUR 26.50 per share, totaling EUR 2.3 billion. All reference shareholders participated in the tender, reducing their shareholdings, as you can see in the right-hand side of the page. Aligned with the strategic plan '25-'27, our objective was to reintroduce the repurchase shares into the capital markets to improve free float and liquidity. And to this end, we executed a series of transactions this year. On the 4th of August, we completed an ABB of 2% of the share capital. We signed a bilateral sale and executed a bilateral sale for 3.5% of the share capital to an international financial institution. Both transactions were priced at EUR 25.9 per share, reflecting the tender offer price adjusted for the EUR 0.60 dividend paid on the 30th of July and thereby preserving shareholder value. On the 7th of October, just a couple of weeks ago, we also completed a second ABB for 3.5% of the share capital. Following these transactions, Naturgy's treasury shares now represent approximately 0.9% of the share capital and our free float has increased to almost 19% versus 10% in the previous year. Through the disposal of approximately 9% of our shares and the reduction of reference shareholder stakes, Naturgy has reaffirmed its commitment to enhance share liquidity and increased free float, which are, as you know, key steps towards inclusion in major stock indices, particularly those of the MSCI families, where on the following weeks, specifically on 5 November of this year, we'll hopefully have some good news. these transactions were overall executed swiftly and at a value-preserving terms for shareholders, hence, delivering a key strategic plan objective in record time. If we move over to Slide 17, and we look at the share price and the liquidity evolution, share price remains above the levels at which the tender offer was launched, considering the dividend of EUR 0.60 paid in July. And liquidity has substantially improved with monthly average daily trading volumes of around 2x the volumes in the first half of the year. So in essence, we have managed to increase the free float and liquidity, reducing the holdings of our reference shareholders as intended while preserving shareholder value. And all of this has been achieved in barely 4 months. If we look at the rest of the year now, in terms of the energy outlook for the -- the current market forwards are anticipating a generally less favorable energy scenario for the TTF in the last quarter compared to the first 9 months of the year, but still maintaining levels of around EUR 32 per megawatt hour. On the other hand, market forwards for Iberian electricity pool prices are pointing towards average levels of around EUR 72 per megawatt hour, above the 9M '25 numbers, but below the comparable period in the fourth quarter of last year. Finally, Brent prices are expected to remain just below $70 per barrel, while CO2 prices are expected to remain fairly stable. So in essence, the current energy outlook and market forwards are aligned with our expectations and the basis of our guidance for the year-end. Indeed, when you think about the guidance, we are on track to deliver our 2025 numbers. After the results presented today and the perspective for the remaining of the year, we are obviously in a position to reaffirm this guidance for EBITDA, for net income, for DPS at a floor of EUR 1.7 per share and improving our net debt outlook from an expectation of a little bit less than EUR 14.7 billion to approximately EUR 13 billion by year-end as a result not only of the good performance of the businesses, but also as a result of the placements in the treasury stock. Our short-term priorities, however, remain unchanged. If we look at them on Page 21, for networks, we are looking for a final regulatory framework for electricity networks in Spain. We are proactively engaging regulators for Nedgia, so that's gas distribution and negotiation of extension in concessions in Lat Am, Brazil and Panama. We are continuing to advance in our OneGrid initiative, which implements operational best practices across geographies. In energy management, we maintain gas procurement contracts aligned with market conditions, continue to assess, as Rita mentioned, new gas procurement opportunities as a key energy transition enabler. And we are proactively managing the risk both through physical and hedging alternatives. In thermal generation, we continue to look for capacity payments. We continue to play a key role in the security of supply through flexible generation in all the markets where we operate. And we are engaging in the initial discussions for PPAs extensions in Mexico. In renewables, we continue to look at selective renewable growth, and that's basically focused on repowering, hybrids and batteries. And we continue to execute our ongoing developments. In renewable gases, we continue to ambition leading the biomethane in Spain. We have more than 70 projects under development currently. We are promoting networks injection and adequate regulation. And as a result of that, you can imagine that we are actively engaging all authorities to make sure that this is a viable alternative for the energy transition. Finally, in supply, we continue to look to grow our client base and continue to evolve our operating model, deepening our excellence in client service and maintaining a balanced integrated position. As you can see from the slide, we remain fully committed to executing on our strategic plan. So finally, to conclude before opening up the floor for questions, we are proud, we are happy to report a strong performance achieved amid a backdrop of macroeconomic uncertainty. This resilience reflects the solid fundamentals of our businesses and the effective execution of our strategic priorities and the hard work of all people from Naturgy. We are on track to deliver our 2025 guidance, building on a strong track record of commitment and delivery. We have increased the free float and liquidity to return to the MSCI indexes, delivering a key strategic plan objective in record time and at value-preserving terms. We retain a strong balance sheet, providing the company flexibility and optionality. And we continue to deliver on our DPS commitment of a floor of EUR 1.7 through the payment of a second interim dividend of EUR 0.60 payable on the 5th of November. And with that, happy to conclude our presentation and open to answer any questions you may have. Abel Arbat: Thank you, Steven and Rita for the presentation. So let's start responding to the questions received through the webcast, and we're going to start touching on a few generic or more strategic questions before getting into the business questions. So the first set of questions relates to the current balance sheet flexibility and what are our strategic priorities around this. What would be the preferred route to deleverage at the moment, either deploying M&A, increasing shareholder remuneration, maybe additional share buybacks or a combination of the above? Steven Fernández: Thank you, Abel. I mean, it's a wonderful problem to have. A company with a solid balance sheet that provides flexibility, and I highlight optionality. So the best way to answer this question is we have a strategic plan that goes from '25 to '27. We're going to stick to this plan. We're going to meet the targets in this plan. This plan does not contemplate inorganic growth, and it contemplates investments that have been disclosed to the market that provide shareholders in Naturgy with value creation. If market conditions change and we are in a position to identify more organic growth opportunities that continue creating value for shareholders, and obviously, accelerating that organic growth could be an option. Alternatively, if opportunities present themselves for inorganic growth that makes sense, that could also be an optionality that we will explore. But I think the most important point is, again, to highlight our strategic plan does not contemplate external growth and it contemplates organic growth that focuses on delivering value as opposed to gaining footprint or size. Abel Arbat: Thank you, Steven. And in this context, would the company consider any further measures to increase the liquidity similar to the ones that we have executed in recent months? Steven Fernández: The company has a treasury stock position right now of 0.9%. Look, I mean, we're in no rush to deliver that to the market. We'll do that when and if the conditions are right at a time of our choosing. What I would say is that having done the bulk of the work, that 0.9% is not really going to move the needle. Abel Arbat: Thank you, Steven. Then there are a few questions around our portfolio of businesses. And if we think that there is anything that we consider noncore or that do we have any plans for portfolio optimization in Lat Am. Again, I think that Steven already mentioned that the plan is only based on organic growth, but do you want to... Steven Fernández: So the plan does not contemplate disposals or sizable disposals. We have taken quite a bit of time to review our existing portfolio, are satisfied with the positions that we have. We see potential in the countries where we operate in Lat Am, and we have no intentions at this stage in rotating assets. Abel Arbat: Perfect. Moving on to a more specific question around free cash flow. There's a question around the positive working capital contribution in the 9 months 2025 and whether or not do we expect any reversal of that positiveness into Q4? Rita de Alda Iparraguirre: The evolution of the working capital in the company is normally influenced by seasonal demand patterns, fluctuations in energy prices and also the negotiation of gas contracts with our suppliers. In this case, working capital evolution is strongly affected by balanced regularizations with our gas procurement suppliers in 2024 and 2025. We could expect partial reversal of our working capital in the future according to contract agreements. Abel Arbat: Okay. Thank you, Rita. Moving now on to various questions on each of the businesses. And I'm going to start with Networks and Networks Spain and particularly Spanish electricity networks. There are a number of questions around the second regulatory proposal, how it compares versus the current one, what's our opinion on its attractiveness, the treatment on OpEx and so on and so forth. So perhaps we could give high-level view on the topic. Rita de Alda Iparraguirre: Yes. Well, as probably everyone knows, the CNMC has already published a second draft of the resolution of the new regulatory framework covering the 2026-2031 period and companies in the sector have already submitted their comments. The published proposal introduces a shift to a TotEx-based remuneration model, along with an adjustment factor linked to increasing contracted power. The second proposal reduces OpEx cut, but still fails to incentivize efficiency and instead penalizes the most efficient operators. Moreover, the proposed methodology does not incentivize reaching the investment volumes outlined by the ministry, which are necessary to achieve decarbonization goals. We expect a final resolution before the end of the year. Abel Arbat: Thank you, Rita. So Again, a number of questions on how this proposal on electricity distribution in Spain could affect the upcoming regulatory review in gas distribution. So could we share our views on the Spanish gas networks' upcoming regulatory review? Do we have any visibility? Do we expect any changes in the current methodology and parametric formula? Rita de Alda Iparraguirre: Okay. So the CNMC indicated that the first draft of the remuneration methodology should be ready by the end of 2025 or beginning of 2026. From our point of view, continuing with the parametric model would be a sizable option to provide stability and predictability to the sector with appropriate adjustments to reflect the exceptional inflation of the current period. Furthermore, we see this new regulation as an opportunity to incentive new renewable gases, smart metering and also to bet for the decarbonization of the gas network. Abel Arbat: Thank you, Rita. Okay. So now moving on to Networks Lat Am. There are a few comments around the FX headwinds that we've experienced this year. And how this is expected to impact the company going forward and also with a view of the EUR 3 billion target by 2027. Rita de Alda Iparraguirre: So in terms of the developments in Lat Am networks, I would say that we have 3 main priorities. The first one that is the most important is obviously the negotiation of the concessions in Brazil in 2027 and Panama in 2028, as Steven mentioned before. Second, obviously, we are also -- one of our key priorities is to manage regulatory management that -- so we aim to obtain fair tariff reviews and also inflation updates to compensate for inflation -- for depreciation rates. In the case of Argentina gas, as I mentioned before, the new tariff review published this year includes monthly adjustment inflation, which is an important milestone for us. And additionally, we continue to focus on what we call OneGrid initiative, which consists of sharing implemented operational best practices across geographies in order to position Naturgy as best-in-class operations and continued efficiency gains. Abel Arbat: Thank you, Rita. We move now on to the questions around our liberalized activities. And in particular, there are a few questions on energy management. So perhaps starting on what's our expectation for energy management margins in Q4 and also what's our outlook for gas prices and spreads going forward? Can we comment on our hedging levels and the key drivers going forward? Rita de Alda Iparraguirre: So forecast for the upcoming winter indicates a moderate price environment for gas in Europe, mainly driven by adequate underground storage levels. We have an 83% storage levels currently in the European Union and the absence of major changes in the global LNG demand market, particularly due to declining demand from China in the last months. However, main price drivers will be more linked to winter temperature trends, demand requirements for power generation and potentially geopolitical developments we've seen in the past. In this context, the company will actively optimize both physical sales and financial hedging to manage its risk exposure and the underlying scenario. Likewise, negotiations with Sonatrach for 2025-2027 gas procurement prices are ongoing with -- to maintain gas procurement contracts aligned with market conditions. Abel Arbat: Thank you, Rita. Then a few questions on the recently approved ban of importing Russian gas into Europe. And the questions primarily relate to any contingency or breach of contract risk. Then there is also questions around the margin contribution from our contract from Yamal and possible replacement alternatives to that contract. Rita de Alda Iparraguirre: So yes, on Thursday, the European Council officially approved the 19th sanction package, which includes a ban on Russian LNG imports effective in January 2027 for long-term contracts. The European Commission is working to provide a legally sound and effective toolkit for companies to achieve the targets avoiding legal problems. While the contribution from the affected contract relevant for Naturgy is 35 [ kilowatt ] hour per annum. The impact is expected to be mitigated through our diversified gas portfolio and access to market purchases. As we mentioned during the presentation, we continue to assess new gas procurement opportunities as we are confident that natural gas and LNG constitute a key energy transition enabler in the future. Abel Arbat: Perfect. Thank you, Rita. Now a few questions on Spanish thermal generation, in particular, around the contribution of flexible generation or CCGTs in the context of higher demand and production in ancillary services. Do we expect this contribution to be sustained over time? What is the run rate that we expect for 2026? And if we can comment as well on our expectation for capacity payments and whether we have more visibility on this process? Rita de Alda Iparraguirre: Okay. So we expect more visibility on capacity payments and its design in the coming months. However, at the moment, there are no further indications on the matter. What is clear is that CCGTs continue to play a key role in the current environment, and we don't expect this to change in the near or medium term. The reinforced operating mode translates into higher demand and production in ancillary services that warranty the system stability and the security of supply. However, the launch of capacity payments, the incorporation of new batteries or the development of new infrastructure will obviously influence how restrictions are allocated in the future. Abel Arbat: Thank you, Rita. A question as well on data centers and what is our role? Do we see opportunities in the data center and how Naturgy is positioned to take advantage of the data centers build. Steven Fernández: So I mean, thank you, Abel, for the question. We are exploring opportunities that data centers present in Spain, namely through the procurement of energy and specifically on some of the sites that we have available, which are generating interest from international players with whom we are in the process of engaging discussions to see how we can work together. What I can tell you is that the model that we are pursuing is not one where the company will take up equity stakes in the data centers themselves or the data center projects themselves, but where the company will be in a position to provide access to the grid and provide electricity as demanded by the investors. Abel Arbat: Thank you, Steven. Now there's a question in renewable gases. What level of capacity is being developed? When we think these projects will start to see commercial operation dates? And what's our view in terms of what is needed for this business to take some speed and start gaining some critical mass? Can we comment on that, please? Steven Fernández: So look, what I would say is that this is a key area that we are developing right now, although admittedly not at the pace that we would like. We see renewable gases as a key solution for hard-to-abate businesses. They can already benefit from existing infrastructure. So we don't have to build brand-new infrastructure like in the case of hydrogen, for example. And by the way, when we say renewable gases, we mostly mean biomethane. So what the team has been doing so far is developing agreements and joint ventures with a number of other developers that provide us with access to good locations, good sites, which is our first process among a series of other processes, including the procurement of feedstock, et cetera. That will allow the company to jump-start its operations once we have adequate regulation that supports the development of biomethane in place. And therefore, the team is not only paying attention and spending time in identifying sites and signing agreements, but also in lobbying and explaining to the government and the regulator why it's important to develop a biomethane regulation that allows for the high-speed development and deployment of all the CapEx potential. So as a reminder, the strategic plan contemplates initial CapEx for biomethane, but the bulk of the CapEx, the way we look at it based on our assumptions, falls outside of the scope of the strategic plan. So it's highly unlikely that you will see very significant CapEx being developed or deployed before the end of year 2027. Abel Arbat: Thank you, Steven. Okay. So there are a few questions as well around the supply business. There is some margin construction in the recent quarter. So the questions relate around the outlook for energy prices and margins in gas and power supply in Spain and what are the repricing dynamics and so on and so forth. Rita de Alda Iparraguirre: Okay. So generally, the sector is experiencing, as you mentioned, high levels of competition and churn ratios in both gas and electricity. In the electricity segment, the group has expanded its client portfolio in a highly competitive environment. However, churn rates still remain high across the sector. In the gas segment, margins have remained resilient, supported by improved visibility on procurement costs, but negatively affected by regulated tariffs. Looking ahead, we expect margins in both gas and electricity to remain solid, leveraging on our integrated position. And we also anticipate maintaining or even growing our customer base, continuing the positive trend of serving electricity during the year. Additionally, the group is improving customer service and operational efficiency, thanks to the new digital platform. Abel Arbat: Okay. Thank you very much, Rita and Steven. I think that broadly concludes the questions received. There are a few more detailed and quantitative questions that the team will address subsequent to the call. And other than that, thank you very much for joining the results presentation, and we remain at your disposal for any additional questions you may have. Thank you so much.
Operator: Good day, and thank you for standing by. Welcome to the Smurfit Westrock 2025 Q3 Results Webcast and Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Ciaran Potts, Smurfit Westrock Group VP, Investor Relations. Please go ahead. Ciaran Potts: Thank you, Sarah. As a reminder, statements in today's earnings release and presentation and the comments made by management during this call may be considered forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the earnings release and in our SEC filings. The company undertakes no obligation to revise any forward-looking statements. Today's remarks also refer to certain non-GAAP financial measures. Reconciliations to the most comparable GAAP measures are included in today's release and in the appendix to the presentation, which are available at investors.smurfitwestrock.com. I'll now hand you over to Tony Smurfit, CEO of Smurfit Westrock. Anthony P. J. Smurfit: Thank you very much, Ciaran, for the introduction. Today, I'm joined by Ken Bowles, our Executive Vice President and Group CFO, and we appreciate all of you taking the time to be with us. I am very happy to say that we have again delivered on guidance in what is a challenging environment with an adjusted EBITDA margin number of USD 1.3 billion and an adjusted EBITDA margin of 16.3%. The quarter was characterized by some challenging months, specifically July in our North American region and August in Europe. Nonetheless, we were able to come through with the numbers we predicted and planned. Since our combination, our North American business has shown great improvement over the course of the last 16 months on both the commercial and operational front, that's reflected by an improved adjusted EBITDA margin of 17.2% for the quarter. As you will have heard us say, as we got to understand the legacy Westrock business, we have taken strong actions to remove uneconomic volume within our portfolio of businesses. This, of course, has resulted in a loss of volume as we transition and reposition our business. While there will be a time adjustment to this reposition, we believe we are clearly on the right track as we are already seeing quality customer wins. In addition to changing our customer portfolio, we're also continuing to rightsize the business by closing down inefficient or loss-making operations including the recently announced closure of a corrugated facility in California in addition to the 8 previously announced closures. In paper, we have already announced approximately 500,000 tons of capacity closure in both containerboard and consumer board grades. These footprint optimizations will be a continuing feature as we develop and grow our business. Turning now to EMEA and APAC. Our adjusted EBITDA margin of 14.8% is highly creditable given the environment that exists in the European sphere. We believe it clearly demonstrates the power of the integrated model, which is producing this resilient margin in an environment of paper overcapacity. Our mills continue to run optimally, while at the same time, our converting business are capitalizing on their outstanding leadership position in innovation. We believe this, combined with our insights into sustainability and the significant pending regulations from the European Union should give our customers confidence to help them in navigating this environment. In our LatAm business, with an excellent EBITDA margin of over 21% due to our strong market position principally -- these are principally in Brazil and our Central Cluster. Our sequential margin showed a small fall in the last quarter as a result of some operational issues in one of our larger mills in our Central Cluster, which is now being resolved. The region still has significant growth opportunities for us to develop in the years ahead. Turning now to the group and regional highlights. What I'm very happy with is the initial potential of the combination as evident in our cash flow performance in the quarter, with operating cash delivered USD 1.1 billion and an adjusted free cash flow of approximately USD 850 million -- USD 580 million. One of the things that especially pleases me about this number is that we're really only starting to get going on working capital optimization as we continue to focus on operating excellence. I'm also very happy to have the people in the new Smurfit Westrock have come together and adapted to the culture of the company and its values of loyalty, integrity and respect and safety adoption by everyone in the workplace. The group has also been working effectively on the synergy program, which Ken will speak on further, which is exceeding our expectations, especially when one looks at the commercial improvements that we can see across the businesses. Finally, in the group, not only in North America, but also in Latin America and Europe, we continue to optimize our asset base with the recent closure of a facility in Brazil and the transfer of equipment to other operating units, together with constant trimming of our assets in our European sphere. In terms of the regions, as I've mentioned, we continue to make excellent progress across our North American system. For example, in corrugated, our loss-making units have declined by almost 50% in a 1-year period with today, over 70% of our corrugated operations solidly profitable. And we expect significantly more progress to occur as we replace and swap out uneconomical volume. In our consumer business, this business is very well positioned with substantial investments and restructuring already done. With strong positions in SBS and CUK, we're actively working to transfer customers from CRB to these grades and have already switched about $100 million worth of business. We do, however, believe in offering all 3 substrates to our customer mix. Our first Global Innovation Summit was held in Virginia in September. And the rollout of our Experience Centers in our North American region, while in its infancy, is now happening. In EMEA and APAC, our integrated model is really proving the success of our business. Our mills are well utilized, and our outstanding position and innovative offering is retaining and developing customers. One of the great opportunities for us has been the effective integration of our consumer operations into our European business. We have a vastly greater customer base to introduce to our consumer operations into Europe, and moving these businesses back to local sales and manufacturing accountability has already started to see some significant benefits. And finally, during the quarter, the rationalization of 2 of our German converting plants has been agreed. This will significantly strengthen our leading German position as we await the inevitable upturn. Turning to Latin America. I'm increasingly excited about our Brazilian operations. The legacy Smurfit and legacy Westrock businesses are a perfect fit with one concentrated on recycled containerboard and the other on virgin kraftliner. Our converting businesses have quickly adopted our value over volume focus, which is already showing significant improvements. In our Colombian business, we experienced significant growth of 8% due to our commercial offering and the market developing as a growing exporter of fruits and vegetables. Across the region, we're capitalizing on many of the growth and development opportunities we have. For example, in Chile and Peru, where our volumes grew by 15% and 25%, respectively, during the third quarter. I'd like to give you a sense of the excitement that exists and is building in -- within Smurfit Westrock company today. We're a stronger and better company through the adoption of the owner-operator model. Everyone across our world is now responsible for their own P&Ls. This has unleashed a tremendous enthusiasm and internal competition to do better and lends itself perfectly into having a performance-led culture where everybody is responsible for what they do. I'm especially pleased that we have now initiated global and regional leadership programs, whereby over 300 managers will have started our group programs. In Smurfit Westrock, people are at the heart of everything we do, and we ensure that they have the tools to succeed in their job and to realize their potential. And our synergy programs and optimize asset base, together with our innovation offering and transfer of best practice will, we believe, contribute to superior performance in the future. I'll now hand you over to Ken, who will take you through the financials. Ken Bowles: Thank you, Tony. Good morning, everyone, and thank you again for taking the time to join us. On Slide 8, you'll see the business again delivered another strong performance in the third quarter, with net sales of $8 billion, adjusted EBITDA in line with our stated guidance of $1.3 billion, a very solid adjusted EBITDA margin for the group of over 16% and a strong adjusted free cash flow of $579 million. The performance reflects the strength and resilience provided by a diversified geographic footprint and product portfolio, particularly in the challenging macroeconomic environment, and of course, the commitment and dedication of our people to delivering for all our customers. Turning now to the reported performance of our 3 segments. And starting with North America, where our operations delivered net sales of $4.7 billion, adjusted EBITDA of $810 million and adjusted EBITDA margin of 17.2%, an excellent outcome. In the region, we saw continued margin improvement, predominantly due to higher selling prices, our operating model in action and the benefits of our synergy program, alongside input cost relief on recovered fiber, which combined to more than offset lower volumes and headwinds and items such as energy, labor and mill downtime. Corrugated box pricing was higher compared to the prior year, while box volumes were 7.5% lower on an absolute basis and an 8.7% on a same-day basis. An outcome very much in line with our ongoing value over volume strategy, which we estimate accounts for about 2/3 of that volume performance. Third-party paper sales were 1% lower, while consumer packaging shipments were down 5.8%. With shipments in our smaller Mexican operations being lower than our U.S. business, which saw volumes down 3.7%. Our differentiated, innovative and sustainable approach to packaging continues to resonate with customers, which, coupled with the empowerment of our people to drop uneconomic business and the implementation of our owner-operator model is driving continuous business improvement across the region. Looking now at EMEA and APAC segment, where we delivered net sales of $2.8 billion, adjusted EBITDA of $419 million and adjusted EBITDA margin of 14.8%. Despite the challenging market backdrop, our operations remained resilient with adjusted EBITDA moderately ahead of the prior year. This performance reflects the skill of our local teams in managing a highly volatile cost environment and underscores the effectiveness of our integrated operating model, where we have consistently delivered an operating rate in our containerboard mills in the mid-90s. Higher corrugated box prices year-on-year alongside lower recovered fiber costs and a net currency translation benefit were partly offset by headwinds on energy and labor and lower third-party paper prices, while corrugated box volumes remained flat on both an absolute and same-day basis. We believe we are the market leader in Europe with strong market positions and a proven operating model, supported by our best-in-class asset base, which allows our people to continue to deliver high-quality sustainable packaging solutions for all our customers. This position is supported by our approach to innovation, where we have a large data set and bespoke applications that place the customer at the center of that conversation. Our LatAm segment again remained very strong in the quarter with net sales of $0.5 billion, adjusted EBITDA of $116 million and adjusted EBITDA margin of over 21%. Corrugated box volumes were flat year-on-year or 1% higher on a same-day basis, with the demand picture in the region showing a marked improvement with strong demand growth in Argentina, Colombia and Chile, amongst others. All while our value over volume strategy continues to deliver strong results in Brazil as we have now largely phased out unprofitable legacy contracts with volumes, with volumes there moving into a more neutral position. The region successfully implemented pricing initiatives to offset higher operating costs [ and delivered ] another consistently strong performance with a small step down in EBITDA margin year-on-year due to a now resolved issue in one of our operations during the quarter. As the only pan-regional player, we believe that Latin America continues to be a region of high-growth potential for Smurfit Westrock, both organic and inorganic, and one where we are well positioned to drive long-term success. Slide 10 outlines our proven capital allocation framework. I don't propose to go through each of these [ frameworks ] today, but I would note that in February, we plan to provide detail on how we see capital allocation underpinning the achievement of our long-term business goals. What is new is that our CapEx target for 2026 will be between $2.4 billion and $2.5 billion, broadly in line with the current year. We continue to invest ahead of depreciation and so this level remains accretive to earnings as we invest behind identified growth, efficiency, sustainability and cost takeout opportunities. The core tenet of our capital allocation framework is that it must be flexible and agile. This was our approach at Smurfit Kappa and continues to be our approach at Smurfit Westrock. It is a proven track record of delivery, and we are already seeing the benefits of it since forming Smurfit Westrock a little over a year ago. Our approach to allocating capital is disciplined and rigorous and requires that all internal projects are benchmarked against all of the capital allocation alternatives and is, therefore, always returns focused. On our synergy program, I'm pleased to confirm we are delivering as planned and on track to deliver $400 million of full run rate savings exiting this year. And finally for me, as noted in the release, the year-to-date has been characterized by a challenging demand backdrop, and as a result, we expect to take additional economic downtime in the fourth quarter to optimize our system. If you recall, we set out our guidance for the year in April. And given the impact from the above, we are now marginally adjusting that guidance range to where we now expect to deliver full year adjusted EBITDA of between $4.9 billion to $5.1 billion. And with that, I'll pass you back to Tony for some concluding remarks. Anthony P. J. Smurfit: Thank you, Ken. I hope you get a sense from my earlier commentary and Ken's performance summary that we believe that Smurfit Westrock is very well positioned for continued performance as well and the economic growth as it revives, I would say the company has never been in better position. Throughout the company, all of the people that are aligned with this approach, and we can already see the tangible benefits of this as many loss-making operations move into profit and thankfully, with much more to come. Reflecting the generally well-invested asset base, our capital spend for full year '26 is expected to be in a $2.4 billion to $2.5 billion range. We believe this level enables us to accelerate cost takeout, increase operating efficiency and capitalize in high-growth areas. In parallel, we recently announced restructuring initiatives, which also allow us to continue to optimize our asset base. As a more general point, our philosophy has generally been to buy and not build. As we have typically acquired at a fraction of the replacement cost is invariably cheaper with an enhanced returns profile. On acquisition, our objective is always to optimize through measured capital allocation decisions. We will discuss this further in February, and Ken has already touched on this. The delivery of our synergy program, together with our ongoing capacity rationalization remains a constant focus. With a significant headcount reduction of over 4,500 people and an unrelenting focus on the owner-operator model, we believe our performance to date is an indication of our potential. We remain confident that our footprint remains unrivaled with strong and leading market positions in the majority of the markets and grades of paper in which we operate. There is no question in our minds that since Smurfit Kappa and Westrock combined, we are building a stronger and better business with management aligned with shareholders and developing our performance-led culture. Over the last 16 months, we have taken significant steps to build this better business, and we are increasingly confident in the future prospects. While for sure, the current economic outlook is somewhat muted, our view is that the steps we are taking, investments we're making, the alignment we have with shareholders and the culture we're building within Smurfit Westrock positions us to go from strength to strength as economies improve. We end full year '25 and enter '26 as a better and stronger Smurfit Westrock. To that end, in February '26, we will be setting out our longer-term targets, which are a bottom-up approach from all of our businesses, which will be designated to identify prospects for this company as we look forward into the future. So thank you for your attention, and I look forward to taking any questions that you may have. Thank you, operator. Over to you. Operator: We will now go ahead with the first question. This is from Mike Roxland of Truist Securities. Michael Roxland: Congrats on all of the progress. Tony, you mentioned obviously, weakness in the European market from both demand and price, is there anything you could do to expedite cost takeout? You mentioned, obviously, continuing to trim assets in Europe, rationalizing the 2 German plants. But given the weakness that persists there right now, can you expedite cost takeout to try to get things rightsized faster? Anthony P. J. Smurfit: Yes. I think -- Mike, thanks for the question. I would say that we have done a really good job over 15 years of optimizing our capacity in Europe. Obviously, there's always little things to be done, but we're running our system pretty well full in Europe with the exception of August and probably December, where we'll take some downtime because those months typically are months where the corrugated box plants close for holidays. So our system is pretty well optimized. Obviously, we continue to look at it. We're basically a low-cost producer in the European market. And when you look at our returns and you look at some of the other competitors' returns that have been publicly available. And obviously, we get a sense of how some of the private guys are doing. We're far exceeding the returns in Europe. And -- so unfortunately, it is a question you've already seen a number of mill closures around the place. I think we're going to see more, and I think that the pain is very, very real, and you can see even some public companies with negative EBITDA margins in the containerboard business in a very significant way. So I think the old saying, the worse it gets, the better it will get, well, it's pretty bad right now. And I think when it turns, it will turn very sharply. And so that's what we are waiting for. Obviously, as I said, that doesn't mean we're sitting on our hands doing nothing. We're continuing to close a few facilities here and there, not very big ones, but we've done a number of stuff. And we have a very, very active cost takeout program across all of the business to mitigate all of the wage inflation that we've had over the last number of years. But -- so cost reduction programs do not stop. They're continual, and we continue to look at our asset base and will trim if necessary. Michael Roxland: Got it. And then just 2 quick follow-ups. Any color you can provide in terms of how demand trended in both North America and Europe in September and what you've seen thus far in October and any outlook for November? And then just quickly on consumer because it was interesting, you mentioned transferring $100 million of CRB business to SBS and CUK. Can you just help us frame the logic behind those moves? Is it just a matter of wanting to run SBS more efficiently at a higher rate? And is there any margin uplift associated with that shift? Anthony P. J. Smurfit: Yes. Taking your second question first. I mean, basically, as the SBS price has trended downwards. Because SBS, you can run with a stiffer sheet and you can use a lower grammage, it's basically become competitive with CRB. And there are positive qualities to SBS versus CRB in the sense of brightness and transportation costs, so -- and runnability on printing machines. So I'm not saying that CRB is all bad. It's not. There are certain customers that will really want CRB. There are certain customers that really want SBS, and there are certain customers who want CUK. And clearly, where the positioning is right now, it's just advantageous for our customers to look at SBS and so we've taken that opportunity as well as some of the CRB issues where, again, you've got some opportunities to -- especially in the freezer for frozen products to move into CUK, which is something we're actively promoting. And I think, as I said, we've $100 million or so already transferred in the last 4, 5 months, and I think more to come. On the first question, Mike, just remind me what was it? Michael Roxland: Demand trends. Anthony P. J. Smurfit: Demand trends. I don't -- I could say that we were expecting to see an uptick in October, and we did not see it. Now you have to remember, Mike, one of the things that has happened is that we took on, as in legacy WestRock took on business in the latter half and first half of last year that we were running in the second half of last year. And a lot of that business that was taken on was not necessarily very economic for us. So we have been addressing that during the first half of this year. And inevitably, that's when we tend to see that exiting again. Some of it will come back as we are a good supplier. We're very reliable and high quality and high service supplier. So we expect some of it to return at prices as we've seen already in Brazil, for example. We expect some of it to return at a certain point in the future at the prices that make it economic for us. And if it doesn't, well, so be it, we'll go out and get some other business. But when you lose big chunks of business, Mike, it tends to go and get 10 chunks of smaller business, it tends to take you a little bit longer, and that's what we're seeing. But we have a huge pipeline of business in our system. We won't land at all. But certainly, our people are very comfortable and confident that we're going to get it. And as I said in my script, we're already seeing some very significant customer wins in high-quality names at levels that are going to be good for us to run that. Operator: Next question is from Phil Ng from Jefferies. Philip Ng: So Tony, you mentioned you're going to be taking some economic downtime in the fourth quarter. Curious what markets, is this North America? Is this Europe? How should we quantify the EBITDA impact? And appreciating you're walking away from -- you're taking a value-over-volume approach. But as we kind of think about how that translates, how should we think about that spread of your volumes versus the market overall, call it, the next 12 months? Anthony P. J. Smurfit: Yes. With regard to -- I'll let Ken take the downtime question. But with regard to -- we're sort of figuring out that -- we believe that the market is down somewhere around 3% or 4%, and we're probably down -- 5% of our loss of volume is due to our own decision making. That's the sort of number that we -- it's not going to be 100% accurate in that. It could be 3%. It could be 4% market down, but you saw one of our larger peers was down 3% in the quarter, and one would have said that they're probably winning some business in the marketplace. So therefore, taking that as a trend then I would say that the market is probably down a little bit more than that 3%. Ken Bowles: Yes. Philip, I think to take the second part of that question first, I think the simplest way to quantify the EBITDA impact is broadly, if you think about where our guidance was, [ where we're bringing to, ] call it, somewhere between $60 million to $70 million is the incremental impact of downtime in the fourth quarter versus what we previously would have said. I think, look, if we think about operating it in Europe and us in the mid-90s, unlikely to see any material -- for the remainder of the year, any material incremental downtime in Europe. So predominantly, it's going to be across the North American region because Latin America, we don't really see any downtime there either. Philip Ng: Ken, do you expect your inventory to be in a pretty good spot as you exit this year in North America? Ken Bowles: It's getting there, Philip. It's -- supply chains in North America is different than Europe in the sense that they're very, very long. So it takes a while to kind of get back to what you might like as kind of optimal inventory. The working capital as a percentage of sales for the group is probably around 16%, which is kind of higher than we'd like it to be. At Smurfit Kappa, we were down in kind of 8% and 9%. Don't expect us to get there over time, but certainly, somewhere in the middle there that the right answer is. You have to remember, as a third-party seller, Westrock over the years had grown into a number of different grades and a number of different widths of paper. So part of the optimization here is kind of bringing it back to not quite Henry Ford. We're getting it back to a place where it's a reasonable set of grades and flute sizes and widths that we feel are optimal for not only the paper system, but the corrugated system and a need for our customers. So it's all part of -- it all really comes back to helping our customers understand what their boxes need rather than just supplying what they think they might want. So I don't think we'll exit this year in perfect shape, Philip, but I think as we kind of move through '26, it gets incrementally better as we kind of understand the supply chains a bit better and rationalize kind of external board grades. Anthony P. J. Smurfit: Philip, if I can just add on to that, I'm really very excited about as we optimize our supply chain system and work through our board grade combinations that together with the corrugated businesses in our system, that this is going to present a big opportunity for us. But it needs careful thought and planning because as Ken has just rightly said, the distances in America are very big, and we've got to make sure that we get that right, but there's a lot of opportunity there for us to reduce stock. Philip Ng: Got it. And sorry, one last one for me. Tony, I thought your comment about pivoting some of your CRB and CUK business to SBS was fascinating. That sounds like a pretty attractive value prop for your customers. You gave us the CapEx guidance for '26 as well. Embedded in that, is there any mill conversions that you're possibly thinking in SBS? Or you feel pretty good about some of the opportunities you see in front of you on the SBS side, you're going to largely keep your footprint intact at this point? Anthony P. J. Smurfit: If you -- if I could just ask you to hold off until February for that because we'll give you a full answer then because clearly, we're working through some different strategies in relation to that, and then we'll give you a better -- once we've organized that, we'll tell you about that. But basically, we have some very, very good assets that we will continue to look at. And obviously, there's some that we will continue to evaluate and give you a better answer to those in February. Operator: Next question is from Gabe Hajde from Wells Fargo Securities. Gabe Hajde: I wanted to ask about the guidance, the CapEx guidance for '26 and maybe a little bit differently. I'm just curious if the organization for the year, if there's anything strategically that you guys are focused more on cash flow for 2026 versus EBITDA. Sometimes that drives different operating behavior. I'll just stop there. Ken Bowles: Gabe, no, not necessarily. I think it's more a case of the reality is that Smurfit Westrock should be -- and if you look at this quarter, particularly, a strong free cash flow generator irrespective of the CapEx cycle. I think what we've always done, though, is be very disciplined about when we place capital into the system and indeed adopting a kind of portfolio approach where you don't have, a, too many big programs in any particular year, any big systems that are taking all the impact in a particular year and no region that kind of has that impact. But I think it's fair to say that when we went through the cycle this year and to Tony's earlier point to Phil, building towards February, when we look at the capital requirements for '26, the reality is that all we feel we need to keep the system going and improving and growing is somewhere between $2.4 billion and $2.5 billion. And that ultimately means that we don't end up with any kind of big build for CapEx going into '27 , for example. But it's a normal phased approach. So no, there's never a case of trying to, if you like, try and get to a free cash flow number at the expense of EBITDA, that never is. I think it actually becomes more of a virtuous circle, which is you place capital into the system, we expect the returns out which should drive return on capital employed in one sense and also drive EBITDA. And then that capital goes back into the system. I sort of -- I look backwards, look forward a little bit here, Gabe, in the sense that as Smurfit Kappa, we place extra capital in the system, increase ROCE, increase the dividend, delevered and grew. So I think it's a model, if you like, from an owner-operator perspective and a philosophical perspective, that's worked in the past. So no, it's not that we take that kind of that choice. It's actually that's the capital we think the business needs to kind of drive and grow. Anthony P. J. Smurfit: Yes. And I'll just add to that, Gabe, that the whole philosophy of our company is to remain agile, as Ken as said, we adapt to the situation that's around us. And one of the key tenets of our business is never to overinvest and have too much investment going forward that we can't back out of, so to speak, so that we're in a position to be able to flex if we need to because that's what really hurts companies, if you can't pivot depending on the environment, either positively or negatively. And so that's been the hallmark of the success of Smurfit Group, Smurfit Kappa and now hopefully in the future, Smurfit Westrock. Gabe Hajde: I wanted to switch gears to Europe. You guys provided a little bit of color as to the -- I know the number kind of jumps off the page where you're underperforming the market. But over in Europe, I think up a little bit, 0.2% is pretty impressive. You talked about the mills running mid-90s. Can you provide a little bit of color in the markets whether it's geographic or end-use markets where you guys are doing particularly well? And then I guess, maybe a little bit on the margin side. Obviously, prices kind of came up quite a bit in the spring and early summer and have come down, basically kind of given back a lot of that. How should we think about that flowing through? Is that hitting Q4? Or is that really more of an H1 '26 event? Anthony P. J. Smurfit: Just on the markets, in general, I would say that the -- there's no real change to what we've said previously that Germany continues to be a laggard, some of the other markets in the U.K. The Benelux tend to be basically flat with some positive movements in Eastern Europe and in Iberian Peninsula, which is growing strongly. So in general, there's no real change into how the markets are operating. We sometimes flatter to deceive in Germany where things get really good for a couple of weeks and then go back to the norm. So I think we haven't seen any material positivity in the German market yet. But inevitably, that will happen. And as I mentioned in my script, we're about to close 2 facilities with improved facilities in the incoming plants that are receiving capital. So when Germany does turn around, we'll be even better positioned than we were before to take advantage of that. With regard to... Ken Bowles: On pricing, actually, third quarter in Europe, we saw prices tick up by about another 0.5%. So not quite done there yet on pricing. I suppose, ultimately, without a crystal ball and forecasting, I think where pricing goes from here depends on -- really depends on the same question we've had all day, which is where does demand go. Because ultimately that will feed into what happens with paper prices. But irrespective of that, it's very much a kind of second quarter, third quarter question on '26 anyway based on where we sit now. But I think it's fair to say that both regions have done really well in terms of pricing given the backdrop, I think particularly Europe in terms of price increases received and held, if you like, even through the third quarter. But I think it's demand dependent really in terms of where it goes from here. Anthony P. J. Smurfit: I think as well, Gabe, if you look at where the paper price is at the moment, it's uneconomic for at least 75% of the business, I would say. And I think that we're lucky that we're very integrated. We've got our own customer. Our paper mills have our own customer, which is ourselves. And we're able to run basically full, but most of the others, demand is relatively weak. And unless you're in the top quartile, you're not making any cash at this moment in time. And I would say you've seen that from the results of a number of players in the marketplace. And inevitably, that will change. The question is, is it first quarter? Is it second quarter? Is it third quarter? And how much hurt will be in the market before then? Operator: Next question is from George Staphos from Bank of America Securities. George Staphos: Congratulations on the progress. Tony and Ken, I guess, I have 2 questions for you. First of all, regarding the North American converting operations in corrugated. I think you had mentioned that 70% of the business now is at -- and I forget exactly how you termed it, but better or acceptably profitable levels. If you could talk a bit more about what that means, recognizing that the margin in North America is maybe one of the proof points there. Can you help us quantify how you're determining the 70%, if that's the right ratio? And what else needs to occur to move the ball further, recognize you made a lot of performance already -- progress already? Secondly, on the boxboard side, you made a couple of interesting comments about ultimately, in essence, the customer is going to choose a substrate that makes most sense. Each of them, whether it's CUK, SBS, CRB has -- have their own unique aspects. The fact that you're being able to move the SBS to a customer, when in theory, they would have already been in a grade that -- using your discussion point, they already would have liked to have been in, i.e., CRB. What's causing the move to SBS? Is it just purely where price is right now? Or what else are you reminding people of in terms of SBS' performance versus the other grades? Anthony P. J. Smurfit: Okay. Let me take the second one first, and I'll come back to the North American corrugated. Basically, on the 2, we've seen the SBS piece is more about brightness. There's a brighter sheet. Caliper, you can get the same performance from a slightly lower caliper. And then I would say, printability, stroke, machine efficiency on the customers' lines, which -- the 3 reasons why we've been able to sell SBS versus CRB. Of course, there will be some customers, George, as I said in my thing that will want CRB because it's a fully recycled sheet. And that's fine, too and -- if people want that. But we are selling SBS, and it's competitive with where SBS price has gone. It's basically competitive now with CRB. And so therefore, we're comfortable to sell it to customers, and we make good money at it at these current prices because, as I say, the caliper is lower. And we have basically our 2 SBS mills in the United States, are very good mills in Demopolis and Covington. So -- and then the CUK has got some unique properties for the freezer and strength for the freezer and again, a caliper issue that can help make it competitive against the CRB sheet. So -- but that's -- again, some customers will prefer CRB and we can offer them that too. So what we've been doing is because, obviously, we have got very, very good SBS mills and very good CUK mills that were -- we would offer them that. And as you know, we've closed the CRB mill. So we have open capacity to be able to sell SBS versus CRB. And that's been a big positive win for us, George, as we look forward, and it's going to be something that's going to continue, I would say. With regard to our North American corrugated business, I mean, I think this is where you really see the owner-operator model in action. We have empowered our people to basically act locally, get involved in local markets again, think about their local customers and to think about profitability. And a lot of business was taken on in legacy Westrock under the basis of a combined profitability. That is not the way we think. We think that's the road to [ predation, ] that's road to death in our business where you have 2 sets of capital needs and 1 profitability. And that's the way that we have, I suppose, continued to survive in Smurfit -- legacy Smurfit, legacy Smurfit Kappa is that we treat capital as a very important thing. And if you want to make a capital investment, you better be able to justify it. And if you got 2 operations with 1 profit that masks where you're making the money, then you're not making the right capital decisions. So what we've done is we've spent the first 6 months of our tenure as a combination, making sure that the P&Ls were done correctly, that the balance sheets of each plant were put into the right order. And then we've told our managers, this is -- you're now profitable for -- you're now responsible for your profitability. And of course, when you tell them that and they see customers with negative 30% or 40% margins based upon a fair paper price transfer, they're going to do something about it, and we expect them to do something about it. And if they don't do something about it, they won't be with us, frankly. So the reality is we are actively moving both at a national level and at a local level to make sure that accounts where you've got terrible margins are not run on our expensive valuable beautiful machines in our converting plants. And that's a process that's ongoing. It's one of the reasons why, as I mentioned to an earlier question, a lot of business was taken on prior to us coming on board, which was not economic, frankly. And we've had to address that, and that's gone away again. And sometimes it's gone back to the same homes it came from, which is quite -- kind of interesting. But so that's how we've -- pardon me. George Staphos: No, please go ahead, sorry. Anthony P. J. Smurfit: Sorry, George. So that's how we've moved very quickly from people understanding their profitability to changing a lot of the plants. So we've gone from -- we've cut our loss makers by 50%. And as we continue to address this, and there will be some plants that will make it. But inevitably, I'd say the vast majority will get to profitability in the next couple of years. George Staphos: Tony, just a quickie and feel free to punt to February, if you'd like. On boxboard, recognizing it's not the majority of your business, clearly. If there's some rollback in tariffs, how might that change your overall view of the attractiveness of SBS? Has -- said differently, has one of the things that's changed in the calculation, your ability to move more SBS been the fact that maybe some of the folding boxboard that was coming to the market has been, I wouldn't say, tariffed out, but certainly has more cost coming into the market. How should we think about that? Anthony P. J. Smurfit: Thank you. I don't think tariff really comes into our thinking here. I think Obviously, the price comes into our thinking because the price of SBS has come down a bit. So therefore, it's more competitive as a grade versus other substrates. And obviously, FBB against SBS with the tariff is making it more challenging. But I still think that the FBB is going to be sold in the United States irrespective because the price -- there's a lot of capacity in FBB specifically in Europe, and they're going to come anyway, I think, to the U.S. with all the added costs that's with it. So I think it's up to us to sell SBS. I think one of the things that for everyone here to understand that SBS is a myriad of different grades. I mean you've got cup stock, you've got plate stock, you've got lottery cards, you've got cereal boxes, you've got freezer box. There like -- there's very, very many different grades of SBS that are sold at different price points, that are sold at different quantities to different customers. And so our hope and belief is that we can continue to develop newer grades into SBS that will allow us to earn a material return going forward. And there's no evidence to say that, that should be otherwise. We've been getting new customers in lottery cards, for example, which is -- it's only 15,000, 20,000 tonnes, but every little bit helps, as they say, over here. And these are good grades of highly profitable business for us to develop in the years ahead. Operator: Next question is from Charlie Muir-Sands from BNP Paribas Exane. Charlie Muir-Sands: Just a couple, please. Firstly, on the revised guidance, it obviously implies a fairly wide range of potential outcomes on Q4. Just wondered if you could elaborate on the main outstanding uncertainties for the range. And then previously, you've been sort of talking about beyond the operational synergies, the $400 million, you talked about at least another $400 million of opportunities. I just wondered if you had any kind of updates on that. And then finally, you mentioned that one-off operational issue in Latin America. I just wondered if you could quantify that given it was relevant enough to call out again. Ken Bowles: Charlie, I'll take those. Start with the last one first. It was a kind of a continuous digester issue in [Technical Difficulty] in Colombia, which probably cost about $10 million in the quarter, but it's $6 million now. So that's the big impact there. In terms of the guidance range, it really, I think the more it has on the years gone past, December tends to be the swing factor here in terms of why we've kept a slightly -- and I wouldn't say the range is wider. I think we just moved down the midpoint a bit to take account of the downtime piece. But really, it's going to come down to where you see December -- sorry, where we see December. And as kind of Tony alluded earlier on, as we're kind of exiting into the quarter, we're not necessarily seeing a much improved demand backdrop. But equally, in our natural sense, we haven't given up hope and a sense of optimism that things won't get better even before the end of the year. So I don't think we can be that negative on the outlook. So really, it's around where does December sit in that conversation. In terms of the bit in the middle, I think George actually pointed to part of this answer in his question, which is when you look at the margin performance in North America, given everything that they've been dealing with in terms of where volume is, the incremental downtime, the headwinds, the performance of the margin in North America probably tells you that a chunk of that additional operational commercial improvement is coming through in the numbers already. Where that goes to, that's the kind of how long is the piece of string to kind of answer because look, it really depends on how many programs we can get at. It sort of goes back to Tony's point earlier on about the owner-operator model and really putting empowerment in the hands of every single GM or mill manager to drive their own business for the best returns, their cost takeout, their improvement programs, their delivery on CapEx. So yes, we're still, I mean, very comfortable, if not more comfortable with the well in excess of where the synergies ended. But I think it's fair to say we are beginning -- without being able to quantify it exactly, we are beginning to see the benefits of that coming through simply in the margin performance in North America alone and particularly in the corrugated division. Charlie Muir-Sands: Great. And you've obviously given us the 2026 CapEx and elaborated on the rationale for it qualitatively. But just in terms of the returns that you're targeting beyond maintenance or onetime depreciation, what kind of thresholds are you typically setting for the investments you want to make in the business? Ken Bowles: As a blend, Charlie, look, it won't be any different than we've had before. It sort of goes back to that portfolio approach of trying to drive the incremental return and return on capital forward. So generally, no more than the old system, we would expect that entire portfolio to kind of be in that sort of 20% IRR range, delivering kind of mid-teens, at least in terms of where ROCE sits as a result. That is, of course, dependent on what those projects do, particularly cost takeout. You're obviously going to get higher returns from sustainability, energy back-end projects. You might get lower returns in the early years, but history has shown us that as those projects embed and move forward, you have much better returns as they move out. So not pinning it necessary to a target return in individual projects. But as a portfolio, it has to drive forward in terms of where ROCE is because ultimately, that goes back to my comment earlier on, this is about capital in and cash flow out. So not a dissimilar profile to what we would see -- you would have seen previously in terms of how we characterize the deployment of capital and allocating capital in a kind of Smurfit context. Operator: The next question is from Lewis Roxburgh from Goodbody. Lewis Roxburgh: Just my first question is on cost. You mentioned in the last quarter, you expected some relief on OCC pricing. So I just wondered to see if that was playing out as expected and if you're getting any other relief from the other buckets like energy or that might just spill into next year? And then just in terms of CapEx, I just wondered some more detail how much of that spend might be related to the legacy Westrock assets versus other projects as well and whether this is sort of the new normal or further increases might be needed to tie into those realization synergies? Anthony P. J. Smurfit: I'll take the second piece, Lewis, and then I'll let Ken take the first piece. Basically, the CapEx number is slightly skewed towards the legacy Westrock assets because we are a very well-invested base in Europe and Latin America. So what we're doing is we're putting a little bit more capital into some of the box plants to improve the quality and service aspects to improve the corrugators. So all the things that we have done over the last 10 years in Smurfit Kappa, we're now implementing over the course of years, not just next year but the years going forward to continue to improve the legacy Westrock business and make it better -- even better than it is. So there's a slight skewing towards legacy Westrock, but not massively material because, as I say, we're in very good shape. In Europe, we invested for growth, and we've got very good assets in our European business. And while there's always growth opportunities like in Spain, like in Eastern Europe and specifically plant by plant. I think that as a whole, the European business is very well invested. And what we'll do over the next 3 to 5 years is continue to develop out our Westrock asset base -- legacy Westrock asset base. Ken Bowles: Lewis, I'll just take some of the bigger cost buckets and just -- alongside fiber because it's probably useful to kind of round some of them out for yourself and your colleagues. In terms of fiber, I think at the half year, we probably said that, that was going to be a tailwind of about [ 100. ] We probably see that in the about -- as you sit here today, somewhere between 130, 140 of a tailwind. Energy, I think at the half year, we might have said about 250 of a headwind. Probably coming in now, we probably see that about the 180 space. Labor, similarly, we probably thought about 200, probably down around the kind of 180 space as well now. Downtime is probably going the other way in that, in a sense where we would have thought downtime was probably going to be 150. It's probably anywhere between 180 and 200 at this space given what we now see for the fourth quarter. So they are really the big cost buckets in terms of the incremental changes that we would have said Q2 versus where we see the year panning out. Operator: Next question is from Anthony Pettinari from Citi. Anthony Pettinari: On the full year EBITDA bridge, maybe Ken, just filling in on the pricing side. Can you give us an update on where you maybe thought pricing would shake out midyear versus where you are and where you might end up with the full year guide? Ken Bowles: Yes. I think it's pricing broadly, we would have thought to plug that in there. I think we probably see pricing coming out somewhere between, call it, 830, 840 versus where it would have been about 900 at the half year. So a small call off probably because of the fourth quarter and where demand is going, maybe a little bit of price weakness there, but not materially down versus what we would have thought. Anthony Pettinari: And would that -- would North America be 700 or 750? Or -- between North American and Europe, how would that breakdown? Ken Bowles: I'll defer that, to read the segmental bridge [ to you guys when ] you get into the trenches with them later on. I think if that's okay, I just have to [ take them ] with me here. Anthony Pettinari: Yes, no problem, no problem. And I guess maybe just one follow-up. You mentioned energy projects, and I mean from other industrial companies and paper companies, we've heard a lot about cost inflation and particularly electricity with demand from AI and data centers. Can you just give us kind of a quick recap of where you are with kind of current energy projects, especially in North America and not to steal any thunder from February, but just how you think about the opportunity in energy at your mills going forward? Ken Bowles: [ Well, where do we start? ] Anthony P. J. Smurfit: Well, we just approved a large energy project in our Covington mill, which will actually move away from coal to natural gas. And that's going to be the IRR on that is depending on where you think the price of the commodity is a minimum of 20% and a maximum of 80% -- sorry, not even a maximum. It's not the maximum is not capped, but realistically, a 50% return for the mill. So I guess what we will be doing, Anthony, is just taking every energy project as it comes and what kind of return we can get on it. Specifically, the only one that we've approved since we've come in is that one. We use gas primarily in most of our facilities. We do a little bit of coal where we have to, and obviously, in other places where we can remove it, we will be. We have a large biomass project in Colombia, which is going to be coming on stream next year, biomass boiler, which is a considerable saving for us in energy. So we're -- we continue to look at energy projects. But with regard to how these AI data centers are affecting us, I haven't heard that they're driving any major cost increases for our mill systems where our mill systems are located. Ken Bowles: I think kraft systems by their nature tend to be fairly well served from a power plant, back-end perspective anyway in that sense. And so not necessarily totally insulated, but generally CO2 positive. But great source of their own energy from a kind of a turbine perspective. In addition to what Tony said, we have a kind of progressive program. We electrified some boilers in Europe over the years. We continue to invest towards the reduction in CO2. I mean, the added benefit from the project Tony talked about there in Covington is it reduces our group CO2 by 1.2%. So very important, if you like, as you look forward to where our customers need to be on scope through emissions and things like that. So there's always benefits above and beyond the pure EBITDA benefit we find to energy projects, and it sort of goes back to what we're trying to get to in terms of low-cost producer and where those mill sits, which allows us to kind of be at the forefront of where we do that. So generally, it's always going to be a progression towards either less reliance on some fossils and something else and more sustainable renewable fuels. But the system in and of itself is fairly well set as we start off. Operator: And the last question today is from Mark Weintraub from Seaport Research Partners. Mark Weintraub: A few quick follow-ups. First off, so with other box shipments in North America, do you have a sense as to when you think you might be inflecting more positively versus the industry? How long is the process of sort of the shedding underappreciated business likely going to persist? Anthony P. J. Smurfit: Maybe overappreciated business. We've given them boxes for nothing, Mark. So yes, I would say that -- I would hope that from the third quarter on next year, you'll start to see some positive movements. We're still -- we still have some businesses that are very poor piece of business that are under contract that will run out during the first and second quarter of next year. And then obviously, we'll have to go out and replace those or we'll retain them. We'll see how the customer reacts to our discussions with them at that time. But if I look at the amount of backlog and pipeline that we have for new business, it's colossal in the sense that I feel very comfortable that we're going to start landing a lot of that business. And we already have landed a lot of that business, frankly, but it just takes a little while to qualify and then get into the plant. So -- when I -- so I would say the third quarter of next year, you'll start to see us inflecting versus this year with better quality business in all of our facilities. Mark Weintraub: And then what's your strategy? What have you been doing vis-a-vis outside sales of containerboard in North America into either export or domestic channels? Anthony P. J. Smurfit: Yes. It's -- the export market, as you know, is weak and a lot of the capacity closures that have been announced in the industry have been geared towards the export market, specifically down into the South American market specifically. And so one of the things that I found out is that these people down in these countries have pretty big inventories. And I think we need some time for those inventories to shake out before we see movements in export prices to the positive because the export price is clearly too low for it to be viable for people to survive. We are selling some into the export market, but clearly, we don't want to sell too much into the export market at that price that's there. But I would say it will be like a eureka moment. At some point, things will change, and people will -- the price will move up very sharply in the export market because it's too low at the moment. But all of the capacity that's come out of the market isn't really affecting it at this time because the stock levels of most customers down there are very, very high. Mark Weintraub: And in the domestic channel, I mean, historically, the legacy Westrock business had sold a fair bit to independents, et cetera. Has that continued? Or has there been some change in that regard? Anthony P. J. Smurfit: We do have outside customers, and they're important outside customers, and they're generally long-term outside customers, people that we served for a long period of time, and we continue to do that. And there's been no real change on that as I can see it. Mark Weintraub: Great. And one last quick one, just to squeeze in. So with the SBS from CRB, et cetera, I assume the customers are running that on the same machinery. And so is it pretty easy to switch back and forth between the grades depending on the variables at play? Anthony P. J. Smurfit: Yes. I mean, basically, yes. I mean you might need a technician to run a lower caliper product on the board just to adjust the machine slightly, but there's no real big -- one of the things that we have heard from our customers is that our -- the SBS runs better than the CRB. But I'm sure if you talk to somebody who runs CRB, they're going to say the opposite, but that's what -- that's what our people tell us from the customer. But I'm sure you can get someone else to say exactly the contrary. But I believe that to be the case because it's a cleaner sheet. Operator: Thank you. I will now hand the conference back to Tony for closing comments. Anthony P. J. Smurfit: Thank you very much, operator. I want to thank you all for joining us today. We remain very excited about the future of the Smurfit Westrock business. We're enthused about a lot of the changes that are happening -- that have happened and that are already happening. And we look forward to the future with great enthusiasm. So thank you all for joining us, and I look forward to seeing many of you in the months ahead. Thank you all. Operator: Thank you. This concludes today's conference call. Thank you for participating, and you may now disconnect. Speakers, please stand by.
Operator: Greetings, and welcome to The Chefs' Warehouse Third Quarter 2025 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Alex Aldous, General Counsel, Corporate Secretary, and Chief Government Relations Officer. Please go ahead, sir. Alexandros Aldous: Thank you, operator. Good morning, everyone. With me on today's call are Chris Pappas, Founder, Chairman, and CEO; and Jim Leddy, our CFO. By now, you should have access to our third quarter 2025 earnings press release. It can also be found at www.chefswarehouse.com under the Investor Relations section. Throughout this conference call, we will be presenting non-GAAP financial measures, including, among others, historical and estimated EBITDA and adjusted EBITDA as well as historical adjusted net income, adjusted earnings per share, adjusted operating expenses, adjusted operating expenses as a percentage of net sales and as a percentage of gross profit, net debt, net debt leverage, and free cash flow. These measures are not calculated in accordance with GAAP and may be calculated differently in similarly titled non-GAAP financial measures used by other companies. Quantitative reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measures appear in today's press release and third quarter 2025 earnings presentation. Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements, including statements regarding our estimated financial performance. Such forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Some of these risks are mentioned in today's release. Others are discussed in our annual report on Form 10-K and quarterly reports on Form 10-Q, which are available on the SEC website. Today, we are going to provide a business update and go over our third quarter results in detail. For a portion of our discussion this morning, we will refer to a few slides posted on The Chefs' Warehouse website under Investor Relations section titled Third Quarter 2025 Earnings Presentation. Please note that these slides are disclosed at this time for illustration purposes only. Then we will open up the call for questions. With that I will turn the call over to Chris Pappas. Chris? Christopher Pappas: Thank you, Alex, and thank you all for joining our third quarter 2025 earnings call. Business and demand trends improved sequentially through the third quarter and momentum in demand and market share gains continued into October. Our operating divisions across domestic and international markets delivered strong growth in revenue and gross profit dollars as well as continued progress, increasing relevance with our customer base with strong year-over-year growth in unique item placements. As we head into the busy holiday season, I would like to thank all our Chefs' Warehouse teams from sales and procurement operations to all the supporting functions for their dedication and commitment to delivering our diverse and high-quality product, service in partnership with our suppliers and customers and the communities we serve. As a reminder, earlier in 2025, we eliminated 2 noncore programs in Texas that came with the acquisition of Hardie's in 2023. These programs -- one protein program focused on high-volume, low-dollar poultry, and another produce processing and packaging program -- together only represented approximately 1% of our revenue. As such, until we lap this attrition in the second quarter of 2026, we will present price and volume metrics as reported and also excluding the impact of these changes to present more representative year-over-year price inflation and volume changes for our business overall. With that, please refer to Slide 3 of the presentation. A few highlights from the third quarter include 9.6% growth in net sales. Specialty sales were up 7.7% over prior year, which was driven primarily by unique placement growth of 5.3%, reported specialty case growth of 3.2%, and price inflation. Excluding the elimination of the Texas produce processing and packaging program, specialty case growth was 5.4% versus the prior year quarter. Unique customer growth, 2.6% year-over-year. Reported unique customer growth was impacted by the Texas commodity poultry attrition and the temporary impact of the heightened conflict in the Middle East during the summer months. Despite the temporary summer impact, our Chefs' Middle East business continued to grow and exceed our expectations. Excluding these impacts, third quarter year-over-year unique customer growth was approximately 5.8%. Pounds in center-of-the-plate were approximately 1.1% lower than the prior year third quarter. Excluding the attrition related to the Texas commodity poultry program, center-of-the-plate pounds growth was 9.6% higher than prior year third quarter. Gross profit margins increased approximately 7 basis points. Gross margins in the specialty category increased approximately 59 basis points as compared to the third quarter of 2024, while gross margin in the center-of-the-plate category decreased approximately 49 basis points year-over-year. Jim will provide more detail on gross profit and margins in a few moments. Please refer to Slide 4 for an update on certain of our operating metric improvements. In summary, Chart 1 shows continued improvement in gross profit dollars per route. Third quarter 2025 trailing 12 months was 4% higher versus full year 2024 and 37.8% higher than 2019. Chart 2 shows third quarter 2025 trailing 12-month adjusted EBITDA per employee increased 9% versus full year 2024 and 28% versus 2019. Third quarter 2025 trailing 12-month adjusted operating expense as a percentage of gross profit dollars improvement by 114 basis points versus full year 2024 and 206 basis points versus 2019. Subsequent to the close of our fiscal third quarter on October 1, 2025, we completed the acquisition of Italco Food Products, a small specialty food and ingredient distributor located in Denver, Colorado. We are excited for the Italco team to join The Chefs' Warehouse family of companies and brands. We look forward to leveraging our unique CW go-to-market and supply chain model as we grow into the dynamic urban and resort markets in the Centennial State. With that, I'll turn it over to Jim to discuss more detailed financial information for the quarter and an update on our liquidity. Jim? James Leddy: Thank you, Chris, and good morning, everyone. I'll now provide a comparison of our current quarter operating results versus the prior year quarter and provide an update on our balance sheet and liquidity. Please refer to Slide #5. Our net sales for the quarter ended September 26, 2025, increased approximately 9.6% to $1.021 billion from $931.5 million in the third quarter of 2024. Net inflation was 7.4% in the third quarter, consisting of 4.4% inflation in our specialty category and 12.3% inflation in our center-of-the-plate category versus the prior year quarter. Reported inflation was impacted by 2 primary factors in the third quarter versus the prior year quarter. Center-of-the-plate inflation was impacted by the commodity poultry program attrition in 2025. Excluding this attrition impact, net inflation in the center-of-the-plate category was 5% versus the reported 12.3%. Continued growth in specialty cross-sell, as we further integrate CW and Hardie's results in elevated reported specialty third quarter inflation. Excluding this impact, specialty inflation was approximately 2.1% and overall inflation for the company was approximately 3.3% versus the prior year quarter. Gross profit increased 10% to $247.2 million for the third quarter of 2025 versus $224.7 million for the third quarter of 2024. Gross profit margins increased approximately 7 basis points to 24.2%. Selling, general, and administrative expenses increased approximately 7.9% to $208.1 million for the third quarter of 2025 from $192.9 million for the third quarter of 2024. The increase was primarily due to higher costs associated with compensation and benefits to support sales growth, higher depreciation driven by facility and fleet investments, and higher self-insurance-related costs. Adjusted operating expenses increased 7% versus the prior year third quarter. And as a percentage of net sales, adjusted operating expenses were 17.8% for the third quarter of 2025. Operating income for the third quarter of 2025 was $38.9 million compared to $31.9 million for the third quarter of 2024. The increase in operating income was driven primarily by higher gross profit, partially offset by higher selling, general, and administrative expenses versus the prior year quarter. Our GAAP net income was $19.1 million, or $0.44 per diluted share, for the third quarter of 2025, compared to net income of $14.1 million, or $0.34 per diluted share, for the third quarter of 2024. On a non-GAAP basis, we had adjusted EBITDA of $65.1 million for the third quarter of 2025 compared to $54.5 million for the prior year third quarter. Adjusted net income was $21.5 million, or $0.50 per diluted share, for the third quarter of 2025, compared to $15.4 million, or $0.36 per diluted share, for the prior year third quarter. Turning to the balance sheet and an update on our liquidity. Please refer to Slide #6. At the end of the third quarter we had total liquidity of $224.6 million, comprised of $65.1 million in cash and $159.5 million in availability under our ABL facility. As of September 26, 2025, total net debt was approximately $575.2 million, inclusive of all cash and cash equivalents, and net debt to adjusted EBITDA was approximately 2.3x. Turning to our full year guidance for 2025. Based on the current trends in the business, we are updating and raising our full year financial guidance as follows. We estimate that net sales for the full year of 2025 will be in the range of $4.085 billion to $4.115 billion, gross profit to be between $987 million and $995 million, and adjusted EBITDA to be between $247 million and $253 million. Please note, for the full year 2025, we expect the convertible notes maturing in 2028 to be dilutive, and therefore, we expect the fully diluted share count to be approximately 46 million shares. Thank you. And at this point, we will open it up to questions. Operator? Operator: [Operator Instructions] The first question comes from the line of Alex Slagle from Jefferies. Alexander Slagle: It sounds like case growth trends and [ volume backdrop ] improved sequentially through the 3Q and [Technical Difficulty] just given some of the choppiness we've heard elsewhere in the industry. And I know you're also lapping some tougher results. So just curious if you could expand on these trends [Technical Difficulty]. James Leddy: I think from a Q3 standpoint, the last couple of years, we've mentioned that July and August were a little weaker than we expected, given all the international travel. I think we didn't really see that impact this year. So while July and August are seasonally some of the weaker months in the food distribution industry in general, we actually saw a very good summer results. And then September was strong. And as we mentioned in our prepared remarks, trends continued into October. So the fourth quarter is looking pretty good at this point. Alexander Slagle: Any thoughts on the potential impact of the government shutdown as you look ahead and I know you mentioned the Middle East. Maybe you can give an update on [Technical Difficulty]. Christopher Pappas: Yes, you're breaking up a little bit, Alex. But right now, where we sit, we're always cautiously optimistic. The fourth quarter, we think it's going to perform pretty well. The Middle East is performing. I think Qatar took a little hit, but the Dubai and Abu Dhabi, Oman, I think our business is really strong. Our major markets are all performing well. And I think a lot -- again, it comes down to we got way ahead of it a long time ago, started to invest in the facilities for capacity and invest in the sales force, invest in the technology. And I just think that whatever headwinds are out there, the team is just doing a phenomenal job of gaining market share and winning in a lot of categories. And I think that's why you see such great numbers. Alexander Slagle: And the first part of the question was on the government shutdown in the U.S. and just whether you expected any impact... Christopher Pappas: I think there might be a little effect maybe in D.C. or something. But our customers' customer base is skewed to obviously a lot of business meals and upper casual to high end. We've lived through a bunch of government shutdowns. We never saw a real big impact. James Leddy: We haven't seen a material impact to date, Alex. Operator: We take the next question from the line of Mark Carden from UBS. Mark Carden: So to start, just building on the 4Q commentary a bit. So the midpoint of your updated guidance, it implies a notable slowdown in adjusted EBITDA growth and little-to-no margin expansion. Just curious if this reflects some conservatism. I know the compare is a bit tougher, but is there anything else that we should be keeping in mind there? James Leddy: No, Mark, I don't think so. I think we raised the full year revenue guidance by $50 million to $70 million from the midpoint to the higher end. I think we feel pretty good about the mid-to-higher end of the guidance at this point given what we've seen in October. As you know, we're always a little bit on the conservative side in terms of guidance. And we raised adjusted EBITDA by $5 million to $7 million from the mid-to-higher point. So it implies a pretty healthy 7% to 7.5% year-over-year Q4 revenue growth and full year 8% to 8.5%, which would be slightly lower than what we've seen year-to-date. But I think it implies a really healthy 10% flowthrough on that revenue growth to adjusted EBITDA. And so, yes, I think that's where we ended up. Mark Carden: And then you guys talked about the acquisition of Italco in Colorado. I know that Rockies are a growth geography for you guys. Does this solve a lot of your capacity desires there? Would you need to do more? And then just more broadly, with some of the economic uncertainty that's out there, have you noticed any shifts in M&A backdrop? Christopher Pappas: Yes. Well, listen, I 100% agree, the Rockies is a great -- it's going to be a great market for us. You have all the resorts and Denver is a dynamic town and they've had good population growth from, I'd say, from the higher end. Obviously, Aspen has always been pretty higher end. But we've been talking with the company that we just acquired for many, many years. We were very familiar with them, very similar product catalog. Obviously, it's a small business, but we think it's going to be a great, great market for us. And the M&A market, I mean, it's pretty frothy. It's been like that for a while. We've been really, really conservative because we just have so much positive momentum going on with all the facilities that we've just opened and all the people we've hired in the last 5 years. So we've just been really, really picky and careful and just pick spots that really make sense for us because I just think we have so much momentum in the organic growth. And it's just -- it's a good time to be able to sit back and just be really picky. Operator: Thank you. We take the next question from the line of Brian Harbour from Morgan Stanley. Brian Harbour: I was curious, have you actually seen accelerating share gains perhaps recently? Or could you talk about how your market share has trended lately? James Leddy: Well, Brian, we have -- given the investments that we've made coming out of COVID the last couple of years in capacity expansion in markets like the Middle East and the Northwest and Florida and Southern California and even in the New York metro area, we have a number of markets that are growing at different phases. We have -- our high-growth markets are growing low double digits to anywhere between 10% and 20%, and we have our mature markets still growing very healthily. And as we add categories in those high-growth markets that are maybe underpenetrated from in terms of the opportunity, we're obviously taking market share, growing penetration, and adding a lot of new customers, and then doing things the same but maybe on a slightly smaller scale in our more mature markets as we continue to add categories and grow. So it's different in every region, but that's part of our model is to grow that way. Brian Harbour: And could you maybe talk a little bit more just by types of customers that you serve? You're seeing this acceleration here. Is that true with nonrestaurant customers? Is it true with the different types of restaurants that you serve? Could you just dig into that a bit? Christopher Pappas: Yes. Well, again, we're obviously the smallest of the public companies. And I always say we are really a marketing company that also distributes. So we're really very differentiated from the big 3 broadliners -- public broadliners. So I think it is a little confusing when you really look at who Chefs' Warehouse is, we are servicing -- obviously, there's overlap. We always have competition. Our motto is anybody that has a truck is a competitor. So we have that competitive nature. But we really do beat to a different drum. It's a much more complicated logistical business that we've put together over 40 years. And the way we go to market and the customer base, it's very diverse, purposely that way because I've lived through all the past recessions and things that can go wrong, obviously, COVID. So it's pretty diverse, and it was strategically created that way. So we do have a balance. And no one is immune to a big headwind. But we like the position -- where we're positioned in the market, and we're cautiously optimistic that our customer base is more resilient than the overall food-away-from-home market. Operator: We take the next question from the line of Peter Saleh from BTIG. Peter Saleh: Congrats on a great quarter. Maybe I just wanted to ask on inflation and beef costs. There's been a lot of discussion. There's been a lot of inflation in beef. What are you guys seeing? It doesn't seem like it's impacting your margins, at least not in the third quarter. Any thoughts on the go forward and the overall beef market and the impact on financials? James Leddy: Yes. I think what you saw in the third quarter, Pete, was an elevated level of inflation year-over-year. I think protein prices have been pretty firm the entire year. So some of it is the year-over-year comparisons. But when you exclude the Texas transition, it's around 5% year-over-year. So definitely elevated. Our year-over-year protein margins were down versus prior year, but we got really good gross profit dollar growth because when you have that level of inflation, you're not going to pass all of it on to your customer, and you're going to get it back over time as you hold prices a little bit and drag them down a little slower when the market comes down. So I think our team has done a good job of managing through this inflationary environment in terms of securing the supply chain. We sell the highest quality proteins in the industry to the best restaurants and steakhouses. So I think they've done a good job of navigating this inflationary environment. Peter Saleh: And then just on the Chefs' Middle East business, I think you mentioned there was maybe a little bit of a step back, which makes sense. Has that started to recover again as we head into the fourth quarter here? Just curious as to the trajectory on that business. James Leddy: Yes. We just highlighted that our unique customer growth, which is usually in the mid- to high mid-single-digit year-over-year type of growth, consistent with our placement growth and volume growth. It was impacted by obviously the attrition in Texas, the Texas transition of those low-margin customers. And then in the Middle East, during the summer when you had the Qatar conflict, we had some customers shut down for a couple of months, but they've started to come back online, and those 2 things impacted our unique customer growth. We really just highlighted The Chefs' Middle East just for that temporary impact. Overall, the business continues to grow really nicely. As you know, we've expanded not only our Dubai facility, but we've also recently expanded our facility in Qatar, and then we're pretty close to finishing our facility in Oman. So we're expanding our capacity in all 3 of those markets, and we're seeing really nice double-digit growth, and they continue to improve -- a good amount of our elevated protein volume growth in the quarter year-over-year was driven by our nascent but really well-growing protein program that we've started to enhance in the region. Operator: We take the next question from the line of Kelly Bania from BMO Capital Markets. Kelly Bania: I wanted to just go back a little bit to the acceleration in the past couple of months. Just curious if you can talk about that a little bit more in terms of how that played out between your mature markets and maybe your higher growth markets, if that's more broad-based, or if there's any particular categories or regions that are standing out in terms of how that played out through the quarter in terms of the growth rates. Christopher Pappas: Yes. I think you got to look at it, Kelly, that obviously, the bigger markets have more impact on our numbers, and they're doing great. The smaller markets, obviously, their percentage growth is higher, but it's from a smaller number. So I think that -- I know it's hard to look at from your seat -- it's so diverse now, Chefs' Warehouse that we're pretty much -- I mean, there's a few exceptions, and they're minor in the total volume. But we're accelerating growth in so many different categories and in smaller markets that it's hard to really give you a total picture. But from my desk, obviously, I look at categories, I look at subcategories, I look at the major territories, outer territories. And I just think the team has done such a great job executing the vision that we want to be the partner of the chef in that mid-to-high casual all the way up to super-fine dining. And I just think they're really executing. And obviously, they're taking market share, and they're also winning on a lot of what's opening, , which is really important for us because just our natural attrition is, say, 7% to 10%. So it's so important for us to keep growing the account base and the category base, especially when you have negative news all over the news that some customer accounts are [ down ]. I just think our customer base -- again, we're small compared to if you're going to put us in the distribution world, we're really boutique. And we like being boutique, and we like where we are, and I just think it's hard to compare us to everything else and all the noise that's out there. Kelly Bania: Just to follow- up on that, and then wanted to ask about the acquisition. But how much do you, Chris, attribute this to just the training that you've been investing in with the sales force and some of the education and tools that you're giving the sales force? Christopher Pappas: Yes. I think a lot. Again, we're celebrating our 40th year, and I've been looking at these numbers for probably 42 years, even while we were trying to get going. So it takes so much to train the team to -- especially to sell the premium products that we sell. It's not overnight. You got to invest way ahead of time. And I just think the team is doing such a fabulous job executing, and you have to be at this level. And our digital team, our IT team, we're giving them all the tools that you need today. And everyone talks about AI. Of course, we're using AI and investing in AI. And I think everybody is going to have good AI. I don't think that's going to be the differentiator at the end of the day. You have to have it, but the customer needs to want to do business with you. We always say, Chefs' not for everyone. And of course, we want to sell more and more products, but we're really disciplined on who we are, and we're not for everyone. So I think the AI tools are making us better. I think we're right there, world-class, with everybody else and where we're investing, and we're getting a great return on those tools. But at the end of the day, you still have to satisfy the customer in every way. You have to have the service and you have to be likable. And I think our laser focus on our customer base and who we are and not trying to be someone else, I think that's what I see -- I think you're seeing the results from that. Kelly Bania: Can I just ask one more about the acquisition, I think Italco? Just maybe what stood out about that acquisition? It's been a while. I'm sure there's a lot of potential targets on your desk. What stood out? Why does this make sense for Chefs' now? And can you just talk a little bit about the margin structure and the quality of their book of business and how much it aligns with Chefs' philosophy on the quality customer? Christopher Pappas: Great question. And again, it is a small acquisition. It's really a super-high-quality company, great people. We've known them for years and years and years. We just were so busy with so many other markets and all the facilities that we're putting up, getting going, and all the categories we've invested in that, thank God, they were very patient and waited for us because it's one of the -- I would say, one of the last, I'd call like really pure specialty businesses. We bought a bunch of these early on when we went public, and we were getting our foot into all the states. We said we're going to be in just about every -- in every NFL city, except maybe Green Bay. And they were really one of the last small boutique companies that for us, it was like a no-brainer. They have a similar catalog of high-end products. They service a ton of customers. Their offerings are much more narrow than us. So that's why we're really excited about this because with Chefs' Warehouse, catalogs, and all our teams going in there, doing training, hiring, we're going to hire a lot of salespeople throughout Colorado, and obviously, boutique places like New Mexico, and they're going to all the mountains and resorts. And we just are really excited that this is going to be a great Chefs' Warehouse over the next 10 years. Operator: We take the next question from the line of Margaret-May Binshtok from Wolfe Research. Margaret-May Binshtok: I just wanted to ask if you guys continue to see progress with digital penetration, trying to get towards your long-term goal through the quarter and if there's anything to call out in terms of how digital penetration is helping you guys gain relevance with your existing customers? Christopher Pappas: Yes. The digital team has done a great job, and it's making the sales force more and more efficient. I think the whole goal of this is to be able to do more with less. And I think we're having great success. But we continue to really rely on our tremendous sales force really to push penetration. I think the digital tools are great support, and it's giving us that last extra -- I always say it gives you that last extra yard getting into the -- to score a touchdown. So we continue to invest in it. It continues to give us a great ROI, and it's just part of what I call the go-to sales strategy of Chefs' Warehouse. James Leddy: And Margaret, on adoption, we didn't have it in the presentation this quarter, but we're a little bit over 60%. So it continues -- on the specialty side, we continue to drive adoption. Margaret-May Binshtok: And then just one more. Anything to call out in terms of business-related travel? Are you seeing any weakness there? Christopher Pappas: I mean, we hear a lot of complaints. We hear complaints, especially like in Las Vegas. The Canadians aren't coming. We hear that in Florida as well. But in so many of our major cities, there's someone eating all this food. So I think there's lots of domestic tourism still. And in the Middle East, they continue to have great tourism. So we hear noise, but we look at our results, and we're really happy with them. So it'd be great if there was a big boom again with our friendly neighbors. I think that would obviously juice the returns even more. But we hear a lot, but we see the numbers, and we say someone is traveling. Operator: We take the next question from the line of Todd Brooks from The Benchmark Company. James Leddy: A couple of questions. First, and Jim, you talked about when you were thinking about the updated guidance and being comfortable with the mid-to-upper end of the revenue guidance. And Chris, you've been doing this a long time. When you're through October and you're talking to your customers now, what's the sense of trend being locked in for a good holiday season based on the momentum that you've seen build across September and October? Christopher Pappas: I'm always cautiously optimistic. We just did -- we just had a bunch of big shows in a lot of our markets. So I was fortunate enough to get out and attend and speak to a lot of customers. And it can always change. We live in really interesting times. A few tweets and the sentiment changes, but we're hearing good holiday bookings. So I was really enthused to hear that a lot of the holiday bookings are pretty strong. So we're really cautiously optimistic it's going to be a good quarter.. Todd Brooks: And then my last question. You've seen a lot, Chris. You've been doing this for over 40 years, like you said. So I get a lot of incoming calls about, well, if Performance and U.S. Foods get together, isn't that bad for Chefs'. Can you talk about just historically when you've seen big consolidations in the industry, what it's meant for the Chefs' Warehouse as far as maybe customers to be had, sales force talent to be had, I think that might clear up some of the maybe trepidation that some people think about the combination potentially happening. Christopher Pappas: Great question. And I could just go by historically, what we've seen -- and even when we do an acquisition, when we look at an acquisition, we're looking at it for long term. Obviously, fold-ins are very synergistic, because you usually just take in the sales force and you're getting the efficiency on trucks and customer service and the back office and all that wonderful stuff. But we always model going backwards in most acquisitions. Not all. Colorado, we think, it's really small, but we think because it's so small, once we get everything squared out, it's just going to be an explosive market for us. But historically, we go backwards when we do an acquisition because customers usually want to hedge their bet, they're not sure, and all that wonderful stuff. And when we've seen big acquisitions from in territories, we usually get a nice uptick. And again, a lot of it is customers want to hedge their bet or salespeople are nervous and there's a lot of integration and a lot going on. So if this big deal goes through, we are cautiously optimistic that it could be really, really good for CW just from the fact that customers are going to want to hedge their bet, and we'll pick up a lot of new business. Operator: We take the next question from the line of Ben Klieve from Lake Street Capital Market. Benjamin Klieve: Congratulations on a really good quarter here. I've got a question about your organic growth initiatives over the last year or 2. They're really starting to, I would expect, fill in. And I'm wondering if there's anything to call out operationally out of Texas, Florida, California that has maybe been a surprise or an operational challenge as you go into the holiday season. Have those organic investments continued to hum as expected? Or has there been any issues to call out? Christopher Pappas: Yes. I don't think I've woken up one day in 42 years where there [ isn't ] an issue. It's the nature of a service company. But yes, I mean, we have such a great team at this point. We're never satisfied. Obviously, every day we're trying to get better. Most markets, again, we're really cautiously optimistic they're going to have a great fourth quarter and a great 2026. The biggest opportunities for us are places like Texas, where we're just -- we're really new, even though we bought a company that's historically been in the market, but as Chefs' Warehouse, we're still in the first inning. So we're just so excited about the opportunity for that growth over the next 10 years. Florida, we made the big investment. We're getting a great ROI. We've got an incredible team, and we still think that we're in the first inning there, but we're really excited. L.A. has got a new facility, and they're having great growth. So we're really excited about that. We got our new protein facility up and running in Richmond, and they're having a great year. And we have great hopes for '26 and beyond. So I don't think there's a market that I'm not really -- I have any complaints about and couldn't be more proud of what they're doing. But the big opportunity in a market that we're just really new in, like Texas, I think, is really exciting. Benjamin Klieve: Well, congratulations again to both of you and the whole team on a good quarter and a good outlook here for the fourth quarter. Operator: Thank you. Ladies and gentlemen, as there are no further questions, I would now hand the conference over to Chris Pappas for his closing comments. Christopher Pappas: Yes. Well, once again, I want to thank the team at CW. They've done a phenomenal job and really excited what they're going to do in '26 and beyond. And we thank all our investors and analysts for joining our call, and we look forward to the next call. And thank you again for joining. Operator: Thank you. Ladies and gentlemen, the conference of The Chefs' Warehouse has now concluded. Thank you for your participation. You may now disconnect your lines.
Operator: Thank you for standing by. My name is Kathleen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Donnelley Financial Solutions Third Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mike Zhao, Head of Investor Relations. Please go ahead. Michael Zhao: Thank you. Good morning, everyone, and thank you for joining Donnelley Financial Solutions Third Quarter 2025 Results Conference Call. This morning, we released our earnings report, including a set of supplemental trending schedules of historical results, copies of which can be found in the Investors section of our website at dfinsolutions.com. During this call, we'll refer to forward-looking statements that are subject to risks and uncertainties. For a complete discussion, please refer to the cautionary statements included in our earnings release and further details in our most recent annual report on Form 10-K, quarterly report on Form 10-Q and other filings with the SEC. Further, we will discuss certain non-GAAP financial information, such as adjusted EBITDA and adjusted EBITDA margin. We believe the presentation of non-GAAP financial information provides you with useful supplementary information concerning the company's ongoing operations and is an appropriate way for you to evaluate the company's performance. They are, however, provided for informational purposes only. Please refer to the earnings release and related tables for GAAP financial information and reconciliations of GAAP to non-GAAP financial information. I am joined this morning by Dan Leib, Dave Gardella and other members of management. I will now turn the call over to Dan. Daniel Leib: Thank you, Mike, and good morning, everyone. Our third quarter results offered further validation of our strategy, including the continued shift toward a favorable sales mix driven by double-digit growth in our SaaS offerings, strong year-over-year growth in adjusted EBITDA and adjusted EBITDA margin expansion. In addition, we continue to make great progress in modernizing and expanding the adoption of our offerings in the marketplace, highlighted by the launch of our new Venue Virtual Data Room product. Against the backdrop of an improving but still soft capital markets transactional environment, which resulted in an 8% reduction in our event-driven transactional revenue, we delivered solid results, which once again demonstrated the resiliency of our operating model across various market conditions and the sustainability of our performance as our business mix continues to transform. Specific to our third quarter performance, I am pleased with the continued strong demand for our software offerings, where we delivered year-over-year net sales growth of 10.3%, an improvement compared to the growth rate we achieved in the first half of the year. Software Solutions sales represented approximately 52% of total sales in the quarter, a positive proof point of our transformation into a software-centric company. On a trailing 4-quarter basis, Software Solutions sales reached approximately $350 million, growing 8.5% from the third quarter 2024 trailing 4 quarters and accounted for 46.5% of trailing 4-quarter sales, an increase of approximately 640 basis points from the third quarter 2024 trailing 4-quarter sales. This continued positive mix shift positions us well to achieve our long-term target of driving approximately 60% of total sales from Software Solutions by 2028. A major driver of the third quarter software growth was the performance of our recurring Compliance software products. ActiveDisclosure and Arc Suite, which posted approximately 16% sales growth in aggregate, marking the third consecutive quarter of double-digit sales growth across these 2 products. The growth in our recurring Compliance software offerings is led by ActiveDisclosure, which delivered third quarter net sales growth of approximately 26%, an acceleration in growth compared to recent trend. We are encouraged by the continued growth in ActiveDisclosure subscription service packages. In addition, as I discussed previously, we are serving additional use cases via a hybrid model that combines our software solution with an unmatched service offering. Within this context, ActiveDisclosure has been increasingly chosen by our clients for their IPO registration and proxy statement needs, which historically were managed in a traditional model. In the third quarter, we saw higher ActiveDisclosure sales associated with IPO registrations being completed on the platform compared to last year's third quarter. In the case of Arc Suite, the growth rate in the third quarter, approximately 10% was more modest than the past few quarters as we overlap the benefit associated with the tailored shareholder report solution, which was introduced in July of 2024. As I commented previously, we expect the growth profile of Arc Suite to be more modest during periods outside of regulatory changes, while over the longer term, still exhibiting the double-digit growth we have delivered historically based in part on a dynamic and evolving regulatory environment. For the fourth quarter, on a year-over-year basis, in addition to overlapping the TSR uplift, we will also overlap a contract renewal with a strategic client during last year's fourth quarter that produced favorable economics since the renewal. These factors combined to create a tough comparison versus the fourth quarter of last year when Arc Suite grew 23% year-over-year. I am encouraged by the continued adoption of Arc Suite among investment company clients as we build on the sales momentum and positive market response since launching our TSR solution. As it relates to Venue, we delivered improved year-over-year sales performance in the third quarter, increasing by approximately 3% compared to the third quarter of last year. We remain encouraged by Venue's performance, which benefits from stable demand from both announced and unannounced deals across public and private companies alike. To further solidify Venue's market position as a leading virtual data room for M&A due diligence, we launched a new version of Venue during the third quarter following a comprehensive rebuild. The redesigned Venue delivers a highly intuitive user experience, empowers clients to manage complex transactions more efficiently, streamlines collaboration within deal teams and safeguard sensitive information throughout the deal life cycle. Following the rollout, we have received very positive client feedback. Venue's modern architecture positions us well to efficiently add further capabilities as needed. We expect the new product launch will strengthen Venue as the data room of choice for corporate transactions. In addition to introducing new Venue, which serves our capital markets clients, during the third quarter, we released for broad adoption ArcFlex, the newest module within Arc suite, designed specifically to meet the needs of investment companies focused on alternative investments. ArcFlex is a purpose-built financial and regulatory offering tailored for a wide range of private investment institutions, including hedge funds, private equity and business development companies. By leveraging the foundational capabilities within the DFIN platform, ArcFlex builds on existing services to provide enhanced solutions customized for private fund clients. Coupled with DFIN's deep domain and service expertise, ArcFlex is well positioned as the leading end-to-end financial and regulatory reporting solution serving the growing private funds market. New Venue and ArcFlex are the latest in a series of new software introductions made possible by our focused investments to accelerate the modernization, innovation and growth of our software portfolio. Over the past several years, these investments have enabled us to launch or modernize a majority of our software products. Our investments have enabled us to increase development velocity, bring new solutions to market more efficiently by leveraging the platform capabilities of our single compliance platform and empower our clients to adapt quickly to an evolving regulatory environment, all while incorporating the most modern technology. Before turning the call over to Dave, I'd like to comment on the U.S. government shutdown and the related impact on our outlook for Capital Markets deal activity. Since the shutdown began on October 1, the SEC's Division of Corporation Finance has been unable to review or accelerate registration statements, issue comment letters or provide interpretive guidance. As a result, the SEC's ability to declare registration statements effective has been curtailed, impacting IPO activity as well as other capital markets transactions so far in the fourth quarter. While some transactions, including select IPO pricings are taking place within a limited window without SEC comment, most of the planned transactional activity has been paused. Overall, the shutdown has delayed the positive momentum in capital markets deal activity over the last 2 quarters. Based on what we experienced during the previous government shutdown, the shutdown represents a shift in the timing of when transactions complete as most deals that were paused during the previous shutdown were reactivated when the SEC reopened. While the duration of the shutdown remains uncertain, we continue to support our clients in preparing transactions so they remain ready to move quickly when regulatory operations at the SEC resume. DFIN's strong client relationships and market leadership position us well to capture the latent demand when activity level normalizes. Before I share a few closing remarks, I would like to turn the call over to Dave to provide more details on our third quarter results and our outlook for the fourth quarter. Dave? David Gardella: Thanks, Dan, and good morning, everyone. Before I discuss our third quarter operating performance, I'd like to recap one housekeeping item. As detailed in our press release issued on October 23, during the third quarter, we successfully completed the termination of our primary defined benefit pension plan, which had been frozen and closed since 2011. As part of this transaction, we made a $12.5 million cash contribution in the third quarter to fully fund the plan, which was recorded as a use of cash within the operating activities section of the statement of cash flows and settled the plan obligations through a combination of lump sum payments to certain plan participants and the purchase of a group annuity contract from a third-party insurer. In addition, as a result of the planned settlement, we remeasured the plan's assets and obligations and recognized a noncash pretax settlement charge of $82.8 million or $60.3 million on an after-tax basis resulting in a negative EPS impact of $2.20 per diluted share due to the recognition of unrealized accumulated planned losses previously reported within accumulated other comprehensive loss on the balance sheet. Finally, the settlement of the plan resulted in the removal of approximately $10 million of net liability from our balance sheet comprised of approximately $200 million of plan obligations and approximately $190 million of plan assets. We are pleased with this outcome, which will further enhance our financial flexibility and reduce future administrative and financial volatility associated with the legacy pension plan. Now turning to our third quarter operating performance. As Dan noted, we delivered strong results within the backdrop of an improved operating environment, highlighted by an acceleration in Software Solutions growth and year-over-year increases in adjusted EBITDA and adjusted EBITDA margin. We posted approximately 10% growth in our Software Solutions net sales, including approximately 16% sales growth in our recurring compliance software products, all while continuing to drive operating efficiencies and expanding adjusted EBITDA margin to 28.2%. On a consolidated basis, total net sales for the third quarter of 2025 were $175.3 million, a decrease of $4.2 million or 2.3% from the third quarter of 2024. Third quarter net sales were at the high end of our guidance range was driven by lower volume in our Compliance and Communications Management segments, which declined $12.7 million in aggregate with Compliance revenue across the capital markets and investment companies businesses accounting for $8.3 million of the decline. The reduction in Compliance revenue was mostly reflected in lower print and distribution volume related to both the ongoing decline in this area, consistent with recent trend as well as the timing impact of certain investment companies print volume that shifted from the third quarter into the fourth quarter this year. In addition, total event-driven transactional revenue declined by $4.4 million year-over-year primarily a result of the lower volume for foreign issuer transactions on U.S. exchanges, partially offset by stronger U.S. IPO volume. These declines were partially offset by growth in Software Solutions net sales, which increased $8.5 million or 10.3% compared to the third quarter of last year. Third quarter adjusted non-GAAP gross margin was 62.7%, approximately 100 basis points higher than the third quarter of 2024, primarily driven by higher Software Solutions net sales, the impact of cost control initiatives and price uplifts, partially offset by lower capital markets transactional volume. Adjusted non-GAAP SG&A expense in the quarter was $60.5 million, a $7.1 million decrease from the third quarter of 2024. As a percentage of net sales, adjusted non-GAAP SG&A was 34.5%, a decrease of approximately 320 basis points from the third quarter of 2024. The decrease in adjusted non-GAAP SG&A expense was primarily driven by the impact of cost control initiatives, a reduction in selling expense related to lower sales in certain areas and lower bad debt expense, which continued to normalize in the third quarter, partially offset by higher health care expense. Our third quarter adjusted EBITDA was $49.5 million, an increase of $6.3 million or 14.6% from the third quarter of 2024. Third quarter adjusted EBITDA margin was 28.2%, an increase of approximately 410 basis points from the third quarter of 2024, primarily driven by higher Software Solutions net sales, cost control initiatives and lower selling expense as a result of the decrease in sales volume, partially offset by lower capital markets transactional volume and higher health care expense. Turning now to our third quarter segment results. Net sales in our Capital Markets - Software Solutions segment were $59 million, an increase of $5.7 million or 10.7% from the third quarter of last year, primarily driven by ActiveDisclosure, which was up $4.7 million year-over-year. During the third quarter, ActiveDisclosure sales grew approximately 26%, an acceleration of the stronger growth trend we experienced over the last 3 quarters, primarily driven by the continued adoption of ActiveDisclosure subscription service packages and the ongoing migration of certain activities historically performed on our traditional services platform. The migration to a hybrid model enables clients to leverage the combination of ActiveDisclosure and DFIN service model. Specific to the shift of traditional activities to ActiveDisclosure, during the quarter, we experienced an increase in the volume of IPO activity taking advantage of the hybrid offering with clients using ActiveDisclosure for the drafting and filing of S-1 documents, resulting in higher usage of ActiveDisclosure for certain IPO transactions. We remain encouraged by ActiveDisclosure's solid foundation for future revenue growth, part of which will be influenced by the amount of event-driven transactional activity taking place on the platform. Net sales of Venue increased approximately $1 million or 3% compared to the third quarter of last year when Venue grew approximately 27% year-over-year. A resilient level of underlying activity taking place on the platform, coupled with our recent launch of new venue creates a strong foundation for future sales growth. Adjusted EBITDA margin for the segment was 34.9%, an increase of approximately 1,010 basis points from the third quarter of 2024, primarily due to the increased sales, cost control initiatives and lower bad debt expense. Net sales in our Capital Markets - Compliance & Communications Management segment were $57.2 million, a decrease of $6.3 million or 9.9% from the third quarter of 2024, driven by lower transactional revenue as well as a reduction in compliance volume, part of which was related to lower print and distribution sales consistent with recent trend. In the third quarter, we recorded $41.8 million of capital markets transactional revenue, which exceeded the high end of our expectations, yet was down $3.5 million from last year's third quarter. Following the second quarter, when we experienced sequential improvement in transactional revenue as the quarter progressed, the uptick in the level of capital markets deal activity, especially the market for new equity issuances in the U.S. strengthened in the third quarter with the number of regular way IPO transactions that raised over $100 million, exceeding last year's levels. As such, we realized approximately 25% year-over-year increase in our transactional revenue related to U.S. IPO activity. However, the improvement in U.S. IPO activity was more than offset by the soft market for foreign issuance transactions and large public company M&A deals, which remained a headwind on a year-over-year basis and combined to more than offset the growth in IPO revenue. With the outlook for capital markets transactional environment is uncertain, in part due to the impact of the government shutdown, DFIN remains very well positioned to capture future demand for transactional-related products and services when market activity resumes. Capital Markets Compliance revenue decreased by $2.8 million or 15.4% compared to the third quarter of 2024, driven primarily by lower volume of compliance work, including the related printing and distribution, consistent with the trend from the first half of the year. In addition, we continue to experience lower market demand for certain event-driven filings such as 8-K and special proxies associated with corporate transactions. Adjusted EBITDA margin for the segment was 34.3%, an increase of approximately 260 basis points from the third quarter of 2024. The increase in adjusted EBITDA margin was primarily due to cost control initiatives, lower selling expense as a result of lower sales volume and lower bad debt expense, partially offset by lower sales volume. Net sales in our Investment Companies - Software Solutions segment were $31.7 million, an increase of $2.8 million or 9.7% versus the third quarter of 2024, driven by growth in subscription revenue. As expected, the growth rate in the third quarter was more modest compared to the levels we delivered in the last several quarters as we started to overlap the uplift in software revenue as a result of the tailored shareholder reports regulation, which became effective in July of last year. As Dan stated earlier, we expect a tough comparison against last year's fourth quarter as we overlap uplifts associated with both TSR and the strategic contract renewal, which benefited our performance last year. Adjusted EBITDA margin for the segment was 36.6%, an increase of approximately 580 basis points from the third quarter of 2024. The increase in adjusted EBITDA margin was primarily due to operating leverage on the increase in net sales, price uplifts and cost control initiatives, partially offset by higher service-related costs associated with the tailored shareholder reports offering. Net sales in our Investment Companies - Compliance & Communications Management segment were $27.4 million, a decrease of $6.4 million or 18.9% from the third quarter of 2024, primarily driven by lower print and distribution volume, which accounted for $4.1 million of the year-over-year decline and lower compliance revenue. Third quarter print and distribution revenue within this segment was impacted by the timing shift of certain volume related to tailored shareholder reports for the variable annuity market from the third quarter into the fourth quarter of this year as well as the ongoing impact of lower page counts related to tailored shareholder reports for the mutual fund industry. Going forward, we expect a broader secular decline in the demand for printed products, which we expect in the range of 5% to 6%, will continue to result in lower print and distribution revenue within this segment in addition to any future regulatory change-driven impacts. Adjusted EBITDA margin for the segment was 34.7%, approximately 450 basis points higher than the third quarter of 2024. The increase in adjusted EBITDA margin was primarily due to lower selling expense and cost control initiatives, partially offset by the impact of lower sales volume. Non-GAAP unallocated corporate expenses were $11.8 million in the quarter, an increase of $2.6 million from the third quarter of 2024, primarily due to higher health care expense, partially offset by cost control initiatives. As it relates to the increase in health care expense, the variance was driven by a single outsized claim, a portion of which is eligible for reimbursement through a stop-loss insurance policy. The company received a $2.8 million reimbursement this week in accordance with that policy. And as such, we will record the $2.8 million recovery in our fourth quarter results. Free cash flow in the quarter was $59.2 million, $8.1 million lower than the third quarter of 2024. The year-over-year decline in free cash flow was primarily driven by unfavorable working capital and the onetime cash contribution related to the pension plan settlement, partially offset by lower cash tax payments, higher adjusted EBITDA and lower capital expenditures. We ended the quarter with $154.7 million of total debt and $132 million of non-GAAP net debt, including $43 million drawn on our revolver. As of September 30, 2025, our non-GAAP net leverage ratio was 0.6x. Regarding capital deployment, we repurchased approximately 659,000 shares of common stock during the third quarter for $35.5 million at an average price of $53.79 per share. Year-to-date through September 30, we've repurchased approximately 2.3 million shares for $111.6 million at an average price of $48.35 per share. As of September 30, 2025, we had $114.5 million remaining on our current $150 million stock repurchase authorization. We continue to view organic investments to drive our transformation, share repurchases and net debt reduction as key components of our capital deployment strategy and will remain disciplined in this area. As it relates to our outlook for the fourth quarter of 2025, we expect consolidated fourth quarter net sales in the range of $150 million to $160 million and adjusted EBITDA margin in the range of 22% to 24%, which at the midpoint represents an increase of approximately 300 basis points compared to last year's fourth quarter, where we posted adjusted EBITDA margin of approximately 20%. Our fourth quarter adjusted EBITDA guidance reflects the stop-loss reimbursement of approximately $2.8 million received this week, as I noted earlier. In terms of our revenue guidance, the midpoint of $155 million implies a reduction of approximately 1% compared to the fourth quarter of last year as lower print and distribution sales and lower capital markets transactional sales are expected to more than offset growth in Software Solutions. I'll also provide a bit more color on our assumptions for the capital markets transactional sales. Due to the impacts of the government shutdown and the resulting increase in uncertainty around timing of deal completions, our expectations for capital markets transactional revenue reflect a temporary softening relative to the recent trajectory. Our estimates assume capital markets transactional net sales in the range of $30 million to $40 million, which at the midpoint is down approximately $2.7 million from last year's fourth quarter and represents a sequential decline of approximately $7 million from the third quarter of this year, solely due to the government shutdown. This guidance assumes transactions that were approved before the shutdown will proceed in the normal course of business. As it relates to new transactions, in line with what we have seen thus far in October, we expect some deals such as IPOs currently in the pipeline to be completed during the fourth quarter based on guidance provided by the SEC, though we expect most in-process deals will be delayed. Conversely, our guidance assumes a continuation of the year-over-year growth trend we've seen in Venue driven by the new product release and further supported by an improvement in underlying market activity. With that, I'll now pass it back to Dan. Daniel Leib: Thanks, Dave. The execution of our strategy continues to deliver positive results and further demonstrates DFIN's ability to perform well in varying market conditions. Our solid financial profile provides us with the foundation to continue to execute our strategic transformation. While the government shutdown has injected uncertainty into the capital markets transactional environment, the combination of our strong market position and deep domain expertise positioned DFIN well to capitalize on the return to a more normalized level of activity. We are in the midst of preparing our 2026 operating plan and extending our long-range plan through 2030. In 2026, we expect to build on the positive momentum in growing our software solutions portfolio, including accelerating the shift of our traditional compliance activities to SaaS, continued operational transformation and the execution of our strategy. Through the planning period, we expect continued progress in delivering higher value for our clients, our employees and our shareholders. Consistent with past practice, we expect to provide an update on 2026 and our long-range projections in February. Before we open it up for Q&A, I'd like to thank the DFIN employees around the world. Now with that, operator, we're ready for questions. Operator: [Operator Instructions] And your first question comes from the line of Charles Strauzer of CJS Securities. Charles Strauzer: Maybe we can just pick up on the government shutdown discussion. And when you look at the -- thank you for giving us the quantification in your guidance for Q4 for revenue. But any metrics you can give us around the impact to margins in Q4? David Gardella: Yes, Charlie, I'll talk about that. I think we've contemplated the margin impact of the lower transactional revenue in our range. As we talked about margins in the quarter, we -- even at the midpoint at 23% for Q4, expect to be up about 300 basis points relative to what we delivered last year. And again, I think that's in line with the margin expansion we've seen so far this year. Obviously, that has a bit of a negative impact in Q4. But the piece that we have going the other way, right, we talked about the outsized health care. We're going to get a recovery on that in Q4. We've actually already received the cash for that recovery. And so when you look at the 300 basis points of margin expansion, again, that's at the midpoint of our guidance. About half of that is driven by this health care recovery. And then I would say the other half just kind of in line with our ongoing margin expansion. As you saw this quarter, to the extent that capital markets transactional revenue comes in higher, we would expect to outperform that just like we did in Q3. And that was a big driver. That will be the swing factor, I guess, in any quarter but certainly as we face the government shutdown here in Q4. Daniel Leib: Yes. And then just to add, and maybe Craig can also provide some context to past shutdowns and impact. But the impact of the shutdown, as we said, is primarily in our capital markets transactions area, all of the compliance activities that run through the SEC continue during the shutdown other than those that are associated with transactions, but minimal impact to venue, and Craig can speak to both venue and then what we've seen from past shutdowns. Craig Clay: Yes, Charlie, to build on Dave and Dan's comments, the SEC posted guidance that provides a path forward for companies seeking to IPO. So unlike past shutdowns, the IPO market is frozen for most but not all. It cannot -- the SEC cannot declare a registration statement effective. But instead, they've instructed companies to file a completed statement and wait 20 days. So there are companies that are pressing ahead. As we look at October, we have 5 listings that have completed, 4 are traditional IPOs greater than $100 million, 2 of those are DFIN deals. We've also completed one very large direct listing this month, Obook, which closed up 480% a DFIN deal. And then you look forward, according to Renaissance Capital, 6 companies intend to price in the next few weeks using the SEC's 20-day guidance. DFIN is working with 5 of those 6. And then if you look at the total number of publicly companies on file at the SEC to price, including the 6, that is a total of 13 with a $50 million or greater placeholder. These are publicly filed but not priced. A DFIN supported deal joined the list yesterday, Medline could be the largest IPO of the year and their public filing signals that despite the shutdown, the IPO market continues to move forward. DFIN's share of these 13 deals is 69%. We have a robust pipeline of companies who file confidentially. -- as well as an IPO pipeline of RFPs. So it is definitely impacted. It has slowed, hasn't completely stopped given the 20-day rule. And then to build on some of the M&A comments that Dan talked about, we're really fortunate at DFIN to have a business that delivers M&A support from deal ideation through the process to announce transactions that require public disclosure. With Venue, it's a really optimistic look as Dan and Dave stated, Q3 results show progress. We're seeing increased activity in Venue, and we have a new product. Clients are loving it. Venue's architecture will provide us great leverage going forward. And we expect the product launch to strengthen Venue as the data room of choice, and we look forward to those accomplishments in future quarters. But M&A in the traditional side, is impacted. It is already a complex regulatory environment and the government shutdown has exacerbated this. So we expect deals that were to close in Q4 to be pushed to 2026 due to regulatory bottlenecks. While we know the government will open, we can't predict it. And we've been here before. These delayed transactions will get completed but it likely could be 2026. It's going to take a beat for the market to catch up once the government opens. And then we're working against the holidays here in November and December. So it's going to open. The underlying activity is strong and DFIN is at the ready. Charles Strauzer: Great. Shifting gears a little bit to the talk about SEC reporting frequency from quarterly to potentially semiannual. How are you thinking about that? And any knowledge you could share with us? Craig Clay: Yes. Great question. So we're closely monitoring the developments related to the proposal to reduce the frequency of corporate reporting. At this time, many, many questions are outstanding. So will the proposal require more disclosure for a semiannual report than a current 10-Q? What will the XBRL tagging requirements be? Another option is for the SEC to continue to require quarterly earnings 8-Ks. These could be larger. And does it expand the 8-K disclosure that would require XBRL tagging. We're also analyzing what happened in Europe. Companies here will be given a choice. Most European countries -- companies, sorry, when given the choice did not reduce the frequency of reporting. So we really don't know what the adoption rate will be here in the U.S. So given these unknown aspects, we're continuing to build models and to follow it. But I think the most important point to make is the vast majority of our 10-Qs are on ActiveDisclosure, which operates as a subscription business with long-term contracts. So this subscription model insulates DFIN from most of the public change that would be associated with this. As the subscription is priced not on a per filing basis but on a software delivery basis. So following it closely, we have some insulation to the impact. Operator: And your next question comes from the line of Pete Heckmann of D.A. Davidson. Peter Heckmann: I wanted to follow up on this resurgence of SPAC IPOs that we've seen. Over the last, what, 4 to 6 quarters, when we think about DFIN's participation there, I guess, how much of DFIN not getting retained on some of these deals is the company's choice and worries about potentially those deals not getting done? And how much of it is just a more competitive set of competitors kind of on these lower-end IPOs? Eric Johnson: Yes. DFIN is selective in our SPAC go-to-market. And as you're familiar with the reasons why risk of liquidation, delisting, merger terminations, there is an increase in the quantity and there is a few quality deals, and those are the ones that we play at. Our share in this increased market has declined, but it's declined because 58% of the year-to-date deals are nano microcap companies, 25% are trading below the $5 per share, 33% are international. Most of those have an international provider. And 50% of the SPACs have been public for over 3 years, so they're struggling to find a target. So we continue to be selective due to these reasons. We're aware of the activity levels and remain really diligent on reviewing the opportunities. We are participating in quality SPAC and de-SPAC deals with Tier 1 deal teams. And the issuers that use a competitor for a SPAC merger and have completed it, we're attacking those clients and winning their future '34 Act reporting on ActiveDisclosure, so contracted revenue. So some of these companies, when they get through, we're able to upgrade them from the lower-end providers. Peter Heckmann: Okay. That's helpful. And then just in terms of Venue in October, I'm not sure if you can give us too much insight there. But just thinking about, we have seen an uptick in larger M&A deals in the bank sector and some other sectors. I guess, are you seeing the benefit of that? And to the extent that there is a slowdown in government reviews that slowed down M&A -- the process of M&A towards closing. Would you expect to see that October, November? Kind of what do you think is the timing there? And then in prior shutdowns, I guess, how fast does the catch-up occur? Craig Clay: Go ahead, Dave. David Gardella: Craig, I'll start and then you can jump in. I think certainly, the momentum that we saw in Venue in Q3, it's embedded in our guidance in Q4 as well. I think the underlying activity still remains and regardless of the shutdown and deals getting completed. It's one of the great things, and we've talked about this in the past that if you look -- describe the market as the number of completed deals, you may get a very different answer than the activity that's going on underneath the waterline, so to speak. And we feel really good about how we're positioned with Venue, especially with the new product in the market and the acceptance that we're getting thus far. Go ahead, Craig. Craig Clay: To build on that, Dave, thank you. We're playing in the formal process of deals coming to market. So before they're announced, certainly before they close. So as Dave said, excited by that opportunity. We have pitches that are up, opportunity creation that is up, so all moving in the right direction as we see what you see. Given that we have this broad application serving both announced and unannounced, we have a lot of activity there but certainly, the government shutdown is worsening an already complex regulatory landscape. So I think you're probably referencing the antitrust. You have health care technology energy deals that are delayed. They already were delayed given the HSR Act updates, which has added time and complexity to the process. The government shutdown exacerbated this. So again, likely to see these deals that had anticipated to close, close later potentially in 2026. So what we expect to see is a government that opens. It will take a while to get moving again. One of the things that's been eliminated during the shutdown is the Trump administration have been able to terminate the waiting period. But with the shutdown, they don't have the staff to do it. So we would anticipate a build. It likely will be in 2026. Operator: Your next question comes from the line of Kyle Peterson of Needham. Kyle Peterson: I wanted to start off, the tax rate this quarter. It looks like you guys had a pretty big kind of onetime benefit. Is that related to the pension plan settlement and everything like that? Or were there any like discrete items or anything that skewed the tax rate around this quarter that we should be mindful of? David Gardella: Yes, Kyle, I think we talked about the pretax pension charge of just over $80 million, the post-tax at $60 million. So certainly, the pension tax component of that weighed on the GAAP tax rate. I think in the non-GAAP tax rate, a little bit different story there where we exclude it but some small dollars of adjustments there related to different tax legislation, et cetera, can impact that rate. Kyle Peterson: Okay. Okay. That's helpful. So even though it's -- you guys settled the pension formally in the fourth quarter, it was a tax noise item in the third quarter. David Gardella: So we -- Kyle, just to be clear, that was -- we settled in the third quarter. Kyle Peterson: Okay. You announced it in the fourth quarter, at least but yes. Okay. all right. That is super helpful. And then I wanted to kind of follow up on Venue, and I realize it's probably a little hard to answer. But is there any way you guys could maybe tease some or parse out some of the momentum that you guys are seeing in Venue? Like what's -- if there's any way you guys could separate the benefits from the redesigned product versus activity potentially picking up, like which one you feel or whether it's qualitative feedback or anything like that, like what do you guys feel has been the bigger driver of the better performance and everything there? And how should we think? Or in past product refreshes, like how long has it taken to get more traction and such, that would be helpful. David Gardella: Yes. I'll start and then, Craig, if you want to jump in. I think when you look at Venue, obviously, we showed the growth this quarter. But if you take a longer-term view of Venue, we grew in the mid-20% range last year. we were overlapping a quarter in Q3 that was right along those growth rates. So I would say sales execution has been the key component to driving the growth that we've seen. That team has done a really nice job in terms of, as Craig talked about, generating new opportunities and converting those opportunities. With respect to the new product, I would say it had a very, very modest impact in Q3. We would expect more of an impact in Q4 and then certainly, the bulk of the impact of the new product to start to hit in 2026. So I think the impact of the new product, the better days due to that product are on the horizon here for us. Craig? Craig Clay: Yes. I will build on the Horizon part, which is our results to date are based on execution. The earlier results in the year were a function of Liberation Day, which sort of froze the market. Now we see that have absorbed and the M&A opportunities are certainly increased. When we launched the new version of Venue, it launched in the first weeks of October. These launch events continue today. So the perspective look is that what you're seeing is primarily a result of execution prelaunch. Certainly, we have a product that we think is the most purpose-built based on decades of experience. Again, clients are loving it. We expect this new product launch is going to strengthen us as the data provider -- data room provider of choice. It will be in future quarters. Our Venue team is going to continue to deliver excellence given the nature of Venue, we're going to focus on what's got us here, sales execution, taking share, price and then now we're supported by a great new product. Kyle Peterson: Okay. That's super helpful. And then if I could squeeze one last one in here. Are you guys thinking about capital allocation at this point, you guys have taken a lot of the uncertainty or volatility out of the pension liability at this point. Cash flow continues to improve, at least the market doesn't seem to be giving guys credit for at least like a strong pipeline and whenever the shutdown gets resolved, we'll have a resurgence in activity. But I guess, like how are you guys kind of thinking and kind of rank to order like uses of excess cash flow between buybacks and other uses? Any color there, I think, would be helpful for everyone on the call. Daniel Leib: Yes, sure. Thanks, Kyle. So no change relative to what we've been doing historically. We've said often the #1 priority is having the financial flexibility to execute the transformation and our strategy. To your point, we are -- have quite a bunch or quite a bit of financial flexibility and capacity. And yes, we -- as evidenced in the last quarter, as evidenced back in April, we've been very aggressive in buybacks at the appropriate times. And we think about priorities, it's the strategy, it's maintaining that financial flexibility, being opportunistic around share repurchases and disciplined and then we're looking at ways of accelerating organic or inorganic investment in the business, but only to accelerate the strategy. Operator: [Operator Instructions] And there are no questions at this time. I will now turn the conference back over to Dan Leib for closing remarks. Daniel Leib: Great. Thank you, and thank you, everyone, for joining, and we look forward to speaking with you soon. Thanks. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the TETRA Technologies Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Kurt Hallead, Treasurer and Investor Relations. Kurt, please go ahead. Kurt Hallead: Thank you, Tiffany. Good morning, and thank you for joining TETRA's Third Quarter 2025 Earnings Call. The speakers for today will be Brady Murphy, Chief Executive Officer; and Elijio Serrano, Chief Financial Officer. Before we begin, I'd like to call your attention to the safe harbor statement in our Form 10-Q. Some of the remarks we make today may be forward-looking and are subject to risks and uncertainties as outlined in our SEC filings. Actual results may differ materially from those expressed or implied. In addition, we may refer to adjusted EBITDA and other non-GAAP financial measures. Please refer to our press release for reconciliations of GAAP to non-GAAP measures. These reconciliations are not a substitute for GAAP financials, and we encourage you to refer to our 10-Q that was filed yesterday. After Brady and Elijio provide their comments, we will open the line for Q&A. I will now turn the call over to Brady. Brady Murphy: Thanks, Kurt, and good morning, everyone. Welcome to TETRA's Third Quarter 2025 Earnings Call. Late last week, our colleague and good friend, Elijio, announced that he will retire at the end of March next year. As part of TETRA's succession planning process, Matt Sanderson will replace Elijio as CFO. Matt is currently Executive Vice President and Chief Commercial Officer, having joined TETRA in November of 2016. Through the end of March 2026, both executives will continue in their existing duties and responsibilities to deliver and execute on the company's One TETRA 2030 objectives. Upon his retirement, Elijio will continue to serve in an advisory capacity for the company. Since I became CEO in May of 2019, Elijio has played a key role in working with me and our Executive Team to refocus the company on our core fluid chemistry expertise and the results speak for themselves. From guiding the company through arguably the industry's most challenging period during the COVID-19 pandemic through the divestiture of our general partnership in CSI Compressco and shaping our One TETRA 2030 strategy, Elijio has been a strong contributor to our current success and future outlook. I, the Board of Directors and the rest of the Executive Team are very grateful for his contribution and are pleased he will continue to serve in a non-executive advisory role. Fortunately, we have a strong Executive Team that many of our investors had the chance to see and hear from at our recent Investor Day at the New York Stock Exchange in September. And as part of our succession planning process, Matt is well-prepared for the transition to CFO. The recent addition of Kurt Hallead as VP of Investor Relations, FP&A and Treasury, along with Katherine Kokenes as CAO, has significantly strengthened our current and future financial organization. I'm confident there will be a smooth and seamless transition. Now I'll summarize some highlights for the quarter, provide an update on our strategic initiatives before turning the call over to Elijio to provide some more details about the financials and our guidance. Our employees delivered a very strong third quarter results against the backdrop of an ongoing challenging industry environment. Our third quarter, combined with our first quarter year -- first half year results, allowed us to reach the highest revenue of $484 million and adjusted EBITDA of $93 million in the past 10 years. Mainly driven by chemicals and deepwater completion fluids, this 10-year record is further highlighted by the fact that the overall deepwater rig count is 40% lower than it was 10 years ago, emphasizing the significant deepwater market penetration we have achieved. For the quarter, we achieved revenue of $153 million and adjusted EBITDA of $25 million with adjusted EBITDA margins of 16%. This represents an 8% year-over-year increase in revenue and 7% rise in adjusted EBITDA, driven by continued strength in our offshore completion fluids and industrial calcium chloride business. Third quarter Completion Fluids & Products revenues increased 39% compared to the previous year period, with adjusted EBITDA margins rising by 6.9 -- sorry, adjusted EBITDA rising by $6.9 million. Through the first 9 months of the year, Completion Fluids & Products adjusted EBITDA margin reached 34.5%, a 500 basis point improvement compared to the same period in 2024. This was driven by a successful completion of three TETRA Neptune wells in the Gulf of America, increased demand for high-density zinc bromide completion fluids, strong contributions from Brazil deepwater projects and robust calcium chloride results in Northern Europe. For full year 2025, we believe completion fluids may reach a 10-year high. As highlighted at our recent Investor Day, the long-term outlook for the Completion Fluids & Products business remains strong, driven by deepwater completion activity, exceptional performance in our industrial chemicals business and a material increase in battery electrolyte revenue as our customer ramps up deliveries from its first automated production line. Water & Flowback Services revenue declined 2% for the second quarter and 18% year-over-year. Adjusted EBITDA rose 18% sequentially due to better cost controls but fell 33% from the same period last year on lower activity. Sequential adjusted EBITDA margins improved by 200 basis points to 12%, driven by higher utilization of our patented automated TETRA SandStorm and Auto-Drillout units, efficiency gains and cost controls. This performance was achieved despite a 12% sequential decline in U.S. frac crew count and a 27% decrease compared to the second quarter of 2024. Despite a muted outlook for the U.S. frac crew count, we expect our onshore testing and flowback business to benefit from three industry trends: longer laterals, increased sand and water usage and a continuous rise in overall volumes of produced water. Outside of the U.S., we are seeing the benefit of material increase in overall unconventional activity in Argentina and the Middle East. We are currently 100% utilized with our Automated SandStorms units in Argentina and have recently been awarded TETRA SandStorm work in the Kingdom of Saudi Arabia. In Argentina's Vaca Muerta region, we've been awarded five contracts related to production testing, SandStorms and two production facilities, one of which is now operational and the second is expected to go live in the first quarter of 2026. These recent wins in Argentina, utilizing the technology we've developed in the U.S. on conventional shale plays are expected to almost double our revenue next year in Argentina, helping to minimize the uncertainty in the U.S. onshore activity. With respect to our Arkansas bromine plant, we've generated $58 million of base business free cash flow and invested $28 million in the project through the first 9 months of this year. We are on schedule and under budget for Phase 1 of the project and remain confident that the plant will be fully operational by the end of 2027. The plant will have the capacity to process 75 million pounds of bromine per year, which is more than double that of our current long-term third-party supply agreement. This will also enable TETRA to generate between $200 million to $250 million in additional revenue and between $90 million and $115 million of adjusted EBITDA, as noted in our definitive feasibility report. Adjusted EBITDA target contribution is underpinned by lower input costs and additional volumes for the battery electrolyte and deepwater completion fluids business. At our Investor Day on September 25, 2025, we unveiled One TETRA 2030, a strategy focused on leveraging our core fluids chemistry expertise into new high-growth end markets, notably delivering battery electrolytes for long-duration energy storage as well as oil and gas produced water desalination solutions. Our goal is to more than double revenue to over $1.2 billion and triple adjusted EBITDA to over $300 million by 2030. We're very appreciative of the attendance and the interest in our Investor Day presentation. The feedback has been overwhelmingly positive and supportive of the strategy and the Executive Team that will deliver the One TETRA 2030 targets. On the electrolyte front, we're encouraged by the progress Eos Energy continues to make in automating their first manufacturing assembly line and its recent announcement that it will expand its manufacturing capacity in 2026. As the AI push continues to drive increasing energy demand, the importance of power stability through zinc bromide long-duration storage systems appears to be gaining traction, mainly due to its safety, scalability and domestic sourcing. To account for that, we have completed the installation of our bulk delivery system, which will significantly increase electrolyte volumes in 2026. Moving to Water Treatment & Desalination; the U.S. Oil and Gas industry is facing increasingly urgent challenge in managing produced water, particularly in the Permian Basin, where over 6 billion barrels of wastewater are injected into saltwater disposal wells annually. This traditional underground injection method is becoming less feasible as downhole formation pressures keep increasing and storage pressure -- storage [ core ] pressure fills up. With the commercial launch of TETRA Oasis and the engineering design of the industry's first 25,000 barrel per day produced water treatment and recycling facility, TETRA is well-positioned to lead in solving this problem. The front-end engineering and design has been completed and the estimated capital and operating expenses are within our initial projections for the project. This step is facilitating commercial discussions with multiple customers, and we remain confident that we could sign our first commercial contract in the coming quarters. We have a strong free cash flow generating base business and our One TETRA 2030 strategy will enable us to leverage our fluids chemistry expertise into new high-growth end markets. We believe this transformation will enable TETRA to generate over $100 million in annual adjusted free cash flow by 2030 and drive meaningful cash returns for our shareholders. Now I'll turn it over to Elijio to discuss the financials. Elijio V. Serrano: Thank you, Brady, and thank you for the kind words. I'm not going anywhere nor slowing down between now and next March. We've got a job to do. We ended the third quarter with $67 million of cash on hand and net leverage ratio of 1.2x. Throughout the year, our focus has been on generating free cash flow from the base business to maintain a strong balance sheet and to self-fund as much of the bromine project as we can. We have accomplished this through aggressive cost reductions in our onshore business, carefully scrutinizing all capital expenditures and remain very focused on managing our working capital. Working capital was $113 million at the end of September, an increase of only $4 million from year-end. As a comparison, third quarter revenue of $153 million was $19 million higher than the fourth quarter, yet working capital was only up $4 million. DSO has improved two days from the fourth quarter. This highlights the focus we have on generating cash from the base business by managing inventory and receivables. Since the end of September four weeks ago, our liquidity has further improved, increasing $10 million from $208 million to $218 million, inclusive of the $75 million delayed draw feature that is available to TETRA for the bromine project. In an effort to further reduce our cost structure and reduce corporate G&A expenses, we are expecting to relocate to a new corporate office later this quarter. The new office is a short distance from the current office in the Woodlands. Compared to our current lease, we expect to reduce lease expense by approximately $2 million per year. We updated our 2025 guidance. Income before taxes will reflect a fourth quarter noncash charge as we early terminate the existing lease and move into a new lease with significant lease concessions for the first two years. With respect to the outlook, total year projected EBITDA is now expected to be between $107 million and $112 million. This compares to our prior total year estimate of between $100 million and $110 million. And this takes into account the stronger-than-expected third quarter that benefited once again by strong offshore activity. The fourth quarter is expected to see continued weakness on the onshore side. The timing of deepwater projects in the fourth quarter will dictate whether we are near to the lower or the higher end of the guidance range. Recall that as deepwater activity improves, some projects moving between quarters can have a meaningful impact on this or the next quarter, and some of these projects are hard to predict exactly when they will be completed. U.S. onshore remains challenging, but we continue to leverage automation, technology and strong cost control to keep our margins in the double-digit range. The wins in Argentina will be a tailwind for us next year and are expected to improve our onshore margins. Eos and the deepwater market will also be a tailwind for us next year. Let me close by summarizing what I believe to be the items everyone should focus upon. First, the third quarter was another quarter where we outperformed with stronger-than-expected revenue, EBITDA and cash flow. We like the cadence that we are on. Second, we continue to win work both offshore and now with the significant wins in Argentina that Brady mentioned. The base business is performing in a challenging market environment. Third, the immediate milestones we laid out as the road markers toward 2030 are materializing. Eos volumes are increasing and Eos is launching the build of their second line. The bromine plant remains on schedule and within budget, all self-funded. The front-end engineering study for the first desalination facility was completed on schedule and confirm our CapEx and OpEx numbers. Now we are changing terms and pricing with customers. And we are expanding our business internationally with the Argentina wins that Roy mentioned during the Investor Day as a goal. The journey towards One TETRA 2030 remains on schedule. Brady, let me turn it back to you for closing comments. Brady Murphy: Thanks, Elijio. Despite the ongoing macroeconomic and energy market uncertainty, we have strong conviction in the longer-term outlook, our ability -- proven ability to differentiate in the markets in which we operate and our One TETRA 2030 strategy. With that, we'll turn it open for questions. Operator: [Operator Instructions] Your first question comes from the line of Bobby Brooks with Northland. Robert Brooks: And I want to congrats Elijio on an incredible career. Just first on the Oasis commercial engineering. It's great to hear you completed the FEED study, but I just wanted to understand, are there any further engineering work that needs to be completed or just maybe more broadly, what are the next steps there? Brady Murphy: Yeah. No, certainly, Bobby. Yeah. No, the FEEDs is an important milestone because it validates what we had estimated in terms of the CapEx and the OpEx and the overall financials for our desalination technology. 25,000 is still a relatively small-scale commercial plant. We expect, in fact, the discussions we're having are much larger facilities where the economics will even get improved from there as we get higher volumes. But the next steps are really socializing, discussing these -- the economics financials with the customers that we're engaged with. As we've mentioned before, we've got 7 NDAs in place. Those customers have been waiting for us to get to a point where we could have commercial discussions and those discussions are initiated. So as far as additional engineering, we have enough confidence in the engineering that's been done to this point to enter into commercial discussions and a contract. But there is still detailed engineering that has to be done in order to construct the final plant. So that will be part of the next steps. Robert Brooks: Would that detailed engineering to then construct the final plant would -- is it reasonable to think that that would be kicked off once a commercial agreement was signed or would that maybe come before that win? Brady Murphy: Yeah. We'll most likely -- I mean, we have high confidence in commercializing this technology. And so we're already getting a proposal together from the engineering firm that we're working with to start the detailed engineering ahead of any commercial contracts. Robert Brooks: Very helpful color. And then just on the CFP sales, so a step down about [ $90 million ] sequentially, but obviously, it's more importantly up $15 million year-over-year. And obviously, a big factor on the sequential step down is the absence of Neptune jobs and the seasonal industrial calcium chloride sales. What I was hoping to get a little bit more color on is thinking about that $90 million step down, is that all essentially the absence of those two factors? And then reversely, looking at the $15 million year-over-year increase, could you maybe break down what were the different -- break down what were the different factors that drove that growth? Brady Murphy: Elijio, do you want to take that one? Elijio V. Serrano: Yeah. So Bobby, the vast majority of it was the European calcium chloride seasonality. And recall that we also had a Neptune -- a well and a half of Neptune that we completed in the second quarter. So it was those two partially offset by the ramp-up in activity in Brazil that we've been talking about. Operator: Your next question comes from the line of Martin Malloy with Johnson Rice. Martin Malloy: Elijio, best of luck with your future endeavors upon retirement. First question I wanted to ask about was just in terms of the offshore market. It seems like it's been strengthening for you all. And when you look at the subsea tree orders for the industry, they've been trending up. Can you maybe talk about your confidence as you look forward to '26, '27? And any early indications as to whether Neptune projects are a possibility in '26? Brady Murphy: Yeah, sure. Thanks, Marty. Look, we have -- we see the same thing you do with the offshore activity from our customers' discussions as well as the subsea tree orders. So yes, we have a strong confidence in '26 and '27 and beyond, quite frankly. We think the deepwater market is going to be on a pretty nice long run, certainly as the U.S. shale play starts to plateau. But in terms of Neptune, I think our pipeline is as strong as it's ever been. So I would say we have a fairly high degree of confidence that we will be executing work in 2026 and beyond with Neptune. Obviously, we don't want to give any specific information on that until we have the well defined, the project awarded and then we can give more detail, but we have a high confidence level. Martin Malloy: Great. And for my follow-up question, I wanted to ask about on the desalinization side and very encouraging to see that you expect a first commercial project in early 2026. Can you remind us of the capital cost for one of these standard facilities and maybe your outlook for initial couple of commercial projects, whether they're going to be owned by the customer, the facilities that is -- are owned by TETRA, how that breaks down? Brady Murphy: Yeah. I'll answer the commercial model, Marty, that we are utilizing. First of all, the core technology within the plant will always be owned by TETRA. We have a couple of different commercial models. One is a licensing model -- a long-term licensing model, but TETRA will continue to maintain ownership. We have a shared capital -- project financials as well as one where the customer funds the capital if they have a lower cost of capital and they prefer to do that. So we have a couple of different models with that type of flexibility. But in either case, TETRA will maintain control and ownership of the core technology within the plant itself. As far as the CapEx goes, I think general industry numbers that are out there are $1 million of CapEx for every 1,000 barrels of desal. I would say that those numbers are relative to the core technology that we bring to the equation. There's also civil works and depending on where power is derived for the project that would be addition to that. But those are order of magnitude type numbers that we're confident in. Operator: Your next question comes from the line of Stephen Gengaro with Stifel. Stephen Gengaro: I apologize if you touched on this earlier, but at a high level, when we think about '26 versus '25 and we think about the first half of '25 in the fluids side, can you outline the puts and takes into '26, maybe even off the back half of '25, if it's easier given what we know about the deepwater fluids business in the first half? And then maybe along with that, you did mention confidence in the deepwater business. What's the timing look like? Because it sounds like the ramp recovery in deepwater is kind of a mid-'26 event based on what some of the larger cap service guys are playing. And how does that kind of fold into the timing of your product sales? Brady Murphy: Yes. I'll take that first, Stephen, and then Elijio will let you add some additional comment. So as we look forward to 2026, there's a couple of really strong growth pieces of our business. We mentioned Argentina. The awards that we've recently received, as I mentioned, we should double our revenue in Argentina in 2026 over 2025. Even the Middle East with the recent SandStorm awards, that will be some additional growth for us. Eos will be -- is anticipated to be a very large material ramp-up from us. Eos activity for us in 2025 is well up over 2024, but it's still -- I would say it's not really -- has not been a material part of our business so far. It will -- we believe it will be very much so a material business for us in 2026. As far as the deepwater work, the markets that we're strongest in, the Gulf of America, Brazil, North Sea, particularly on the Norway side, we have good visibility into the projects and our customer plans for those markets in '26. And so we -- that's why we have a confidence level because of those markets and those customers for us in '26. Now the Neptune can move the needle for us, as you well know. Our confidence level, as I've mentioned, is high for 2026. Now whether those come in the first half of the year or second half of the year, we'll give a little more color as we get into the start of the year, a little bit visibility on that. But those are all contributing factors to what we think will be a pretty strong 2026 for us on the deepwater side. Elijio, did you want to add anything? Elijio V. Serrano: Yeah. Stephen, you referenced an interesting point just on rig activity. Look, as you know, right, the rig count doesn't necessarily -- it underrepresents what our opportunity set is from the completion side. So I would not necessarily take what you're hearing from the drilling contractors about a little bit of a lull in contracting activity and suggest that there's any direct correlation to our outlook for the completion side of the business. And Stephen, to add, if you want to sequence the second half of this year to the first half of next year, Brady mentioned Argentina. We got a ramp-up occurring there. Obviously, we expect yield continues to increase volumes. Every second quarter, we see around a $15 million increase in our Europe calcium chloride business. And the Brazil market continues to perform quite nicely for us. So there's quite a few tailwinds that I think are going to benefit us in the first half of next year compared to the second half of this year. Stephen Gengaro: I don't know if you'll answer this, but if we exclude Eos, does fluids grow '26 over '25? Elijio V. Serrano: We believe so because of the deepwater market and the activity that we're seeing out there. Operator: Your next question comes from the line of Tim Moore with Clear Street. Tim Moore: Congratulations Elijio for his retirement plan, and he will be well missed. So just maybe starting out on desalination. Can you maybe provide us with an update on the beneficial reuse ag growing season for Eos? I can't remember if that needed maybe two growing seasons. And then just on the topic, you talked about FEED study and progress and everything. Can you just maybe remind us of any remaining regulatory-related milestones that that first customer might have to do in Texas to get signed off to really start the construction? Brady Murphy: Yeah. I think that the regulatory side of that equation is -- has really been constructive, Tim, over this past year. I mean we're -- again, a reminder that we're not the ones that apply for the permit. Our customers are. So they're the ones who will still own the water and will be responsible for the permitting. But all of the information that we have tells us that that is being well-facilitated by the regulators these days. So no real concerns on that side of it. As far as the program we have with EOG, we do have an NDA in place on that project. And so we're limited to the details that we can give. We can say it's going very smoothly, very successfully. And we're very encouraged by the progress of the pilot. It is a grassland studies as we -- is actually a grasslands growth project. But that's really as much detail as we can share at this point other than it's going very well. Tim Moore: Understood Brady. That was helpful color. And then just switching gears to Eos Energy. They hold their quarterly earnings call next week on the 6th. Can you just give us a sense of maybe TETRA's lead time visibility on rolling orders? I mean, is it kind of a rolling 60- or 90-day advanced planning period for you to get the solutions ready for PureFlow Plus and electrolytes? I'm just kind of thinking about that as we model out the fourth quarter and that probably ramps up for them and you benefit. Brady Murphy: Elijio, you want to take that one? Elijio V. Serrano: Yes. So we're in constant dialogue with Eos on a weekly basis between our manufacturing team and their procurement team at the executive level, appears to be almost like a weekly or every other week call. Once we get purchase orders, we can turn it around quite quickly. As you know, we're producing the electrolyte out of our West Memphis facility. That facility is producing the zinc bromide that is either used for the offshore market or we further purify it and increase the purity levels there to meet the Eos demand. And all the incremental products that we buy are available on short notice. So we can turn around purchase orders within 30 days from Eos. Tim Moore: Great. That's really helpful color, Elijio. And then my last question is because most of the others already asked and my favorite theme in the last few years has been desalination, but you don't get asked a lot about your calcium chloride business, and we know there's seasonality drop in the third quarter every year. But how would you kind of quantify maybe that overall business 9 months year-to-date? Does it grow more than 5% this year, the industrial calcium chloride? Elijio V. Serrano: So Brady, I'll take that one. One of the things that we joke about is the leader for our calcium chloride business, Tim Moeller, every time he gets in front of the Board, he talks about a record quarter. And they literally have been achieving a record quarter with the calcium chloride business. They have found additional applications for the calcium chloride. They continue to expand and gain market share. So that business is one of our little crown jewels that probably isn't recognized and appreciated as much as it should. And they've been outperforming the Consumer Price Index by a nice factor. Brady Murphy: And if I could just add to that, Tim, if we look -- as we laid out in our Investor Day, that business tends to outpace the growth of GDP by something north of 300 basis points. Tim Moore: No, no. Yeah. It's pretty familiar, but I think investors just really haven't caught on the last few years. I mean it was something like I calculated 35% to 40% of your EBITDA last year, the year before. So I'm always curious of how that's going. It seems like it's going great. So that's it for my questions. Elijio V. Serrano: Tim, I will add that we updated our investor deck and posted it on our website this morning to reflect Q3 numbers, and it includes TTM Q3 calcium chloride revenue and the trend. I encourage you to take a look at it to appreciate how that business is performing. Operator: Your next question comes from the line of Josh Jayne with Daniel Energy Partners. Joshua Jayne: First, just as we think about offshore opportunities into next year, you've hit on it a little bit. Maybe you could just talk through your key markets, Brazil, Gulf of America and North Sea. And in the event that we've seen this over the last couple of years, things can slip to the right when thinking about offshore projects. Could you discuss which of those markets you may expect to hold up better than others in the event operators become increasingly cautious and just talk through those opportunities a bit more. Brady Murphy: Yeah, sure, Josh. I mean, I think keep in mind, the Brazil awards that we were awarded, we've really only seen a half a year of benefit from Brazil this year. So next year, we're expecting to see a full benefit and not really anticipating any change to that program. I would say the same for the Gulf of America. We've mentioned in our Investor Day as more and more operators start moving out to the lower tertiary, these wells have significant productivity. And even in a lower cost environment, we anticipate those projects to continue to move forward. So no real change in our outlook for Gulf of America. And then North Sea, I'd say the same. Equinor and the businesses in Norway continue a very strong pace. Again, we're not anticipating much change there. Now keep in mind, the rest of the markets, even though we may not have a strong service operation in a lot of other deep markets around the world, we do sell our completion fluids through the major service providers. Since again, they don't manufacture their own completion fluids. They buy them from companies like TETRA. So we actually have a pretty strong market presence around international markets around the world, but through the service providers. That can probably be a little bit more volatile than the three key markets that I've mentioned, and we'll see as we get into the 2026 planning process with our customers. But again, everything we're hearing about the deepwater market is a multiyear growth story for us. Elijio V. Serrano: Josh, the other thing I would add is if you look at our investor deck and our historical results for the Completion Fluids & Products segment, those margins hold up in almost any cycle. During COVID, we saw margins improve in -- during the two COVID years over the prior year. So that business has strong resilient margins even during slower periods. Joshua Jayne: Absolutely. And then as a follow-up, I just wanted to -- maybe you could talk about SandStorm and opportunities in Saudi just as a -- how do you see that evolving as potentially a multiyear opportunity? Could you speak to that a bit more? And is that the type of product and business that is ultimately going to consume more of your capital over the next two to three years? Brady Murphy: Yeah, absolutely. Yes. I mean it's a very exciting opportunity for us. I mean we're starting to really see unconventional activity outside of the U.S. ramp up. As I mentioned, our Argentina growth, which really was fueled by SandStorm and our production testing capabilities is going to double next year compared to this year -- is anticipated to double compared to this year. Now Saudi, we're not seeing that type of growth yet, but having our first award with SandStorm is a great start because it typically leads to the growth of other pieces of our business as we've seen in Argentina. So yeah, we're very excited about getting a foothold into that market with such a key piece of technology that will be a catalyst for growth for us. Operator: There are no further questions at this time. I will now turn the call back over to Brady Murphy for closing remarks. Brady Murphy: Thank you. I appreciate everyone joining us for the call today. Again, despite the current macro and energy market uncertainty, again, we have very strong convictions in our base business performing to the levels that it is as well as the future outlook, again, related to our One 2030 strategy. So thank you very much for your participation. We'll conclude the call. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Thank you for standing by. Good day, everyone, and welcome to The Boeing Company's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised this call is being recorded. The management discussion and slide presentation plus the analyst question-and-answer session are being broadcast live over the Internet. [Operator Instructions] At this time, I'm turning the call over to Mr. Eric Hill, Vice President of Investor Relations for opening remarks and introductions. Mr. Hill, please go ahead. Eric Hill: Thank you, and good morning. Welcome to Boeing's quarterly earnings call. With me today are Kelly Ortberg, Boeing's President and Chief Executive Officer; and Jay Malave, Boeing's Executive Vice President and Chief Financial Officer. This quarter's webcast, earnings release and presentation, which include relevant disclosures and non-GAAP reconciliations are available on our website. Today's discussion includes forward-looking statements that are subject to risks and uncertainties, including the ones described in our SEC filings. As always, we will leave time at the end of the call for analyst questions. With that, I will turn the call over to Kelly Ortberg. Robert Ortberg: Thanks, Eric, and good morning, everyone. Thank you for joining today's call. I'd like to take a moment to welcome our new CFO, Jay Malave. It's been great to have Jay on board and officially welcome him to his first quarterly earnings call for Boeing. So now let's take a closer look at our business as we enter the final quarter of the year. Our sustained focus on safety and quality is driving better performance across the enterprise, and we are reearning the trust of our stakeholders, including customers, regulators and employees. Our focus on culture change continues to energize our teams and improve how we work together. By August of this year, we have delivered more commercial airplanes than all of last year. Our defense business is well positioned in the current geopolitical environment, and our service business continues to deliver in a robust aftermarket. Across all of our market segments, we continue to see strong demand, which is reflected in our growing backlog. We marked important milestones in our recovery as the operations generated positive free cash flow in the quarter for the first time since 2023. And earlier this month, we jointly agreed with the FAA to increase 737 production to 42 airplanes per month. While we're turning the corner, we're well aware of the work ahead of us to fully recover our performance, particularly on our commercial development and certification programs. We'll talk more about our status but I want to emphasize that we're exploring every lever to deliver better performance on all of our programs. Now turning to the businesses. Let me start with Boeing Commercial Airplanes. We're making meaningful progress in line with our safety and quality plan and our investments here continue to improve the health of our factories. Notably, we've seen 75% reduction in traveled work on our 737 and a reduction of 60% across all airplane programs. Supported by greater stability, we successfully ramped up the 737 production to 38 airplanes per month as we had planned. We then focused on enablers such as improved quality, training and workplace coaches to help stabilize at that rate and demonstrate that all of our key performance indicators are healthy. Once we are satisfied with the sustained health and stability of the production system, we then presented our disciplined plan to the FAA to increase production to 42 airplanes a month. We continue to be guided by our safety and quality plan and we'll monitor our performance against these 6 KPIs as we methodically move to higher rates. As a reminder, we expect rate increases beyond 42 per month, will go in increments of 5. And while rate increased breaks won't be earlier than 6 months apart, we will remain disciplined and we won't move to higher rates until we achieve stability and readiness. Also in the quarter, the FAA announced it will allow delegation to Boeing to issue airworthiness certificates for some 737 MAX and 787 airplanes. Our team continues to work under the oversight of the FAA in building safe, high-quality commercial airplanes that comply with all airworthiness certification requirements, and we appreciate the FAA's confidence in Boeing and earning limited delegation authority is a responsibility we take very seriously. On the 787, the team is performing well, and the program continues to work towards demonstrating stability at rate 7. As we previously shared, we'll be guided by our KPIs before we transition to planned higher rates and aim to move to 8 per month in the near future, having recently completed a successful rate 8 Capstone review with the FAA. At the same time, we're investing in the expansion of our South Carolina site to ensure we're prepared to meet exceptional market demand, and we look forward to an exciting future for the 787 program. Turning now to our development programs. On 777X, as we announced earlier this morning, we have delayed our expectations for certification and first delivery, resulting in a $4.9 billion noncash charge during the quarter. As we've previously said in the third quarter, completion of our certification program is taking longer than expected. We have worked to understand the implications to our go-forward plan and now we anticipate first delivery of the 777-9 will occur in 2027. Jay will provide further details on this in his prepared remarks. We've accumulated more than 4,000 flight hours, more than double a typical flight test program. And so far, there are no major technical issues on the airplane or on the engine. In the quarter, we completed critical testing of the airplanes brakes, engines, takeoff performance and aerodynamic performance. However, we still have a significant portion of the Flight Test Certification Program to go and our team is executing plans to complete this certification as part of the schedule we shared today. The airplane and the engine are performing well. Demand for the airplane remains strong, and we remain confident that the 777X will be the next flagship airplane for our global customers. This is obviously a disappointment, but we just need more time to complete the certification process. With this charge, we now have a higher confidence that we'll complete the certification within the financial estimate. Better news on the 737-7 and -10 programs. With more than 3,000 hours of lab testing and analysis, we now have a final depth of design changes to permanently address the engine anti-ice issue. This effort remains on the critical path, and we're now following the lead of the FAA as we work to certify the suite of design updates. As we previously shared, we anticipate certification for the 737-7 and the -10 to happen in 2026. Looking now at our Defense business. We continue our active management approach, and we're making progress to derisk our development programs. We again demonstrated stability on our EACs in the quarter, and our BDS team is working hard every day to earn trust of our customers. We also continue to proactively engage with our customers and suppliers. In many cases, we've been able to revise contract baselines to lower execution risk and create win-win outcomes for the customer and for Boeing. We still have work to get these programs through the development phase and as I've said before, you're never done until you're done, but we clearly are making progress. In the quarter, BDS had several notable milestones, including delivery of the 100th KC-46 tanker across our combined U.S. Air Force and global customer base. We're proud our platform continues to provide unique value and capability to our customers. We also secured key contract awards in the quarter. The U.S. Space Force awarded Boeing a $2.8 billion contract for the Evolved Strategic Satcom program, solidifying our position as a leader in the national security space. More recently, we signed multiyear contracts valued at $2.7 billion to produce additional PAC-3 seekers, leveraging the advanced investments we've made to ramp up quickly and meet the demand. In St. Louis, we are executing our contingency plan as our IAM representative workforce remains on strike. While of course, we prefer not to be in this position, the team continues to work in support of our customers. We are building JDAMs without IAM workforce at about the same production rate as before the work stoppage and the team is progressing on our MQ-25 and T-7A development programs. We'll continue to manage through this with focus on supporting our customers. Now moving on to Global Services. BGS had another strong quarter, delivering exceptional performance for our company as they support our defense and commercial customers. The U.S. Navy awarded Boeing contracts totaling more than $400 million for the repair of the F-18 landing gear and outer wing panels. We're still on track to close the sale of Jeppesen and the other portions of our digital business later in this quarter. At the same time, BGS team continues to secure deals for the digital capabilities that we'll retain related to fleet maintenance, operations and repair. A good example, we recently announced an agreement with EVA Air that includes digital diagnostic tools and advanced analytics to improve efficiency and maintenance operations. Now lastly, I'll share another update on our company's culture change. This remains a topic of interest and conversations with many of our stakeholders. I'm pleased with how the employees have embraced culture change. You'll recall that we use feedback and direct employee input to help shape our new values and behaviors earlier this year. Since then, as I've traveled around the company, I'm excited to see how many teams are using the values and behaviors to effect change in their daily work. For example, I have come across production teams that are using their daily tier meetings to call out which values and behaviors help them work better with each other. And during my recent visits in Miami and some of our global sites, teams told me how championing our values around safety and quality is strengthening our relationships with our customers. I'm confident that with our new values, behaviors and the processes we're putting in place with performance management, leadership development and new training opportunities will continue to see positive culture change. Before we close out the year, we're also going to do another voice of employee survey like we did back in February. We'll get a feel for how we're doing on the culture change and get feedback on the areas that are working and where we still need to improve. All this work is going to take time to really take hold and while I don't expect overnight improvement, we'll continue to listen to our people and use the values and behaviors. Now before I finish my prepared remarks, I'd like to say thank you to our employees for their dedication to safety and quality and enabling another quarter of improved performance. While we're all disappointed with the 777X delays, it shouldn't overshadow the progress we're making. Our customers are giving us great feedback on the quality and delivery performance. We're increasing production rates. We turned cash positive in the quarter, and we're winning in the market. We're well positioned to build on the momentum, delivering on our more than $600 billion backlog and restore Boeing to the company, we all know it can be. Now let me hand it over to Jay to further discuss our operating results. Jay? Jesus Malave: Thanks, Kelly, and good morning, everyone. Let me start by saying that it has been an honor to join Boeing at such an important time in the company's history, and I'd like to thank the team here for the warm welcome these last few months. Throughout my career, I've always been impressed with Boeing's people, products and services and iconic legacy. I'm very excited to partner with Kelly in support of our continued recovery and delivering for our global customers and stakeholders. Boeing is in a much stronger position than it was a year ago. It's my job to help Kelly and the leadership team build on that progress. I'd also like to thank Brian West for his role in getting us to where we are and for his support throughout this transition. Now let's start with the total company financial performance for the quarter. Revenue was up 30% to $23.3 billion, primarily driven by improved operational performance across the business, including higher commercial deliveries and defense volume. The core loss per share of $7.47 primarily reflects the $6.45 impact of the $4.9 billion charge on the 777X program. which I'll discuss in more detail shortly. Free cash flow was positive $238 million in the quarter, primarily reflecting higher commercial deliveries and working capital that improved compared to both the prior year and the prior quarter. Importantly, this was the first positive free cash flow quarter since the fourth quarter of 2023 and serves as an important progress point in our company's recovery. These free cash flow results were better than expectations in July, driven by higher commercial deliveries as well as the potential DOJ payment shifting to the fourth quarter. Turning to BCA on the next page. BCA delivered 160 airplanes in the quarter, the highest quarterly delivery total since 2018. Revenue was up nearly 50% to $11.1 billion primarily reflecting higher deliveries compared to last year. Operating margin of negative 48.3% was impacted by the charge on the 777X program. BCA booked 161 net orders in the quarter, including 50 787 airplanes for Turkish Airlines and 30 737-8 airplanes for the Norwegian group. Backlog in the quarter ended at $535 billion and includes more than 5,900 airplanes with the 737 and 787 both sold firm into the next decade. Now let's click down to the commercial programs. The 737 program delivered 121 airplanes in the quarter, including 41 in September. On production, the factory stabilized at 38 per month in the quarter. Importantly, we jointly agreed with the FAA in October to increase to 42 per month and the program is now focused on continuing to drive a stable production system as they transition to this new rate. Spirit continues to deliver fuselages with improved quality and flow, which sets us up well for both our future production ramp and the planned reintegration. That transaction is still expected to close this year. The quarter ended with approximately 5 737-8s built prior to 2023, down 15% from the second quarter. Importantly, we completed the rework on the last of these airplanes and shut down the shadow factory in the third quarter. On the -7 and -10, inventory levels were stable at approximately 35 airplanes. As Kelly said, we have made good progress on the suite of engine anti-ice design updates over the past few months and continue to work with the FAA on the certification path for these programs. On the 787, we delivered 24 airplanes in the third quarter and ended with approximately 10 787 airplanes in inventory that were built prior to 2023, down 5 from last quarter. We still expect to deliver these airplanes through 2026, which is aligned with our customers' fleet planning requirements. Finally, on 777X, during the quarter, we recorded a $4.9 billion loss provision net of a cost-based extension benefit to reset the development and production schedule on the program with first delivery now expected in 2027 versus the prior expectation of 2026. To provide more background and color, we received approval to begin the second phase of certification flight testing in early 2025 and had anticipated authorization to start the next major phase of certification play testing in the third quarter. However, this authorization has been delayed as Boeing and the FAA work through the supporting analysis that enables the next phase of certification flight testing. Given this delay and our assessment of the time line to enter future certification phases, we have shifted our flight test and production schedules to reflect these learnings. We now expect the next major phase to start later this year or early 2026. The certification program delay, coupled with our reassessment of production costs constitute the basis of the incremental loss provision this quarter. The charge amount includes additional customer concessions, the cost of incremental rework on build aircraft, learning curve adjustments and the carrying cost of production operations spread out over a longer period of time. On a comparable basis to last year's total charges on the program, the costs are higher due to rework on build aircraft, incremental production disruption and learning curve adjustments. As far as the cash profile, we see 2 impacts. The first is related to delivery timing, where we expect headwinds of about $2 billion in 2026 as deliveries move to the right. This converts to a tailwind later in the decade as we deliver delayed units. Second, the cash roll off of the $4.9 billion accounting charge is expected to be spread into the next decade. While disappointing, the reset allows us to operate to a higher confidence plan and allows our customers to manage their operations accordingly. As Kelly mentioned, this confidence also stems from our completion of dry run flight tests. While we have not received certification credit with the FAA for those flights, we have obtained important verification data to support technical risk burn down. Okay. Let's shift over to BDS on the next page. BDS delivered 30 aircraft and 2 satellites in the quarter and revenue grew 25% to $6.9 billion on improved operational performance and higher volume. Operating margin of 1.7% was up significantly compared to last year, also reflecting the better operating performance in the third quarter. These results also included immaterial impacts associated with the IAM work stoppage as we continue to execute our contingency plans. BDS booked $9 billion in order during the quarter and backlog grew to a record $76 billion. Overall, we continue to make progress stabilizing our fixed price development programs even with minor cost updates on a few programs, such as for the tanker, which absorbed additional Everett shared costs from the 777X update. We have seen benefits from our active management approach and retiring risk and developing win-win opportunities for both us and our customers. We remain focused on delivering these important capabilities to our customers and met several important milestones in the quarter. For example, on a T-7A program, we achieved 4 additional customer milestones under the MOA and started assembly on the first production representative test aircraft. The remainder of the portfolio continues to benefit from exceptional demand supported by the global threat environment confronting our nation and allies. Performance on these programs also continue to stabilize and build on the improved operational performance that began earlier this year. Overall, the defense portfolio is well positioned for the future as evidenced by our record backlog, and we still expect the business to return to historical performance levels as we continue to drive execution and transition to new contracts with tighter underwriting standards. Moving to Global Services on the next page. BGS continued to perform well, again delivering strong financial results in the quarter. Revenue was up 10% to $5.4 billion, primarily reflecting improved commercial and government volume. Operating margin was 17.5% in the quarter, up 50 basis points compared to last year, unfavorable commercial volume and mix. Both our commercial and government businesses again delivered double-digit margins. The business also received $8 billion in orders with a year-to-date book-to-bill of 1.2. Okay. Shifting to cash and debt. Cash and marketable securities ended at $23 billion and the debt balance ended at $53.4 billion. The company also maintains access to $10 billion of revolving credit facilities, all of which remain undrawn. We remain committed to strengthening the balance sheet and supporting our investment-grade rating. Regarding cash flow, we still expect the fourth quarter to be positive before any impact from a potential DOJ payment. This outlook continues to assume significant capital expenditures for future products and growth, particularly in St. Louis and Charleston. This ramp-up was seen in our third quarter CapEx spend, which we now expect to be closer to $3 billion for the year. Net-net, even with the higher CapEx, our better-than-expected performance year-to-date supports updating our 2025 outlook to a free cash flow usage of about $2.5 billion, barring the impact of a prolonged government shutdown. Okay. Let's sum it all up. Another quarter of progress in our recovery. While the 777 reset was disappointing, our overall performance continues to trend favorably. This includes receiving limited FAA delegation to issue 737 and 787 airworthiness certificates, transitioning to higher 737 and 787 production rates, delivering improved performance across the company as well as generating positive free cash flow in the quarter. Broadly speaking, the markets we serve continue to be significant and our backlog of more than $600 billion demonstrates the strength of our portfolio. Long term, these fundamentals underpin our confidence in managing the business with a long-term view built on safety, quality and delivering for our customers. With that, let's open up the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Myles Walton from Wolfe Research. Myles Walton: Jay, what is the negative cash flow in 2026 on the 777X in totality or versus this year? And as you look out, how soon after first delivery can that program get to a neutral position from a cash perspective? Jesus Malave: Sure. Thanks for the question, Myles. So as I mentioned before, it's a headwind relative to our prior expectations of $2 billion. So I'd expect the overall absolute cash flow to be usage. It's a little bit higher than that. As far as how we get to call it, I'd say, breakeven neutrality type of free cash flow, we've talked about this a little bit in the past. So next year will be a heavy use year. The year after that will be better in 2027. And then we would expect ourselves to get closer to neutral in 2028. And that's all on the back of improving payments from aircraft deliveries and advances. So again, next year, we'll build up inventory. There'll be limited advances and delivery payments. But in 2027, we'll start to see those benefits and those will continue to ramp up in '28 and beyond. So I would expect, starting in 2029, neutrality will go to a benefit of positive free cash flow for the program. And so look, all told, next year is going to be a little bit heavy, but it will continue to improve from year-over-year from that point. Myles Walton: Okay. And sorry, just to clarify one thing. Is that 2026 usage of cash on 777X, so it's about similar to 2025 usage when all is said and done? Jesus Malave: Yes, that's a good way of looking at it, but perhaps maybe a little bit higher, but in that zone. Operator: Your next question comes from the line of Ron Epstein from Bank of America. Ronald Epstein: So maybe back on the 777, certainly you're going to get bombarded with these, so apologies for that. But what's driving this now? Like what changed from like just 2, 3 months ago to reevaluate what's going on with the program. Yes. So I guess that's the question. Like what changed to really make the focus on this now? Robert Ortberg: Yes. So Ron, first of all, let me reiterate what I said in the prepared remarks. There's no new issues with the airplane itself or the engines, the test program. Ironically, we have more hours and the maturity of this airplane is probably higher than any other airplane we've been through the test program. The issue is solely around getting the certification work complete. We had anticipated getting TIA approval. That's what's needed to actually get cert credit when we fly those particular tests. We have not been able to achieve the certification credit and that's because we haven't gotten the TIA approval. So look, we've taken a step back. We very much underestimated how much work it was going to take for us to get the TIA approvals and for the FAA to have the opportunity to review all the data submissions that are required. So we stepped back and we've rebaselined this program to incorporate those learnings as Jay said. And the philosophy I want here is I don't want this to be a continuous quarterly issue for us to make sure we have a solid financial estimate here that we have a high level of confidence that we can get this certification work done. Now recognize that some of this is still not in our control. We're working very closely with the FAA. I'm hopeful that there's opportunities for us to improve upon some of this. I think I've talked to the administrator Bedford. And I think he also agrees that we need to look for ways to streamline the process. But in effect, this is a result of us realizing that the plan we had in place to get the certification approvals just was not realistic going forward. Ronald Epstein: And just one clarification, if I may. On the TIA, what's really slowing that down? Is it on the FAA side? Or is it that there was something that you guys didn't understand about what would be... Robert Ortberg: It's a little of both, Ron. I would say it's that this is the first airplane that we've gone through this incremental TIA process like this. And I think there was learning in what analysis and data we had to have complete and submitted to get the TIA approval. So some of that's for us. And I think it's taken longer as well for the FAA to go through those submittals and get the approval. So I'm certainly not throwing the FAA under the bus with this. This is a learning collectively for the both of us in terms of what it takes to get through the new process. And again, as I said, we've tried to do our best to put a conservative estimate here in place that accommodates us continuing having a slower process than what we had originally planned for these TIA approvals. Now I don't anticipate because of the maturity of the airplane. Once we get the approvals, I think the flight testing should go reasonably quickly. But again, it's the analysis, the paperwork to submittal and the approval process is really the big learning here. Operator: Your next question comes from the line of Robert Stallard from Vertical Research. Robert Stallard: Welcome back, Jay. I hate to do follow-up on the 777X here. The charges of $4.9 billion is perhaps larger than was anticipated. So wondering if you could maybe work through some of the moving parts here. And then probably for Kelly, in conjunction with that, how are you expecting to manage the 777X supply chain given this delay? Jesus Malave: All right. Let me start with the magnitude of the charges to build upon the comments that I made during the prepared remarks. With the delay in the certification, we had to revise our production plans on the program with a focus on mitigating additional precertification airplane builds and provisioning for a higher confidence long-term production plan, the primary driver of the charge. And when you kind of break that down, the scheduled delay simply had a broad impact through the elements of the production system. The longer period of performance or holding period, however you want to describe it, combined with a slower ramp rate, it adds substantial carrying cost to the program. It also affected the learning curve with the slower ramp. And even the aircraft that are going to be reworked are also going to be held for a longer period of time, adding cost to them. So as we mentioned, we have a higher confidence plan from a schedule and cost perspective on here so that we've got ourselves protected. If you compare this to other charges, particularly those that we had last year, as I mentioned during my prepared remarks, we are carrying higher provisions for the built aircraft require rework, the production disruption and the learning curve, all of which are simply better informed by current experience. So as you would expect, the team is just not going to sit here and take this lightly and hasn't taken it likely. They're going to -- they're all focused, we are all focused on doing everything we can to improve the long-term productivity on this program, while also working to mitigate the total delay impact to our customers the best we can. But this baseline puts us in that position to be able to not only beat it, but potentially beat it. Robert Ortberg: Yes. And Rob, let me just talk a little bit about the supply chain. I think the answer is we just have to flow the new revised schedule out to our suppliers. And then we're going to have to negotiate on a case-by-case basis the impact that has to the various suppliers. And depending on the commodity, the impact might be significant or might be fairly insignificant. So we're going to have to work through that. I'll just say that the revised estimate and the charge here contemplated the impact of the supply chain as well. Operator: Your next question comes from the line of Noah Poponak from Goldman Sachs. Noah Poponak: Kelly, Jay, could you speak a little bit more about the 737 ramp from here? And I guess, do the remaining months of this year have 42 production units? Or is there some spacing before we actually see that for any reason? And then as you go higher, on the one hand, it's not easy and supply chain is still tough, but on the other hand, I think you're intentionally holding inventory for that reason. And it seems like you have a lot of buffer in the stations at 42 to break to 47. Then I think beyond that, you start to layer in a new line. So I guess, that 6 months you've spoken to you, Kelly, should we all be assuming that for the 42 to 47 to 52? Or is each of those breaks? Or is that too aggressive of an assumption? Robert Ortberg: Okay. So let me start with the first part of the question, which is just when do we get to 42 here for the balance of the year. So recognize, Noah, when we say we're at a 42 rate, that's a rate that we flow in the factory. Not every month, depending on the number of days in the month, the number of workdays in the month, would that necessarily equate to a rollout of 42. And just recognize that for the -- we've got the holidays coming up in both November and December. We are, as we speak, rolling at the 42 rate. So we've, as you know, we test our supply and our own processes before we actually go to that rate, we do some pretesting. So we've gone ahead and we're loading now at the 42 rate. So I'm planning that we will exit the year very soundly at the 42 a month rate. So that's our plan, and I think we're in good shape to do that. As you mentioned then, we'll go to the next would be the 47. I mentioned in the prepared remarks, not earlier than 6 months because we need time to go to the new rate, demonstrate stability. And then as we did this time, test ourselves at a higher rate. And in many cases, when you test yourselves at the higher rate, there's actions you have to take to go improve and ensure that we're ready to go. So we don't think we can do that faster than 6 months. And I will just reiterate what I said when we started this campaign here a year ago is it's way more impactful for us to move when we're not ready then to hold off and wait until we're ready. And we will not go to the next rate until we show the maturity in the system. I'd much rather be a month late, then go a month early in this process. And I think we've clearly demonstrated that if we are deliberate, do the right thing, make sure we're meeting our key metrics, we can actually move faster than we planned. So in terms of the follow-on cadence, I think you're right, Noah, in that we've got a significant inventory right now, and that's clearly boosting us from going from 38 to 42. Will also still help us when we go 42 to 47. But at that point, I think we start to get more, I'll say, aligned with the supply chain in terms of inventory balances and their expectations. So we'll have to watch that. That will be -- the rates above 47, I think will be as much on how is our maturity looking, but also how is the supply chain ramping up. We've got time to work those things. I don't see anything right now that tells me we can't do that. But that's how I kind of look at that. So if you were doing -- if you were pegging these all in 6-month increments, I'd say the first 6 months are going to be easier than the following rate increases in terms of hitting that 6 months exactly. Noah Poponak: Okay. And how will the process with the FAA compare going to 47 and 52 compared to when you did getting to 42? Robert Ortberg: Yes, we're going to use the exact same process. In fact, when we did the 5 to 7 on the 787, we use the same metrics and the same Capstone review process that we used just now moving from 38 to 42. I think both sides will understand the process and think it's a good process. So we just use that same one as well on this mini break up rate 8 on the 787. So I feel pretty good that the process is in place. I don't think getting through that, it might have taken a little bit longer with this first approval with the FAA, but they did a good job in moving pretty quickly. They have to coordinate with a lot of stakeholders as well. So I think -- I don't think the process is going to be an impediment in the future. I think it's more are we ready? Is the supply chain ready? And when that happens, then I think we have a good process to go get approval. Operator: Your next question comes from the line of Peter Arment from Baird. Peter Arment: Welcome, Jay. Kelly, maybe could you talk a little bit more about the -- what's left for certification on the -7 and 10? It sounds like you've got a lot of confidence around it. But what are the milestones or the way we should be thinking about what's left here just given the enormous amount of testing hours and things that you've done here? Robert Ortberg: Yes. So we've got -- as I mentioned, we've got a significant number of hours of testing on this anti-ice design. So what we've got to do is go make modifications to the test aircraft and they're both hardware and software modifications and then we go through the process, the certification of those steps with the FAA. It's pretty straightforward. And the anti-ice is still the critical path, is still the critical path for both certifications. Now if you take the engine anti-ice out of it, there is still work to be done to complete the certification. Probably a little more work on the -10 than the -7 but not near the magnitude of what we're experiencing with the 777X program. So we think it's pretty straightforward to get through the certification of the design. We've got a lot of test data, a lot of analysis that will help us move quickly through that. And as I said, we're still planning on getting that done here in '26. Operator: Your next question comes from the line of Seth Seifman from JPMorgan. Seth Seifman: I wanted to ask about the 87. You mentioned the recent Capstone review and how we can think about kind of the way you went through the 37, the flow of rate increase is coming on the 87 and what some of the kind of key things you're watching are there, whether it's internal or whether it's in the supply chain, having to do with structures or engines or anything like that? And then also, whether you've kind of burned through some of the concessions there and starting to get to a better place of cash profitability on that program? Robert Ortberg: Yes. So the cadence of production increase is a little bit different story than on MAX. Obviously, the -- we weren't shut down on MAX. And so we didn't -- on 787 through the strike. So we didn't -- we don't have the level of inventory that we have on the MAX program. So our next rate increase will be from this 8, which we should be at 8 by the end of the year and then we'll move to 10 next year. I do think on 787, the move from 8 to 10 will be more challenging for us with the supply chain, particularly seats. We're continuing, as I've mentioned in previous calls, we're continuing to struggle with seat certifications. I think that's going to be with us for a little bit longer. We are making progress on that. But I think seats will continue to be a constraining item for us. And then just the general supply chain on 787 because we don't have the buffer. We want to make sure that we're stable here at 8 a month rate before we go to 10. So we're planning to do that sometime next year. I'm not going to put a month on that yet. Maybe as we get to some stability at rate 8, we'll fine-tune that. Operator: Your next question comes from the line of Sheila Kahyaoglu from Jefferies. Sheila Kahyaoglu: The Q3 free cash flow number was solid. And Jay, you mentioned positive core free cash flow in Q4 pre the DOJ payment. So curious what BCA rates are underpinning that positive free cash flow. And just albeit a modest Q4 free cash flow exit rate, just a modest number, how do we think about 2026? Is it breakeven? Is it some low to mid-single-digit inflow of cash? Is that still doable? Jesus Malave: Okay. Thanks, Sheila. Let me just kind of baseline you on our discussions and our update for 2025. If you recall last quarter, we talked about a usage of $3 billion for the full year. As I mentioned in my prepared remarks and what you just indicated as well, Sheila, is that's better by $500 million to about $2.5 billion based on the better performance year-to-date. Let me -- what I'll do is I'll bridge you from the third quarter into the fourth quarter, so $200 million. When you go from that number, we expect a nice inflow based on seasonality, particularly at BDS with the tanker award. And so we'd expect an uptick there about in excess of $1 billion from BDS. Partially offsetting that is BCA volumes. Right now, we're holding anywhere to slightly down from the third quarter in terms of deliveries to maybe flat. But more importantly, in there, even if we're flat, we will see lower receipts because we've got a kind of just a mix headwind where we're expecting lower 777 deliveries in the fourth quarter. So that will be somewhat of a headwind. The next is interest expense or interest payments. Again, we have a seasonality aspect to it. So the payments in the fourth quarter will be more similar to what we saw in the second quarter. So it's about $900 million plus in the fourth quarter, and that's a step up in outflow of about $600 million. And then finally, we've got the DOJ payment. We've talked about that in the past, which is about $700 million. So when you reconcile all those items before the potential DOJ payment, you're in the range of positive $500 million. With the payment, that would swing us into a negative net-net. But again, operationally, we'll see better performance in the fourth quarter relative to the third and a pretty good exit rate as we think about next year. As I think about next year, look, it's encouraging what we've seen so far. The performance has improved throughout the year. We see that particularly in the free cash flow on an operating basis. But it's early for me to really make a strong kind of call on that right now. I'm still going through the planning process. There's a lot more that I need to get into in terms of the puts and takes on the full year basis for next year. And I'll give you just a lot more color on that in January. But as I mentioned, things are trending favorably, and we're bullish on our outlook. Operator: Your next question comes from the line of Scott Deuschle from Deutsche Bank. Scott Deuschle: Just a follow-up on that last question, Jay. I was wondering if you could share your perspective on this $10 billion free cash flow target, the company set out there for a while. And just more specifically, is that a target that you're willing to endorse? And if so, do you think the business is on the trajectory to achieve it in the next handful of years? Jesus Malave: Thanks, Scott, for the question. Just maybe taking a step back in the 2.5 months that I've been here. Overall, as I mentioned in the prior question, we've made great progress this year. We still have plenty of runway to go as we stabilize the business and complete the development programs. Right now, my observation is the foundation is in place, and that will lead to steady and gradual improvement over the upcoming years and I expect the financials to flow. Again, just like for next year, it's really a little early for me to comment on a specific long-term framework, but I'm confident in the underlying cash generation capability for us to return historical levels that you've seen before. You've got a great backlog and operational excellence will be the key to unlocking our cash flow potential. Over the coming months, I plan on assessing our operating plans and the cash flow drivers to develop the framework and I look forward to presenting that to you at the appropriate time. But it's just a little early for me to do that right now. Operator: Your next question comes from the line of Kristine Liwag from Morgan Stanley. Kristine Liwag: Kelly, you mentioned that the Jeppesen deal is closing next quarter. You also received approval from the EU for the Spirit deal 2 weeks ago. Taking a step back, can you share your thoughts on how you think about the Boeing portfolio today, your priorities for M&A? And also any color on the effect of these 2 items and free cash flow next year? Robert Ortberg: Well, look, I think the 2 items here that we've got imminently in front of us are our focus from an M&A perspective here right now. Getting through the Jeppesen close, we're pretty close on that. I think that's likely going to close a little bit before the Spirit transaction. And as you said, we've got EU approval on Spirit, but we're still waiting for the U.S. approval with Spirit. We don't see any showstoppers here, but we expect to get that done. And then we're on to the integration phase. We have to de-integrate the Jeppesen business from our digital business. We've got great plans to do that and then the reintegration of our Spirit business and that will be -- come over the next couple of months after we get into the close. So look, that's our focus right now. I don't have any other areas to point you to in terms of M&A for us right now. Operator: Your next question comes from the line of Doug Harned from Bernstein. Douglas Harned: Kelly, at the beginning, you talked a little bit about investment in Charleston. And on the 787, though, our understanding had been that you can really go from 7 to 10 a month in Charleston without that much material CapEx adds, but going to 12 and 14 will require more and an expansion of the facility. So when you're looking at Charleston right now, what needs to be done to go to 12 to 14 a month? And then the investment you're discussing today is that related to the 10 a month? Or are you already making steps toward going to those higher rates? Robert Ortberg: Yes. We're already making steps for the higher rates. You're right, we could probably -- if we thought capping at 10 was as far as we go, we would not be investing in expanding Charleston. So we're going to have a formal groundbreaking. But essentially, what you're going to see if you've been to Charleston, we're going to double the footprint, the manufacturing footprint. Now we don't need double, but it also gives us a lot more flexibility for some storage space as well. So a major expansion of the Charleston facility, and it's all around getting to rates higher than 10%. We think that the market demand will allow us to get to rates in the teens and that's what we're focused on putting the capital in place, getting the facilities in place. Obviously, if the facilities come online, they'll help us at rate 10, but we don't need that. And I think we're looking at really 2028 before we're really utilizing that expanded facility. Douglas Harned: Can you dimension at all the CapEx trajectory you're talking about for this? Jesus Malave: We expect that to increase next year, Doug. Again, I think in the -- when we kind of give you the '26 framework in January, we can provide more color, but there will be some higher CapEx in '26 related to both this as well as the growth in expansion in St. Louis. Operator: Your next question comes from the line of Gautam Khanna from TD Cowen. Gautam Khanna: Welcome, Jay. Kelly and Jay, I know you touched on seat certification as a potential constraint on 87 production hikes. I was just wondering more broadly, if you can talk about where you see the pinch points in the supply chain today and kind of across the programs as you move forward in rate, where are you most concerned that bottlenecks may emerge? Robert Ortberg: Yes. So again, I made a few comments on this already. I think you do need to break down between the 737 supply chain and the 787 or the widebody supply chain because we have this excessive amount of inventory. So look, I think in general, I would just comment that the supply chain is doing well. We do have constraints still around seating, but we know what those are. We've got specific actions with the suppliers. And some of that is on Boeing to get the actual seat installations certified on the aircraft. So we're working through those. There's nothing else I would highlight. I mean we have to watch the continued demand on the engines in both the forward fit and the aftermarket and the durability upgrades that are going on in the market. So that will be an area that we'll continue to work with GE and CFM on. But there's nothing I would particularly focus on. But this really is one of these things where that could change tomorrow. We have to keep tabs on all of our supply chain we need all the parts. But I think in general, we're doing well. I think people also are gaining confidence in our ability to meet our production output. So the fear of people discounting our production in the supply chain, I think, is diminishing going forward as well. Eric Hill: Rob, time for 1 more question here. Operator: Certainly, your final question comes from the line of Scott Mikus from Melius Research. Scott Mikus: Jay, you've been at the company for 2.5 months now. Just curious, what are your early observations? What are your priorities? And given that the company will end the year with about $33 billion of cash after Jeppesen is sold, how are you thinking about the balance sheet and what you want to do with that cash balance? Jesus Malave: Yes. Let me then Scott kind of work maybe backwards here. On the cash balance sheet, I think with the completion of both transactions, we'd expect the cash balance to be closer to probably in that $28 billion range, so high 20s, not as high as $33 billion. As far as observations, look, I've come in here, there's been a lot of enthusiasm. As I mentioned in my prepared remarks, the team has embraced me with open arms. It's made my transition as seamless as it can be. There's a fair amount that I need to get up to speed on in the company and again, everyone is helping me do that. As far as some of the culture changes that we've seen, as Kelly mentioned, I see a lot of enthusiasm. I see a lot of excitement about the recovery that the company has embarked on. People are committed. They're dedicated and they want to be part of the improvement. So it's easy to walk in, at least easier for someone like me to walk in cold to an environment like this where everyone is really operating and working on the same direction. Overall, in terms of what I need to focus on and my priorities in the short term, it's really getting up to speed so I can put myself in a position to be a valued contributor. It's maintaining the focus on fully restoring the health of our balance sheet. It's enabling and driving the planned improvements of our recovery and ensuring that they are sustainable. And finally, it's keeping an eye on the future while maintaining the focus on the short-term and medium-term recovery. So again, first things first, get up to speed and then contribute and drive us and be a participant in this recovery. And again, we're on a good path here. So I'm very excited to be here. Operator: That completes The Boeing Company's Third Quarter 2025 Earnings Conference Call. Thank you for joining. You may now disconnect.
Operator: Welcome to the Avnet First Quarter Fiscal Year 2026 Earnings Call. I would now like to turn the floor over to Lisa Mueller, Director of Investor Relations for Avnet. Please go ahead. Lisa Mueller: Thank you, operator. I'd like to welcome everyone to Avnet's First Quarter Fiscal Year 2026 Earnings Conference Call. This morning, Avnet released financial results for the first quarter of fiscal year 2026, and the release is available on the Investor Relations section of Avnet's website, along with a slide presentation which you may access at your convenience. As a reminder, some of the information contained in the news release and on this conference call contain forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict. Such forward-looking statements are not a guarantee of performance, and the company's actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in Avnet's most recent Form 10-Q and 10-K and subsequent filings with the SEC. These forward-looking statements speak only as of the date of this presentation, and the company undertakes no obligation to publicly update any forward-looking statements or supply new information regarding the circumstances after the date of this presentation. Please note, unless otherwise stated, all results provided will be non-GAAP measures. The full non-GAAP to GAAP reconciliation can be found in the press release issued today as well as in the appendix slides of today's presentation and posted on the Investor Relations website. Today's call will be led by Phil Gallagher, Avnet's CEO; and Ken Jacobson, Avnet's CFO. With that, let me turn the call over to Phil Gallagher. Phil? Philip Gallagher: Thank you, Lisa, and thank you, everyone, for joining us on our first quarter fiscal year 2026 earnings call. We are off to a solid start in the new fiscal year. In the first quarter, we achieved sales of $5.9 billion, above guidance, and adjusted EPS of $0.84, near the high end of guidance. Our performance was led by strength in Asia and Farnell, which both had double-digit year-on-year growth. Sales in our Americas region grew year-on-year for the first time since fiscal 2023. While sales in our EMEA region were flat with the year-ago quarter, they did grow better than seasonal on a sequential basis, as did all of our regions. From a demand perspective, in the quarter, we saw strength in certain key vertical segments, most notably transportation, compute and communication. Overall, semiconductor lead times and pricing continue to be stable for most technologies. That said, we do see extended lead times and price increases in memory storage and certain interconnect products, particularly those supporting data center and AI build-outs. On the IP&E side, lead times also continue to be stable. Our book-to-bill ratio improved globally, led by Asia and the Americas, and all regions were above parity. Our backlog is growing, and we continue to see customers placing orders within lead times, which is a sign of strengthening market. Cancellations have remained at normal levels. In the quarter, we had a modest increase in inventory to support sales growth in Asia and certain supply chain opportunities, although we did see improvement in days of inventory on hand. We remain focused on balancing these growth opportunities with reductions in the near term and optimizing the inventory we have on hand. Now turning to our Electronic Components results. At the top line, our Electronic Components sales increased on a sequential and year-on-year basis due to a generally improving demand environment led by Asia and the Americas. In Asia, sales grew sequentially and year-on-year and now represent just over half of EC sales. This marks our fifth consecutive quarter of year-on-year sales growth in the region, driven by strength across the communication and transportation end markets. The Americas are showing signs of recovery, with sales growing both sequentially and year-on-year. Sales were strongest in the industrial and communications end markets, followed by transportation and consumer. In EMEA, sales were basically flat year-on-year and higher sequentially, which is better than seasonal for the region. Bookings improved as the region returned from its summer slowdown. The industrial and communications end markets showed year-over-year growth, while compute grew both sequentially and year-on-year. We are optimistic about continued modest improvement in Q2. We continue to see healthy design win activity and momentum in demand creation. We recorded solid increases in demand creation revenues and gross profit dollars for the quarter. We are also pleased with progress on our IP&E product sales. As we mentioned in the past, IP&E is one of our higher-margin businesses. Sales have been steady with improving margins and doing particularly well in Asia. Now turning to Farnell. Farnell delivered sequential and year-on-year growth and experienced similar sales trends to EC with strengthening in Asia and the Americas. Operating margin remained stable sequentially due mostly to increased sales of the on-the-board components, offset by higher sales of single-board computers and test and measurements, which tend to be a bit lower in margin. The team continues to execute on their strategy, including enhancing digital capabilities and leveraging Avnet's core ecosystem for new and additional opportunities. While there is still plenty of work to do, we are pleased with Farnell's progress, especially given its improved performance, while the macro environment in Europe, its largest region, has yet to fully recover. To conclude, we are encouraged by the increasing number of positive signs in our business. We feel good about the recovery in Asia Pac and progress in the Americas. Conditions in EMEA are stabilizing and modestly improving. While geopolitical and market uncertainties remain, we believe our strong supplier line card and diverse customer base and the strength of the end markets they serve position us well as the market recovers. During the quarter, I spent some time with the leadership teams from several of our supplier partners, both in the U.S. and Europe. Most recently, I attended the Electronic Components Industry Association, ECIA, Conference in Chicago. Consistent with our views, our supplier partners are also seeing several positive signs, including lead times extending in certain technology and discussions on actual or potential price increases. Maintaining and strengthening our supply relationships through these challenging times has helped us navigate the market, which also translate into increased value for our end customers. It is times like these that I'm especially thankful for our dedicated and experienced team across our whole organization who have led us through this prolonged market cycle. I want to thank them for their efforts that continue to reinforce Avnet's position at the center of the technology supply chain, helping our customers and suppliers navigate complexity and unlock new opportunities. With that, I'll turn it over to Ken to dive deeper into our first quarter results. Ken? Ken Jacobson: Thank you, Phil, and good morning, everyone. We appreciate your interest in Avnet and for joining our first quarter earnings call. Our sales for the first quarter were approximately $5.9 billion, above the high end of guidance of our range, and up 5% both year-over-year and sequentially. Regionally, on a year-over-year basis, sales increased 10% in Asia and 3% in the Americas. Sales in EMEA were flat year-over-year and were down 6% in constant currency. From an operating group perspective, Electronic Components sales increased 5% year-over-year and sequentially. Farnell sales increased 50% year-over-year and 3% sequentially. For the first quarter, gross margin of 10.4% was 42 basis points lower year-over-year and 15 basis points lower sequentially. The year-over-year decline is primarily driven by declines in the Western regions, partially offset by improvements in Farnell. The sequential decline in gross margin is primarily driven by a decline in Europe, partially offset by improvements in the Americas, Asia and Farnell. The sequential gross margin declines in EMEA were primarily driven by a less favorable product and customer mix compared to last quarter. The regional mix shift to Asia also had a negative effect on EC gross margin year-over-year and sequentially. Sales from the Asia region represented 49% of first quarter sales in fiscal 2026 compared to 47% in the year-ago quarter and 48% last quarter. Farnell gross margin increased both sequentially and year-over-year, in part due to improved product mix of on-the-board components. Turning to operating expenses. SG&A expenses were $464 million in the quarter, up $26 million year-over-year and up $13 million sequentially. Foreign currency negatively impacted operating expenses by approximately $5 million sequentially and $11 million year-over-year. The expected increase in sequential SG&A expenses was primarily driven by the additional sales volume and from higher salary expenses due to employee raises that took effect in the first quarter of fiscal 2026. As a percentage of gross profit dollars, SG&A expenses were flat sequentially at 76%. Overall, first quarter operating expenses were as anticipated. As we move through fiscal 2026, we expect expenses to be well controlled, but would expect modest increases with sales growth as the market recovery unfolds. For the first quarter, we reported adjusted operating income of $151 million, and our adjusted operating margin was 2.6%. By operating group, Electronic Components operating income was $159 million, and EC operating margin was 2.9%. The sequential decline in EC operating margin of 11 basis points was primarily due to higher SG&A expenses. Farnell operating income was $17 million, and operating income margin was 4.3%. Operating income margin was up approximately 375 basis points year-over-year and flat sequentially. Turning to expenses below operating income. First quarter interest expense of $60 million decreased by $5 million year-over-year and was up $1 million sequentially. Our adjusted effective income tax rate was 23% in the quarter, as expected. Adjusted diluted earnings per share of $0.84 was at the high end of our expectations for the quarter. Turning to the balance sheet and liquidity. During the quarter, working capital increased $160 million sequentially, primarily driven by $176 million increase in receivables. The increase in inventories of $185 million was offset by a corresponding $201 million increase in accounts payable. Excluding the impact of currency, working capital increased by $198 million sequentially. Working capital days decreased 4 days quarter-over-quarter to 95 days. Inventory days decreased by 3 days sequentially to 92 days. Our return on working capital increased 36 basis points sequentially from higher operating income. The increase in inventories and corresponding increase in accounts payable was primarily driven by increases in the Americas to support supply chain services engagements and increases in Asia to support overall growth. Overall, the quality and aging of our inventory continues to improve. We remain focused on reducing inventory levels where elevated, noting that we also want to ensure our Electronic Components and Farnell businesses have the right inventory in our distribution centers to position ourselves appropriately as the market recovers and as lead times extend for certain products. Our increase in working capital led to an increase in debt of $323 million. We used $145 million of cash for operations in the quarter, primarily due to the increase in receivables to support the growth in Asia revenues. From a cash flow perspective, increases in inventory were offset by increases in accounts payable. With regards to our capital allocation, we have a consistent, disciplined approach. We continue to deploy cash in a manner that generates what we believe will have the greatest long-term return on investment for our shareholders, prioritizing reinvestments in the business and returning excess cash to shareholders. During the quarter, cash used for CapEx was $25 million, within our expected quarterly levels. We ended the quarter with a gross leverage of 4.0x, and we had approximately $1.7 billion of available committed borrowing capacity. We will continue to prioritize lowering our leverage to appropriate and historical levels in order to maintain a strong balance sheet, which we continue to believe is an important aspect of having a sustainable and profitable distribution business. We anticipate reducing our leverage to approximately 3.0x over the next year. We increased our quarterly dividend by approximately 6% to $0.35 per share. We have increased our dividend in each of the last 12 fiscal years. We have more than doubled our dividend in the past 10 fiscal years, which is an average annual dividend increase of more than 10%. In the quarter, we repurchased approximately 2.6 million shares totaling $138 million, including $100 million of shares repurchased in connection with our convertible debt issuance. We repurchased 3% of outstanding shares in the first quarter and have repurchased 8% of outstanding shares over the past 4 quarters. Book value per share decreased to approximately $57 a share. Turning to guidance. For the second quarter of fiscal 2026, we're guiding sales in the range of $5.85 billion to $6.15 billion and diluted earnings per share in the range of $0.90 to $1. Our second quarter guidance considers the uncertainty that continues to impact the market and implies a sequential sales increase of 2% at the midpoint. This guidance assumes sequential sales growth in the Americas and Asia, with flattish sales in Europe. This guidance also assumes similar interest expense compared to the first quarter, an effective tax rate of between 21% and 25% and 83 million shares outstanding on a diluted basis. In closing, our team continues to execute well against the areas we can control, and we still have opportunities for improvement. Given today's rapidly changing market conditions, our team continues to demonstrate the value we bring to our customers and suppliers. We remain confident our approach through this market downturn will benefit our stakeholders in the long term. With that, I will turn it over to the operator to open up for questions. Operator? Operator: [Operator Instructions] And our first question is from William Stein with Truist Securities. William Stein: First, I wanted to ask, Phil, you mentioned revenue in the data center, I think, AI application category. I suspect your exposure there is still relatively small compared to the overall sales. Can you just bring us up to speed on that metric, please? Philip Gallagher: Sure can. Thanks, Will. I appreciate the question. Yes, so it is relatively small. So our exposure to the hyperscalers is, on a grand scheme, I don't know, maybe in Asia, 7% of our business, give or take, Will, of Asia Pac, where most of that's happening right now for us. But the reason I bring it up is it's well beyond the GPUs and even the FPGAs. The opportunities we're seeing in storage, connectivity, power, cooling, connectors, that's where we're seeing the opportunity for us right now. And really, I think the big value for where we sit in the technology supply chain is as it's going to enable, let's say, the really downstream opportunities are going to be massive in particularly in our MCU/NPU area. You're going to get the applications out on the edge, and that's where our customers, that's a sweet spot for us, whether it be predictive maintenance, smart wearables, smart agriculture, smart security, surveillance, et cetera. So we're talking about AI. We're playing in it today. We're selling into the data center, into the hyperscalers. But today, our customers are also selling into the hyperscalers. So as we're calling on anybody in power, power management, et cetera, and you're seeing some guys announced in the EMS provider space, some nice growth here, well, we're going to participate in that as well, right? So I hope that answers the question. We're excited about it. William Stein: Yes. So it sounds like 7% of your Asia sales. As a follow-up on a different topic, inventory days in the quarter were flattish. I think you called out down a couple of days sequentially, but my model is roughly flattish. It's not a huge difference anyway. But we expected this number to be down more meaningfully. Maybe I just got a little bit ahead of myself, but that drove cash flows negative in the quarter. And you talked about investing for future growth and other things. Maybe I'm just hoping you can help set expectations going forward a bit here. Should we expect this relatively higher number of inventory days to persist for longer term, maybe even perpetually? Or should we expect inventory days to come down over time? Philip Gallagher: I'll let Ken answer that. Ken Jacobson: I think -- first, I think you kind of calculated end of quarter inventory. We use an average inventory, so there's a little bit difference in terms of how we measure the inventory days. But I think we're continuing to see a trend of declines in the EC business. We're down roughly 10 days year-over-year. Inventory went up a little bit, partially in Asia. And that's -- we don't have all the right inventory to service where the growth is, right? So you're investing in certain inventory, but there's still opportunities, including in Asia, where we need to get inventory down, which will help the days as well. And then for the supply chain services, we're actually seeing that business come back a little bit. It was down in FY '25, and we're seeing that come back a little bit. And again, some of that is going to turn this quarter. So there's still opportunity to go after inventory where it's in excess and to kind of drive the inventory down a little bit at the same time as the sales grow, that they should improve. So I think the expectations are still there. It was a little higher than we had anticipated coming into the end of the quarter. But there's nothing of concern or anything in terms of a longer-term trend that we would see because of what happened towards the end of the quarter. Philip Gallagher: I'll add to that, Will. The quality of the inventory is good, okay? The aging and the quality is good. So we have no concerns there. And our longer-term goal will get back into the 80s. So we know we want to continue bring it down a little bit while still making investments, right? We still need to do that. Inventory is not a bad thing in distribution, it's actually a good thing. And to get the days down into the 80s as we continue to drive the top line up. William Stein: Just one follow-up to that quantification. 80s like, in a year, in 3 years? Any sort of trajectory you can give us would be helpful. Ken Jacobson: I think when we talk about 8 in front of it, I think, by next quarter, we exited the quarter at roughly 91, 92 days. We think we'll be with an 8 in front of it next quarter, and then kind of gradual trajection down. Operator: Our next question is from Joe Quatrochi with Wells Fargo. Joseph Quatrochi: You called out EMEA being better than seasonal in the September quarter and then -- thinking that it could be flattish for December. I can appreciate the seasonality is a little bit difficult to kind of call right now, but like, how do we think about, I guess, the demand profile of that for the December quarter and kind of your visibility relative to seasonality in EMEA? Philip Gallagher: Yes. So I'll go first. Thanks, Joe. Positive. I mean -- but modest. I think we used the word modest. December quarter is usually not a growth quarter sequentially in Asia Pac, to your question on seasonality. This quarter, we're expecting modest growth. And why is that? Well, we believe Europe is about hitting the bottom. It's been a tough several years in Europe, as you know. But we're seeing the bookings positive now for a couple of quarters, backlog is building. So based on that, we think we'll see some modest growth in September to December in Europe. Joseph Quatrochi: Got it. And then just trying to think about now that the total business has returned to year-over-year growth. How should we think about just incremental margins for the business? Appreciating obviously, the geographic mix matters, but the Americas turning to year-over-year growth, I think, is a positive. Ken Jacobson: Yes, Joe, I think it's a positive in terms of that will start to give some more operating leverage there and kind of start to expand the operating margins. How we look at it is the guidance implies flat gross margin year-over-year, which we think is good. There's still some things we want to do in terms of mix, but as well as -- EMEA had gross margin down this quarter, but I think flat year-over-year, at least is holding our own in gross margin. But I think in the next quarter, we should see a seasonal mix shift, right? So part of it depends on what the Lunar New Year looks like for Asia. But just seasonal growth in the West should have a nice impact to gross margin, which should then have some operating margin impact, all things being equal. So not ready to talk about third quarter yet, but book-to-bills are healthy right now. Joseph Quatrochi: Maybe just one last follow-up. In the prepared remarks, you talked about suppliers seeing potential for price increases. Just wondering if you could maybe provide any more color on that front and just any additional details? Philip Gallagher: Yes, without getting too specific, Joe, it's in certain technologies because lead times overall are, overall, pretty unchanged. I mean, you have some modest increase in lead times. But for sure, some of the, let's call it, the interconnect and maybe the power type of products going into the data center and hyperscalers starting to see a little inflation. And for sure, with memory, right? With HBM taking off, there's definitely some lead time issues in memory. I believe we'll start seeing price increases there as well. And then some selective higher-end technology suppliers have been calling out potential increases as well, which is called in the higher-end MCU space. Ken Jacobson: And the only other thing I'd say, Joe, is that input costs are still high. So it's -- overall, ASPs are holding up pretty well. Operator: Our next question is from Ruplu Bhattacharya with Bank of America. Ruplu Bhattacharya: I want to ask a couple of more questions on margins. So if I look at core segment margins, they were down 10 bps sequentially on $250 million higher sales sequentially. And look, from the guide, it looks like the trends are the same with Asia growing and America is growing as well, whereas Europe is flat. So Ken, when we think about core business margins, I mean, how should we think about that over the next couple of quarters? And what needs to happen for the margins there in the core business to get above 4%? And do you think that can happen in fiscal '26? And then I have a follow-up. Ken Jacobson: Yes. Ruplu, I'm not sure that I would want to call fiscal '26 core margins. I guess it's possible depending on where the mix shifts in the fourth quarter. But I think what I would say is, again, we're managing gross margin at the business unit level, trying to drive that a little discipline in where the EMEA margin was at. But we understand it's a few different things going on there, but nothing to be concerned with in terms of a longer-term deterioration of the gross margin in Europe. We should see some improvement in gross margin as we have a seasonal mix shift. But I think again, if Asia is going to be 50% of our business, right, it's going to take a little longer in terms of growth with the West to kind of get the operating margin to that 4% level. So we'll continue to kind of focus on each business and making sure they're being consistent with their gross margin. But we would expect, going into the second half of the year, we're at least going to get the seasonal mix shift that would occur, absent Asia continuing to reach record levels, right? The guidance implies record sales in Asia. Ruplu Bhattacharya: Okay. Yes. No, that makes sense. Can I ask the same question on margins for Farnell? If Europe remains flat from a revenue standpoint, can you still see Farnell margins continue to grow 50 bps, I think you were targeting? Is that -- does it depend on overall revenue? Or does it -- is it more dependent on mix? I think you called out some mix impacts this quarter. So again, how should we think about Farnell margins going forward? Ken Jacobson: Yes. From a gross margin perspective, Ruplu, I would think about Farnell being a little different than the core business, that they -- regionally -- EMEA still has the best margin, but that's more because they sell more semiconductors and IP&E products, right, relative to the U.S. and Asia. But in general, each region has a pretty healthy gross margin there. So regional mix isn't as impactful to Farnell, but product mix is impactful. So there's still some runway to go on Farnell gross margin as the broader market recovers and the mix improves in on-the-board components. We saw a little bit of uptick here, but I think there's still some runway there to go. And again, going into the third quarter, in the March quarter, you would have seasonality impacting Farnell as well because most of their business is in the West, so they would still have that kind of seasonality in terms of sales demand. Philip Gallagher: Yes, Ruplu, just to build on Ken's point to reemphasize it. Their mix is both regional, not as big a deal though. The tailwinds that we were kind of counting on for Farnell in the September quarter out of Europe didn't come. September kind of just didn't happen like we had expected, so that dampened it a little bit. And then you got to Ken's point that on-the-board components, semis, IP&E run at a higher margin than the test and measurement MRO, and there's a mix issue there. We're starting to see it improve, but as the on-the-board components increases, that runs a higher margin business. That all said, our expectation is to continue to grind it out at Farnell and continue to see modest improvement sequentially quarter-on-quarter, whether through revenue, profit or OpEx. Ruplu Bhattacharya: Got it. Can I sneak one more in for you, Phil? You've mentioned demand creation revenues and IP&E. What are those each as a percent of revenue? And are -- I'm assuming these are higher margin businesses. I mean, what is the margin delta with the core business? And can they be meaningful drivers for margin upside over the next couple of quarters? Philip Gallagher: Yes. The -- I'll give you a range, Ruplu. I think as what we typically do in the IP&E, so it's, call it 15% to 20% of our total components business, roughly. And the demand creation in the 28% to 33%, depending on the quarter, demand creation revenue. And call it, 300, 400 bps incremental margin. But keep in mind on the demand creation, to get that 300, 400 bps, we also have more costs, right? So we had FAEs and the technical support, things along those lines. So it's not -- it doesn't all drop because we've got to make investments for the suppliers with the technical front end. Operator: Our next question is from Melissa Fairbanks with Raymond James. Melissa Dailey Fairbanks: I wanted to start off first with some questions around the transport business. Phil, I think you highlighted that as being one of the areas where you saw some favorable trends. Was that across all geographies? Or was it kind of more limited to the areas where you saw growth in Asia and the Americas? Philip Gallagher: It was -- depends on year-on-year or Q-on-Q, it was up in both in Asia Pac, right? And the Americas, we saw it up sequentially, down a little bit year-on-year. And Europe, negative in both, as you might imagine. Melissa Dailey Fairbanks: Sure. Yes. Do you have any kind of visibility into what your exposure to either pure EV or hybrid versus kind of that traditional supply chain for ICE vehicles? Philip Gallagher: I don't have that off the top. It will definitely be higher in the EV in Asia. Asia will be heavier EV, Americas will be higher combustible and Europe will be somewhere probably in between. Melissa Dailey Fairbanks: Okay. Yes, that was a bit of a trick question. I didn't expect you to... Philip Gallagher: It's fine. Melissa Dailey Fairbanks: Maybe one quick follow-up on the data center business. Especially as you're getting deeper into some of these higher value components, whether it's the memory, the storage, the FPGA, the interconnect. Is there any change in linearity with either how the bookings come through for that business? Or is it still just kind of book and ship and you see turns in the quarter? Philip Gallagher: Yes. No, it was -- most of those will be a supply chain arrangement, Melissa. So for the most part, we're going to see -- it would probably, for the most part, show up as a turn in the quarter because we're managing forecast. And then when the forecast flags the shipment, we kind of book and bill at the same time. You know what I mean? So we don't -- a lot of that, we don't show on the bookings -- long-term bookings. That kind of happens same day, almost. Frankly, once they pull it -- in other words, it's not really -- it's not inflating the bookings unrealistically. Operator: Thank you. There are no further questions at this time. I'd like to hand the floor back over to Phil Gallagher for any closing comments. Philip Gallagher: Great. Thank you. And I want to thank you and everyone for attending today's earnings call, and I look forward to speaking to you again at our second quarter fiscal year 2026 earnings report in January. Have a great holiday. Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Anssi Tammilehto: Good noon, everybody. Welcome to discuss Neste's Q3 results that were published this morning. My name is Anssi Tammilehto. I'm SVP for Strategy, M&A and Investor Relations at Neste. Here with me, we have our President and CEO, Heikki Malinen; and our CFO, Eeva Sipila. We are referring to the presentation that was launched into our website early this morning. And the key highlights of the presentation include, for example, our Q3 financial performance and the status of our financial targets, including the performance improvement program and leverage, and they are actually progressing well. We are also talking about key regulatory developments and also key opportunities and uncertainties in the market. We are also having time for discussion with you all, and that's, of course, last but not least. And as always, please pay attention to the disclaimer as we will be making forward-looking statements in this call. And with these remarks, I would like to hand over to our President and CEO, Heikki. Heikki Malinen: Thank you very much. And good evening to you folks in Asia, and good morning to you in the U.S. Welcome to Neste's webcast. Nice to see you here again. Q3 in brief, let me state that it's actually now 1 year and -- 1 year and 2 weeks roughly, that I've been working for Neste in this role as CEO. It's been a very busy 1 year. I wanted to just take a few minutes and just reflect on this past year. Obviously, I've had a chance to travel globally widely the company; meet our customers, our suppliers; understand the business; see how our refineries are performing. And I think overall, I really -- the more I -- longer I work here and the more I understand the company, I have come to a conclusion that Neste really is a rough diamond. We have a lot of potential to develop the company further. We have a great group of people here, and as I talked to the Neste folks, I really feel that there's good momentum inside the company and a strong commitment by our staff globally to move this company further. So maybe that sort of more as a context. We will be discussing Q3 results here today. For me, personally, I'm actually pleased with the results. We're obviously not at the level of overall performance we want to be, but the direction of travel into Q3 is good. And if I look at what we have accomplished here, our refineries have been performing well. I'll talk about safety in a moment. Sales has picked up. There's even some positive -- actually good momentum in the market and our performance improvement program is on schedule, maybe even a bit ahead of schedule. So these are also positive things that we're adding them up all together and even our fossil traditional Porvoo Oil products business did well. So it's a good basis to move into the -- into then '26. Well, let's take a look at first safety because safety really is the fundamental of everything that we do. It's a license to operate unless we take good care of safety. We have no right to be making these products. On the left-hand side, you can see the data for our people safety, the total recordable in the incident frequency rate. It is heading gradually down. These numbers, just a reminder, since 2023, they include Mahoney, which is our UCO collection business in the United States, which is a very different type of activity. But in any case, we need to bring that number down much more, and the team here has very clear plans on how to do that. On the right-hand side, you can see our process safety figures for this year. So far, 2025 was actually gone, if I can say quite well. Of course, the trend has really fallen. We've had a number of months where we actually had no major incidences in the company on process side. I think it's too early to say how much of a trend this is. But anyway, the direction of travel is good. And the discussion at least in Neste about process safety is continuous. And we have now, in Q3, launched with a 5-year roadmap journey to further improve our process safety and our ambition is to significantly bring that down even more. But as always, these take time, and it doesn't happen overnight. But anyway, we are systematically moving forward. We have some major initiatives underway. You will hear more from Eeva about the performance improvement program. I just want to say it's on track. You'll see the curves in the moment, maybe we're slightly ahead of schedule. But even having said that, what's interesting and important to understand is the direction of travel towards the EUR 350 million, I think we can confirm that. And then the more we do work around this program, the more evident it becomes that there is -- as I said, there are opportunities within the company to perform even better. And that for me as CEO, is of course, a very important piece of information. We have been driving down our costs, fixed costs, variable costs and the refinery performance is rising. In the middle, you see then the Rotterdam capacity project. It is a significant undertaking. At the moment, having just recently visited the site, and I'm again going in some weeks' time back to Rotterdam. It is very busy. We have approximately 2,300 people from many, many different countries and nationalities working on the site, and the work continues. But it's a big undertaking. And what I want to say separately is that we've also had very good performance on safety with all the folks on the site, it's very critical that we don't have any accidents and the team has done, and I'd say a really good job in working towards that goal every single day. And then on the right-hand side, operational achievements. Actually, I think there are many, but we wanted to just highlight maybe two. One was that on subside, we had record high SAF sales volume. We are clearly -- the market is picking up, even though the mandates are still somewhat were clearly below our hope in Europe, 2% vis-a-vis 6%. And then as you can see, the market has become stronger and Neste has been successfully able to leverage the tailwind. I want to highlight a couple of numbers from the third quarter over 1 million tons of renewable products sales volume of which SAF was about 244 produced tons. So year-to-date, we have produced about 741 tons of SAF. So the journey has clearly started. Our comparable sales margin in RP rose clearly to almost $500 per ton. What was also very positive and helped our result was that the total refining margin for Oil Products exceeded $15 per barrel. And that, of course, then helped the results. EBITDA EUR 531 million, heading in the right direction. Cash, I'll let Eeva talk about cash in a moment. But of course, that's something we monitor very carefully as we do when it comes to the 40% leverage ceiling if I want to use that word. My final slide here before I hand it over to Eeva, and then I'll come back later, it's about the performance improvement program. This is -- for me, this is sort of more than just the performance program. It is very much a journey that will ultimately then move us into what I've called inside the company, a journey of continuous improvement, continuous development. While we're doing this program, we're also building more systematic methods on performance management. We've reviewed all of our KPIs, and we continue to do that because, of course, you get what you measure. We have very systematic cadence on performance reviews. This whole approach, we've really pushed that forward harder, and we will continue to do that, bring it down deeper and deeper into the organization. So I see this is an important part of moving forward with this program. We also track our various activities in this program very carefully. I personally participate in biweekly reviews of all the initiatives that we approved before they even get included in this calculation. So I think I have a good understanding of where the program is going, and I'm happy to say that I really like what I see. I see -- I really like what I'm seeing in the teams. So good work and big thanks to the team Neste on this one. So we are heading well towards EUR 350 million, and so far, EUR 229 million annualized run rate improvement by the end of Q3. And with those words, I give it over to Eeva. So Eeva, please take it from here. Eeva Sipila: Thank you, Heikki, and good afternoon to everyone on my behalf as well. I'll start with the familiar reference margin of renewable diesel. And just as a reminder. So at least do note this is a gross margin. So it deducts only the feedstock cost and is hence different from the sales margin, we'll discuss later on. But indeed, I think this trend line shows very well the strength and recovery we've seen in the European markets in the quarter. Then just to break down by segment are EUR 531 million of comparable EBITDA, so EUR 266 million coming from Renewable Products, EUR 232 million from Oil Products and then EUR 34 million for Marketing & Services. And I'll maybe comment the segments a bit more in detail in that -- very shortly. As Heikki already said, so the performance improvement program is obviously an important part of our EUR 531 million result. We're very pleased with the run rate of EUR 229 million achieved at the end of Q3. And then this gives a year-to-date impact in our figures of EUR 84 million. Now a few points on the EUR 229 million. So if we break it into cost reduction versus more margin volume optimization, it's roughly 80-20 split. And maybe also good to remind you that there is an element of lease costs here, especially on the logistics side, which then are actually not visible in the EBITDA rather in decreased depreciation as we have fewer leases. So roughly a bit more than 10% of the 229 is related to that. Overall, the bigger categories are really around logistics, transportation in all forms and fashion, the optimization there and the lower discretionary spend across everything we do. Moving then to the business segment commentary. So Renewable Products. We're very pleased with the reliability of the operations. We almost reached a similar sales volume, as you see from the left-hand side pillars as we did in Q2, and then the sales margin continued to tick up. If we move to the right-hand side and look at the sort of comparison between our Q3 results versus Q2, you see that the big change really comes from the sales margin area. And naturally, the diesel price has supported as it had a positive impact on our margins to actually both of the two segments and also OP, but important here as well, we continue to see some headwind in the feedstock cost. But then we also had a more one-off positive, which comes from the SAF BTC, so the -- now expired tax credit program in the U.S. which was in place for SAF until September. And we actually booked the full EUR 27 million benefit of those credits in Q3 and that it may be worthwhile noting. On the CFPC side, the continuing tax credit system, we continued on a similar path as in Q2. So looking EUR 27 million in there as well. Then moving into the Oil Products side. So Here, the diesel crack clearly contributed a much better market environment than in Q2, but also, we had a better raw material or crude feed cost level in our Q3 and that supported the $15 per barrel margin as well. Overall, as Heikki already mentioned, so we're pleased with good utilization rate, very stable utilization across the quarters as you see well from the left-hand side. And then really on the right-hand side, maybe in sort of additional point to note is indeed the utilization of 91 and also some fixed cost improvement in the figures. Finally, on Marketing & Services, we had a good season, the Q2 driving season, supporting the results, but the team continues, it's very good and diligent work on the fixed cost side and supporting then the result. Moving then to cash flow and profitability. So the CapEx continues at a very -- under sort of very tight control. We have upgraded now our annual guidance to a level that we expect the CapEx this year to be around EUR 1 billion, so slightly down from the earlier range. And this is really, really thanks to sort of a lot of good discipline across the segments. Now we knew going into Q3 that we'll have a tougher quarter when it comes to cash flow due to the upcoming maintenance or now already started maintenance -- ongoing maintenance, should I say, in Rotterdam and upcoming maintenance in Singapore which meant that we had to build inventories during Q3 to be able to serve our customers during the Q4 period, and that obviously had some headwind on our working capital. But I'm very happy that the total outcome was minus EUR 50 million for the quarter because this is the -- also the year-to-date number, and this obviously gives us confidence that we can deliver positive cash flow for the full year as we work to deliver those built up inventories to our customers in the coming months. So as said, a slight headwind on the cash flow visible also in the leverage, but we're well below our 40% target and we're happy with that performance. So with that, I think Heikki it's back to you. Heikki Malinen: Thank you, Eeva. So a few words about topical matters and then the outlook. So as always, we need to discuss briefly what's happening on regulation. I think overall, our view is that the recent news and decisions are supporting the long-term renewables demand outlook whether you can say it's enough to say there's a long-term secular growth, not completely sure, but at least momentum is building. Here in Europe was, of course, extremely important are the decisions related to implementation of RED III. And the Netherlands, Germany, Italy, France, all moving forward, waiting eagerly to see what happens with Germany. The preliminary information was that they are looking to increase the volumes potentially quite substantially, but still waiting for that decision, hopefully, by the end of the fourth quarter, we will know then which way the direction is in Germany. And then, of course, will the implementation start in '26 or '27. But anyway, it seems to be heading in the right direction, so but still need to be patient here some weeks. On aviation, nothing really major to say other than that, maybe in Asia, South Korea, Singapore, of course, Japan has announced SAF mandates and then Indonesia is also looking at it. So gradually also those countries which have been maybe less advanced in moving forward with these mandates are starting to consider them and discuss them. So that's also a positive when it comes to SAF sales. On the U.S. side, the summer was very busy with the Big Beautiful Bill. A lot of major decisions were made now with the U.S. government in the shutdown, we're waiting to see how the implementation then progresses. But as I said in the -- at the end of Q2, I think if I look at all of these regulatory changes in the U.S. I think for Neste, it's still sort of net positive, some things that are clearly positive, some are negative, but overall, net-net, more on the positive side. And I think that's the main news on regulation and I sit waiting then for Germany and their decisions. The market, let's see. So in terms of opportunities and uncertainties, well, already discussed the German part. On the feedstock side, I think what's worth mentioning is that with the various changes in tariffs, we've now started to see some clear decline in animal prices -- animal fat prices, particularly in Asia, Australia. So that is sort of impacting -- that's a potential a bit of a tailwind for our business. However one needs to always remember that some countries accept animal fats, in their renewable fuels and others don't, so we always need to match the feedstocks with the actual market requirements. But we're very good at that. On the crude oil slate, we, of course, use a lot of crude oil in Porvoo refinery. As part of the performance improvement program, we really started to work systematically and try to see how can we diversify the crude oil slate even further. And we've done in an accelerated fashion, a lot of research here on the various technical limits by crude oil type and have actually been able to identify ways, how can we modify them and also then expand the number of crude oil options we have at our disposal. So I'm very pleased with the results. There are actually quite a number of options we have to expand the crude oil supply. And that, of course, gives us then hopefully, some options to negotiate more favorable arrangements for the company. We already talked about the performance improvement program and the potential even more beyond. On the uncertainties, regulatory matters, of course, still uncertain geopolitics is still around. The whole question about what will happen to Russian refineries, Russian oil, global oil markets. I think the forecast -- the variance between the forecast is very broad. So it's very difficult to make any accurate predictions about that. And maybe the last thing I want to mention briefly is China. China exports. So in the last weeks, we have seen news that China is considering permitting the export of SAF out of their country and remains now then to be seen how much and into what markets that Chinese SAF ultimately goes. So we are keeping a close eye on that as well as we head into 2026. The market outlook pretty much as we have communicated, I would say earlier. And when it comes to the guidance, that guidance is also unchanged. So I wanted to accelerate here to make sure we have plenty of time for Q&A. So maybe with those words, I hand it over to the operator. Thank you very much. Operator: [Operator Instructions] The next question comes from Alejandro Vigil [ Garcia ] from Santander. Alejandro Vigil: Congratulations for the strong results. The first question is about the flow of products export/import in the Renewable Products division because as you mentioned before, now we could see China exporting SAF. And I'm also interested in your thoughts about the different regions, the U.S., Europe and Asia in terms of capacity and balance of export/imports. And the second question is about, what you mentioned about Germany, which is the potential volume upside coming from this RED III implementation in Germany? . Heikki Malinen: Thank you very much. So thank you, Alejandro for the questions. Yes, of course, the thing with these products, once you put them on a vessel, you can ship them in many directions. I think maybe the three things as far as Neste is concerned, so as we already discussed in the spring, so our exports from Singapore to the U.S. have been pretty much constrained. Nothing really has changed there. So as the incentives have gone away, so also our exports have been significantly diminished. That is the case still today. And unless the regulation changes, that will probably be the case also for the near midterm. Then we feel like to --know where is that volume going? Volume has been coming to Europe. The European market has been able to absorb the Singapore refinery volume, and we've had actually reasonably good sales here in this market. Regarding China, it is not easy to get a good sense for what's actually happening there. So of course, we have to also rely on different sources here. But our sense still is that, of course, they have domestic UCO, quite substantial amounts of that. We've seen that UCO prices in that region have not declined as much as one would have expected. So someone is buying that and producing. And now we will then have to wait and see how much tonnage actually comes out of China, and where does it ultimately land? So I think that we will probably be able to report more in the Q4 results once we see that situation evolving. Regarding Germany, yes, this is a very exciting news. I mean the numbers in terms of incremental demand have ranged anywhere from 1 million to 2 million tons. So I mean, whether it's on the low end or on the high end, I mean, it's still positive. And hopefully, the other European countries will then follow up. But Germany, of course, is the biggest market, and that's why it is so critical that, that decision would be positive. Hopefully -- we're hopeful. Operator: The next question comes from Derrick Whitfield from Texas Capital. Derrick Whitfield: Congrats on your results for the quarter. I have two questions for you. First, regarding the short-term market tightness you're referencing on Slide 10. Could you elaborate on this dynamic as we're generally seeing the drivers as being more secular versus short term in nature? And then second, if you could elaborate on the trends you're seeing across the global waste feedstock markets. While you're referencing higher feedstock costs on Slide 13, Tallow and UCO spreads appear to be a bit more favorable for you for the quarter and seemingly have the potential to remain favorable as U.S. regulatory and tariff policy have taken U.S. producers out of the market. Heikki Malinen: Yes, it's a very big question. The short-term demand versus secular demand. I mean, ultimately, the whole matter of having -- moving to clean fuels, especially in SAF, I mean, there's no option. So I mean, logically, you would say that's really the direction of travel for us, of course, at Neste and that's more of a supply issue. It is the fact that we are moving forward with Rotterdam, second-line construction, the more I look at it, the more convinced I am that even though it's a quite formidable task, it is still the right thing to do. And if everything goes well, we should be well positioned as we head into the latter part of this decade. If this RED III implementation goes in a positive way, that, of course, will then give quite a substantial boost in diesel. And don't forget, Neste has the ability to move its capacity fairly flexibly from SAF to RD. So -- and we will take advantage of that flexibility depending on how the market ebbs and flows. Regarding feedstocks, yes, I have to say that it is clear that regulatory decisions on your side of the continent has -- have impacted that some of the buyers seem to have disappeared or at least procuded their procurement from Europe and from Asia. So hopefully, that will ultimately bring some price levels down. But I would say, so far, it's been more of an Asian phenomenon and maybe Australian phenomenon on the animal fat. UCO prices, of course, have, as I said earlier have been holding fairly well. And then I would say in the U.S., we saw this movement up in feedstock prices, but maybe the uncertainty around the implementation of these regulatory decisions is maybe taking a bit the air out. But let's see once the decisions are clear, whether there's another momentum move upward. So Neste is one of the largest buyers of these feedstock, if not the largest buyer, and I think we have a good global setup. We have a good team. We're able to optimize that constantly. We can also trade internally inside the system, but also trade with third-party if we want. So I think we're well positioned for that. I think that's about all the key things I can share with you now. Thank you, Derrick. Operator: The next question comes from Henri Patricot from UBS. Henri Patricot: Two questions, please, both on the Renewable Products margin. The first one, I wanted to check if you can give us some indications as we think about the fourth quarter margins to what extent you're able to capture what seems to be very good spot margins in Europe? Or are you quite constrained because of the maintenance? And then I wanted to also check on the -- on SAF. We've seen quite an increase in SAF prices. Are you able to give us some color on your margins on that side of the business. Have you seen as well an improvement in the SAF margins in the third quarter and in the fourth quarter as demand seems to have picked up? Eeva Sipila: Thanks, Henri. So I would say that we were somewhat constrained in the Q3 as well on taking advantage of really the spot market prices. I think they were relatively high. But obviously, we're very pleased that we were able to utilize even smaller pockets to end up to the $480 that we did. Now going into Q4. So I think the big impact you need to take into consideration is really the maintenance ongoing Rotterdam and coming up in Singapore. And if you look at sort of a year back when we had similar maintenance, be it in Q3, Q4, it is roughly $100 per ton impact. So don't forget that. Otherwise, obviously, we are very much now selling what we have produced to inventory. If all goes well, we will push -- we will hope to be sort of ramping up well and having a bit more still volume to push out really to take into -- take the benefits of the current market, obviously, we are focused on that. But I think we have sort of more limiting factors. And then obviously, please do remember that now in Q3, we had the BTC one-off that will not reappear in Q4 as that sort of legislation. This has now ceased or expired. What comes then to SAF prices. I think the -- indeed, the market turned out to be a bit better than it looked in -- during the summertime when there was a period where one had to consider that whether it makes sense to produce SAF or just focus on renewable diesel, the end outcome was better. I think maybe partly also due to just sort of a bit of lack of product and very, very low exports into the European market, and that helps strengthen the market, and then we obviously took advantage. And like Heikki said, so we are very flexible between the renewable diesel and SAF, and we'll continue to sort of focus on that flexibility really to be to Q4 or '26 for that matter. Operator: The next question comes from Matthew Blair from TPH. Matthew Blair: Could you provide an update on your Martinez refinery? Is this plant EBITDA positive? Or -- are you actually seeing any export opportunities out of California into more attractive markets? And any sort of commentary on the feedstock slate. It looks like veg oils might be a little bit more attractive at certain points during the quarter than some of the low CI feeds. And then on the Oil Products side, could you expand a little bit more on the opportunities on the crude slate. It sounds like you're able to implement a little bit more flexibility. Do you have any examples of crude that you've been switching to and switching away from? Heikki Malinen: Thank you, Matthew. So if I take a stab and then Eeva can continue. So obviously, our Martinez is important. Don't forget, we have a joint venture. Marathon is the operating partner, and we, of course, are actively contributing, but they are the operating partner. So they run the operations day-to-day. I think overall, the refinery is now -- has been running quite well. I would call it from Neste angle that we've come out of the project phase and we're now moving into the more continuous operating phase. And having just some time ago, visited Martinez, so I really feel that they have a really good team on location in California running this. But still, it's early days in this journey of making these renewable fuels even for that team. On the export opportunities, I think the -- I think this is a general comment that with all the different regimes globally, the cost of feedstocks, I don't sort of at least at the moment, I think it's very much focusing on domestic sales. That is kind of where the opportunity aligns at least in the short to medium term. On the feedstock side, I think it's been quite volatile recently, both of the partners supply feedstocks. And then, of course, the refinery can buy whoever they want. So this is -- I don't really -- I can't comment on what the actual substance of the feedstock mixes due to the structure of the joint venture. On the Oil Products side, yes, the crude slate is really interesting because, of course, we buy a lot of it. We have -- our primary sources, the North Sea, has been. And we know we've had a good relationship, getting feedstocks out of there. But -- I'm sorry, a crude out of there. But of course, in the spirit of trying to make more money and improve our performance, we have to look at options. And the only thing I can say is over the last three quarters, our engineers and chemists in Porvoo have really looked at a very, very broad set of options. And out of that, they're now narrowed it down to let's say, a shorter list, but there are some very interesting things, and we're testing them in production level mode to see how they perform. But anyway, the options are evident, and we will continue to work. I think we'll be able to report more as we head into 2026. But I'm very pleased with the work they've done on this crude side. Operator: The next question comes from Peter Low from Rothschild. Peter Low: The first was just on perhaps your term contract negotiations for 2026. I think those usually take place around this time of year. Can you comment at all on how those negotiations are progressing? And whether the current tightness in the spot market confers on your degree of pricing power? And then the second question was on the outstanding BTC, which you recognized as a contingent asset in the first quarter, but I don't think you booked in the underlying results. I think that was EUR 30 million to EUR 40 million, as you said at the time. Can you give us any update on when do you expect you might be able to formally recognize that? Heikki Malinen: So if I -- thanks, Peter. Thanks for your two questions. If I take the first one and then Eeva will take the second. Yes, this is indeed the time of the year when it is a term contract time, so to speak. I think last year, we said that for 2025, I think we said about 2/3 of the volume had been termed -- yes, about 2/3. I think, of course, the market has changed quite a lot. We also have the SAF market is now active with the mandates. What I would like to say here is that we will always term some volume, but I think at the moment, we're a little bit monitoring the situation. We're in no rush to make any decisions here. Let's see how the weeks now move forward. We will term some, but I will then report to you probably in Q4 how these things ended. But at the moment, we're in no rush. Eeva Sipila: And regarding, Peter, the Q1 CFPC credit. So we're working on a deal to monetize all of the '25 credits and targeting to be successful during the fourth quarter, and that would then probably be the trigger for us to recognize the Q1 as well. Operator: The next question comes from Adnan Dhanani from RBC. Adnan Dhanani: Two for me, please. First, as it relates to your operated production facilities, utilization rates have been around the 80% mark in recent quarters. How do you see that evolving in the coming quarters? And are there any hurdles there to materially increasing it beyond that 80%? And then secondly, on the opportunity you mentioned from the lower animal fat prices. Can you just provide some color on the current split you have in your operated refineries between UCO and animal fats? And where that could go to take advantage of that opportunity? Heikki Malinen: So the first one, Eeva, on utilization, I think 80% has been sort of a good number for modeling, would you not agree? Eeva Sipila: Yes. Yes. I would say, Adnan, that whilst, of course, it's not necessarily an indication that we're satisfied with the 80%, but just realistically thinking of where we are. I would use that as the right -- as the number also going forward into '26. Now we have identified quite some bottlenecks in our processes, which we are working on to improve the number, but some of them are also tied to maintenance and CapEx, and hence, the sort of progress will not be sort of massive in -- going into '26. So that's a good number for you to use. Heikki Malinen: I would agree. And I think Neste has a -- might if I look at the last decade, Neste actually has quite a good history in debottlenecking these lines, both Singapore Line 1 and Rotterdam Line 1, both have been able to get beyond the nameplate capacity. So we are constantly working -- I mean, under the performance improvement program, we're very systematically turning every corner in those refineries to see how can we get more tonnage. But as Eeva said, a number of these things, they require some investments, not massive, but some money and some of these investments, you can only do when you have a bigger turnaround. So that really creates the delay. But I'm actually very pleased also with the work the engineers are doing. Then on the animal fat, the blending -- I don't want to go into the detail of the blends. It is a bit sensitive. And obviously, UCO plays a big role as does animal fat. What I can say to you, though, is that Neste has invested a lot in pretreatment technology. We have heat treatment. We have pretreatment technologies. We're able to clean up a lot of the bad stuff, if I may use that term from the feed. So it doesn't go into the refinery. And constantly, we're trying to optimize within the technical limits to get as much of the cheap stuff or cheaper stuff in there as we can. But I want to still mention that in some European countries, for example, animal fats are not really allowed. And that does, to some degree, restrict the potential. But I'm pleased anyway with the direction of travel on animal fat prices. That is a good thing. Operator: The next question comes from Artem Beletski from SEB. Artem Beletski: So I would like to ask two relating to European regulation. And the first one is relating to RED III implementation. So you have been discussing about Germany and the impact on the demand for next year. But maybe could you talk about some other markets which are also doing RED III transposition and increasing targets in 2026? What are interesting opportunities you see there? And the second question is relating to some discussions out there when it comes to product certification and some actions or plans to make more strict approach in some markets like Germany or Netherlands. How much is this actually visible when it comes to our customers' behavior? And maybe what comes to preferring U.S. supplier on European market? Heikki Malinen: So thank you very much. So of course, for us, what's very important is what happens here in the Nordics, both Finland and Sweden, very -- Sweden, very critical. Remember, Sweden actually dropped the mandate quite a lot here some years ago. We believe we're going to see gradual movement of the percentages as we head into '27 and '28 and even towards '30. So it's gradual because, of course, people are worried about inflation and so forth. But I think that's all positive. In Central Europe, of course, Germany is just a very big thing. Other markets, we are looking closely at is, Italy is interesting. The Netherlands. And then small markets like Portugal, but volume-wise, Portugal, Spain, are small. I would say, Italy, Germany, Netherlands and then Nordics are critical. And I think overall direction at the moment looks positive. On product certification, this is a really critical thing because -- this is, of course, a trust-based system. The value of the certificates, the biocredits fundamentally related to the fact that the feedstock you procure and use is really the stuff it's supposed to be, and that you have very good tracking. And Neste spends a lot of time and money to make sure that we track with our business partners resources and that we are using the right feedstocks. I can't comment on other industry players. Only to say that I do think that at least the savvy customers are aware of the importance of this, and then they've recognized, that Neste is a reliable partner. I think that's what I would -- that's all I would say. And I think the German legislation, if it goes forward, we'll sort of further heighten the importance that the feedstock needs to be the right kind and from a reliable source or acceptable source if I use that word. So that would be good for us as well. Operator: The next question comes from Nash Cui from Barclays. . Naisheng Cui: Two questions from me, please. The first one is on the Q4 margin impact. I think you provided a very helpful comment earlier talking about $100 per ton impact from similar maintenance previously but we are having two major maintenance this quarter, including Singapore for half of December, I think. So I wonder, could we see more impact over there because there are two plants of in Q4. Then my next question is on inventory. So I wonder if you have built enough inventory to sustain a run rate sale about 1 million to 1.1 million ton in Q4? Eeva Sipila: Sure. Thanks, Nash. So you're right to highlight that there is indeed two breaks. But obviously, the Rotterdam is the sizable because it's full for the quarter, and it's really the start of the Singapore shutdown that impacts this quarter, a bigger bulk actually goes into Q1. So I think the reference is not sort of -- is a pretty good one. Of course, it depends on also how the maintenance breaks go. And a part of this industry is such that when you stop and you open certain things, you sometimes do have surprises. So obviously, the syndication is assuming that we don't have big surprises. And more importantly, that we have very organized and speedy ramp-up in Rotterdam. So it is not meant to be sort of exact guidance, but I just thought it's helpful because it indeed the magnitude is such that if you ignore it, your models will probably lead you to a too high number. Then when it comes to the inventory, I think we are well provided with what we produced into inventory to serve our customers as per our customer promises. It's more than a question of really on our ramp-up time in Rotterdam that the faster we are, we may have some excess to sell in the quarter. And if we then have any issues, we might miss that opportunity to really tap on the spot market. Naisheng Cui: I just wonder if we put margin aside, is there any color you can give on the absolute cost side of this on the two maintenance? Can you say on EBITDA? What is the absolute cost? . Eeva Sipila: Well, we haven't really given such numbers, this per ton is what I think is -- gives you a helpful indication of the impact in the quarter. Operator: The next question comes from Alice Winograd from Morgan Stanley. Alice Bergier Winograd: Two questions from me please. First, looking to 2026, what do you think are the key building blocks of supply growth and demand growth for HVO, for instance, you mentioned Germany, adding some 1 million or 2 million tons in demand. And what else is on your radar that you can maybe quantify from a fundamental perspective? And the second question is on FX. I believe you printed EUR 109 million of FX this quarter? And when do you expect to see the current spot rates to fully show in the P&L because there's quite a gap there? Heikki Malinen: Do you want to take the FX first? Eeva Sipila: Yes, sure. So indeed, the bigger FX move started or the appreciation of the euro started more -- during the quarter, so to say. So the -- as we are hedged, it comes with a delay. We'll start to -- now that levels are obviously kind of, I would say, stabilized at least to some extent to these current levels. So that will start coming through in the Q4. We typically don't have a super long hedging when it comes to FX, but obviously, some going also into next year. Heikki Malinen: Yes, of course, 2026, that goes into the department of forecasting, which has not been easy in this business. I think on a very high level, I think three things. Of course, the macro situation. Europe, as you know, has been overall quite weak here for a number of years on macro. Some minor signs of improvement as we head into next year, but still very early to say. I think the big thing is really regulation because that, of course, will create instant demand. And then when you look at the overall level of how the market is behaving, now looking more at the fossil diesel because that, of course, impacts then the renewables market as well. What is happening with this whole Ukraine-Russia matter? How are these refined products being moved around? That may also have some impact. Inventory levels have been overall quite low here. As we came out of the summer, that's also been supported. So maybe that will a little bit boost as you head into the new year. But for me, really the big thing is what's going to happen in the coming years. And I think it's very much about RED III. Operator: The next question comes from Matt Lofting from JPMorgan. Matthew Lofting: Two, if I could, please. First, Slide 10 in your deck shows the improvement through recent months in the gross renewable diesel margin. It sounds like you're sort of saying at least to this point that feedstock costs have been relatively sort of high or stable. So I just wondered if you could disaggregate roughly sort of how much of the improvement in the gross margin you think is indexed to the strength in fossil fuel diesel market versus being driven by underlying improvement in the renewable fuels market? And then secondly, I noticed that you mentioned listed trade policy, unpredictability in your list of uncertainties. To this point in the year, sort of what have you seen from that perspective in terms of any impact on the business and the market. Just wondering how much of a, let's say, base case versus sort of tail risk you see there? Heikki Malinen: Do you want to do the feedstock,? I'll come to trade. Eeva Sipila: Yes, it was Matt -- your question on the unpredictably really around the feedstock, did I get it right? Matthew Lofting: Yes, yes. Eeva Sipila: Yes. So well, I think considering how volatile the feedstock market has been this year and I think it's prudent to sort of assume that there's some unpredictability into that. Now of course, as the year draws to a close, what we have and now either at the production facilities or close by, obviously, it starts to be more predictable. The -- but it's really these sort of trade barriers that have now been a sort of big area of causing this sort of unpredictability. And I think now the animal fat, where the price has decreased, which is in our favor, is a prime example because it really comes mainly from the fact that we see less U.S. buying and less buyers, hence, around whereas then the UCO has been moving a lot less because actually, the sort of the Chinese buyers have been picking up if there was anything sort of left unpicked from U.S. But as we've all seen, these trade topics change on a daily basis. They're dynamic to say the least. So many things can happen. And then, of course, when it comes to our inventory valuations and those type of things, then the sort of it matters what the prices are at the year-end. And hence, we want to sort of highlight that as a real uncertainty. But I don't think I can really provide any more clarity unfortunately, on the topic. Heikki Malinen: Maybe to your question about trade policy. I mean, of course, there's a lot of stuff, but if I raise two uncertainties. One is regarding the U.S. importation of foreign feedstocks in the RIN 50. Obviously, I think not all industry participants are necessarily of the view that, that is the right thing. So the debate, I think, we didn't have visibility on the debate, how will that ultimately then end? Will it go forward as proposed or will it change? But as I said, my understanding is there are different views on what is the right way forward. So we'll just have to see. And then I think from the European standpoint, Neste, we, of course -- as I referred to the Chinese SAF, the European Commission at the moment is monitoring the SAF situation. And then we'll have to see in '26 or '27, depending on now what happens, what will happen on -- as you know, on renewable diesel, we have antidumping duties. But on SAF at the moment, it's monitoring is what's being done. So that will be some uncertainty. That's worth understanding and noting. Operator: The next question comes from Paul Redmond from BNP Paribas. Paul Redman: My question was just about in preparation for Q4, you have been building inventories. I just wanted to confirm where the focus of that build was. Was it on sustainable aviation fuel or renewable diesel? And then secondly, just a question about CapEx. You reduced your CapEx. If we could just get some insight on what the key drivers are of that? Is it phasing or a true reduction in CapEx? And you were forecasting to a similar spend in 2026. Should we think there's any change there? Eeva Sipila: Yes, I can certainly start with the CapEx. So I would say that Obviously, when the guidance was given, it was very sort of quickly after Heikki started, and we've done a lot of work on reviewing really the amount of CapEx spend that it drives and fulfills our return requirements. And hence, there's been a real reduction of scope in -- but then what comes to the bigger bulk of the CapEx, obviously, related to Rotterdam that has moved, and we expect that to sort of be the bulk of next year as well. So there's really no -- I wouldn't -- we're not expecting a change to the earlier view on next year. But of course, the more you work on, there's always areas of cost efficiency that can be applied and tighter and better procurement, and we're obviously trying to sort of make sure the organization is really alert on all of those topics. But yes -- and then on the Q4 preparation. Well, we obviously know our commitments and have balanced both. So there is an inventory on both RD and SAF. But of course, volume-wise, the RD is much bigger. Heikki Malinen: Maybe if I can just build on that. I remember our conversation after Q1 and after Q4 of last year was very much about, okay, so how will the SAF procurement actually take place in Europe in 2025? And this is the first year when we have the mandate. And coming into this year, we really didn't know exactly, is there going to be seasonality around the summer. Will there be buying later in the year? Or will there be buying equal amounts through the year? So it's been a bit difficult also to plan the inventory when we don't really exactly have any data on the buying behavior and the buying profile. But as we have this year's data and next year's, then we'll probably become also smarter on how do we sort of build our own inventories as the market develops. So just more as a context, remembering those discussions in the spring of this year. Operator: The next question comes from [ Matti Carola ] from OP Corporate Bank. Unknown Analyst: First one regarding the performance improvement program. Could you a little bit elaborate the impact on the variable cost and how much is visible already in the sales margin you have right now? So I mean, the big part is, of course, big part of the headcount reduction, but if you could give a color about this impact on sales margin. Then the second one is about the SAF next year. How do you see SAF market going as the Netherlands opt in this is done and also the U.S. reduction is a little bit killing the exports from Singapore. So do you see potential for RD -- or how do you see the market? Heikki Malinen: You do the first one? Eeva Sipila: Yes, I can comment on the performance improvement. So -- well, the headcount is important, it for regulatory reasons, obviously, it comes a bit in phases that there's still people have certain tenures that we need to respect and hence, not all the savings are in. So actually, I would say that the biggest impact in the P&L is really around the overall procurement, spending less and spending more wisely. And that's by far the biggest. Then the logistics side is important, but part of those savings obviously land into reduced leases and hence in the depreciation role, but still significant also in the P&L. Heikki Malinen: That's your question, I'm trying to recall exactly the wording on the Dutch opt in clause, whether that actually -- I mean, that has, of course, been favorable for SAF, but now if it is going away it could be not exactly sure how much -- yes, I'm not exactly sure how much of a hit that will really mean. On the U.S. side, of course, the fact that you have this equalization from the incentives regarding SAF and RD, of course, that, of course, then reduces in some ways the attractiveness, if I may use our competitiveness coming out of Singapore. So that will be sort of a net negative, I would say. Operator: The next question comes from Christopher Kuplent from BofA. Christopher Kuplent: I've got really only ones remaining on Rotterdam. Could you tell us how much of the project CapEx is still left to be spent? And slightly related to that, what that will do to your depreciation charges running through the RP line? I mean, we're sort of at EUR 140 million, EUR 150 million per quarter right now. Where is that going to pan out once Rotterdam is fully ramped up into '27? Eeva Sipila: Sure. So Christopher, what we are expecting in Rotterdam as CapEx next year is around EUR 700 million. And then now the '27 number on top of my head is obviously a lot lower because there's -- by that time, everything will be built up, but there are some tails 100-ish, if I remember right, in '27. So then that all kind of adds to the depreciation. Obviously, there is a relatively long depreciation time for -- because the asset will be around for decades. So the imminent increases is, of course, visible but based on that, if we can come back to a more exact number, but that would be the number to use on top of what you're seeing today. Christopher Kuplent: Okay. And just to confirm, you're not fully depreciating the asset until it's ramped up, right? So even the CapEx spend to date is not in your quarterly charge yet? Eeva Sipila: Correct. We have the -- what we call sort of comparability in use. So as it is a site in progress, so to say, asset under construction. So yes, that's very true. Operator: There are no more questions at this time. So I hand the conference back to the speakers. Heikki Malinen: Once again, it was a pleasure to spend this hour with you. Summary, I wanted to touch on the four key points. As I've said, I think we're making really good progress on the performance improvement program. You see the numbers. We will continue to report on that, actually see there is more potential. And I think that we will continue to work on this going forward. Regulatory developments very much focused now in Germany. Let's keep our thumbs up, if I can use that word. There is positive momentum in the market. Let's see how much that holds into '26. And then on the balance sheet, which we maybe didn't have to discuss this much this time. So we are below the 40% leverage number. And that, of course, is something we've aspired to do with the help of these initiatives. So with those words, let me thank you, on Eeva's and on my behalf and wish you all well. And to the Americans, Happy Halloween. And we will then see you again in February. Take care.
Operator: Greetings, and welcome to the Urban Edge Properties' Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Areeba Ahmed, Investor Relations Associate. Thank you. You may begin. Areeba Ahmed: Good morning, and welcome to Urban Edge Properties' Third Quarter 2025 Earnings Conference Call. Joining me today are Jeff Olson, Chairman and Chief Executive Officer; Jeff Mooallem, Chief Operating Officer; Mark Langer, Chief Financial Officer; Heather Ohlberg, General Counsel; Scott Auster, EVP and Head of Leasing; and Andrea Drazin, Chief Accounting Officer. Please note, today's discussion may contain forward-looking statements about the company's views of future events and financial performance, which are subject to numerous assumptions, risks and uncertainties, and which the company does not undertake to update. Our actual results, financial condition and business may differ. Please refer to our filings with the SEC, which are also available on our website for more information about the company. In our discussion today, we will refer to certain non-GAAP financial measures. Reconciliations of these measures to GAAP results are available in our earnings release and our supplemental disclosure package. At this time, it is my pleasure to introduce our Chairman and Chief Executive Officer, Jeff Olson. Jeffrey Olson: Great. Thank you, Areeba, and good morning. We delivered another strong quarter with FFO as adjusted increasing 4% over the third quarter of last year, bringing our year-to-date growth to 7% compared to the first 9 months of last year. Same-property net operating income increased by 4.7% for the quarter and 5.4% year-to-date. Last week, we completed the $39 million acquisition of Brighton Mills, a 91,000 square foot grocery-anchored shopping center located less than 1 mile from Harvard Business School. The property is situated in a highly desirable infill neighborhood of Boston that has experienced significant growth driven by new multifamily developments. The 3-mile trade area comprises 449,000 people with average household incomes of $170,000. The purchase was funded with proceeds from the sales of Kennedy Commons and McDade Commons, both structured as 1031 exchange transactions. Those 2 properties were sold at a 5.4% cap rate with a 5-year forecasted NOI growth of only 0.4%. We acquired Brighton Mills for a similar cap rate in the mid-5s, but we expect annual NOI growth will exceed 3%, primarily through contractual rent increases. The property also has tremendous demand for residential and commercial development, as several parcels with the same zoning have been approved or are already under construction. It is one of the few shopping centers in the market with surface parking. Our price of approximately $5 million per acre is well below the $9 million to $10 million per acre land values in the immediate area, making this a textbook covered land play that delivers solid current returns and meaningful growth as we wait for the leases to expire so that we can eventually extract even more value from the land. Our Boston portfolio now includes 7 properties with the value approaching $500 million, representing about 10% of our company's value. Five years ago, this region accounted for less than 2% of our value. Over the last 2 years, our capital recycling strategy has resulted in nearly $600 million of acquisitions of high-quality shopping centers at an average 7% cap rate, while disposing of approximately $500 million of noncore assets at a 5% cap rate, a disciplined approach that has meaningfully upgraded our portfolio quality and long-term growth rate. The acquisition market remains highly competitive, driven by more institutional capital on the equity side and tighter spreads from traditional banks on the debt side. Given our better-than-expected results, we are raising our 2025 FFO as adjusted guidance by $0.01 per share at the midpoint to a new range of $1.42 to $1.44 per share, representing 6% growth over 2024 at the midpoint. Looking ahead, we expect shopping center fundamentals to remain strong, driven by favorable supply-demand dynamics and record-low vacancy rates. This strength is already evident in our year-to-date leasing spreads, which averaged 40% on new leases and nearly 10% on renewals. In closing, I want to recognize our exceptional team. Their dedication and focus continue to drive our success. I'm grateful for their commitment to delivering another quarter of strong results. I will now turn it over to our Chief Operating Officer, Jeff Mooallem. Jeffrey Mooallem: Thanks, Jeff, and good morning, everyone. We continue to make meaningful progress across leasing and development, reinforcing the strength of our portfolio and our ability to drive long-term value creation. Leasing activity in the quarter totaled 31 deals aggregating 347,000 square feet. This included 20 renewals totaling 265,000 square feet at a 9% spread and 11 new leases totaling 82,000 square feet at an outsized 61% spread. That spread was primarily driven by new anchor leases with HomeGoods and Ross. These national retailers took spaces that were previously leased to now bankrupt companies, reinforcing what we have been saying for the past several quarters. When we have an opportunity to get boxes back in our portfolio, we are usually able to generate very strong rent spreads. Our overall same-property lease rate now stands at 96.6%, a 20 basis point decline from last quarter, and our anchor lease rate is at 97.2%, also a 20 basis point decline. We anticipated this decrease due to the lease rejection of our at-home store at Ledgewood Commons. The at-home vacancy alone had a 60 basis point impact on leased occupancy, but its impact on NOI is much less, as it was a single-digit rent that we expect to replace with a strong renewal spread. To put it another way, the deals with HomeGoods and Ross signed in the third quarter will contribute almost twice as much base rent as at-home did from this box in 60% of the square footage. We also executed 9 new shop leases in the third quarter, totaling 27,000 square feet, achieving a same-space cash spread of 42%. Our shop occupancy rate remained flat from the prior quarter at 92.5%, in part because we continue to look for ways to create new shop space where economics justify it. For example, this quarter, we split a vacant 11,000 square foot space in Millburn, New Jersey, and turned an underperforming anchor space into more desirable shop space. We've already executed a lease on about 40% of this space at a very healthy spread, and we expect a similar return on the remainder of the space. On the development front, we stabilized one project with the opening of Bob's Discount Furniture at Newington Commons 2 quarters ahead of schedule, bringing our rolling 12-month total to $49 million of projects stabilized at a blended yield of 17%. We also activated 3 new redevelopments this quarter with a gross investment of $8.4 million. Our active redevelopment pipeline now totals $149 million with a strong 15% projected yield. We continue to convert our signed not open pipeline, which now stands at $21.5 million and represents 7% of NOI into rent commencements. This quarter, we commenced $5.6 million of annualized gross rents from tenants like Starbucks, Sweetgreen, Dave's Hot Chicken and our first Tesla Service Center. Today, we are adding to the rent roll our second Trader Joe's location in Woodbridge, New Jersey, which opened for business this morning. I want to wrap up by sharing some insight into the overall leasing market and the health of our national retailers. In the past 45 days, Scott Auster and I have been out on the road. We have visited 8 different national retailers in their offices to discuss overall sales trends, capital plans, store performance and opportunities to do more together. The takeaway has been extremely positive. We heard good news about operating metrics and good news about the strength of our Northeast corridor market versus other parts of the country. Nearly all are in clear expansion mode and are prepared to pay the rents needed to make that happen. With a shortage of good space available for these retailers in our markets, they are encouraging us to take back space that may be under-leased, where we can, and we're busy studying the best ways to do this at some of our bigger properties like Bergen, Yonkers and Cherry Hill. This has always been and continues to be a business of both short-term results and long-term value creation. We believe today's economic climate allows us to achieve both. With that, I'll turn it over to our CFO, Mark Langer. Mark Langer: Thank you, Jeff, and good morning, everyone. We're pleased to report another excellent quarter, underscored by strong earnings growth and sustained leasing momentum. And the third quarter FFO as adjusted was $0.36 per share and same-property NOI, including redevelopment, increased 4.7% year-over-year. This growth was driven by rent commencements from new tenants, higher net recoveries and higher collections on past due receivables. FFO as adjusted, also benefited from lower recurring G&A. On the financing front, we secured a new $123.6 million 4-year nonrecourse mortgage on Shoppers World at a fixed rate of 5.1%. A portion of the proceeds were used to pay off our $90 million line of credit, which carried an interest rate of 5.5%. The remaining proceeds are expected to be used towards capital investments and general corporate purposes. Debt markets for retail assets continue to strengthen as capital flows from CMBS, life companies and especially banks have increased, which has resulted in spreads compressing 30 to 40 basis points since the first quarter. That is in addition to the 20 to 30 basis point decline in base rates. Our liquidity position remains very strong at over $900 million, including $145 million in cash and no amounts drawn on our line of credit. Outstanding indebtedness consists of 100% nonrecourse fixed-rate mortgage debt. Our net debt-to-annualized EBITDA was 5.6x at the end of the quarter, which provides us with the flexibility to capitalize on future growth opportunities. Looking ahead to the remainder of 2025, we are raising our FFO as adjusted guidance by $0.01 a share at the midpoint, implying fourth quarter FFO of $0.36 per share. This guidance increase reflects better-than-expected results year-to-date from new tenant rent commencements, year-end CAM reconciliations and lower G&A. Our expectations for same-property NOI growth, including redevelopment guidance, have also been increased to a new midpoint of 5.25%, up from the prior midpoint of 4.6%, implying growth in the fourth quarter of approximately 4.5%. As Jeff mentioned, our $21.5 million SNO pipeline will continue to contribute to future growth with $5.6 million in annualized gross rent already commenced in the third quarter and another $300,000 expected in the fourth quarter. In summary, we are pleased with the track record of execution we have generated over the past 3 years. We now expect that our FFO as adjusted CAGR will be nearly 6% during this time, driven by generating average same-property NOI growth of 4.3%. This growth was achieved while improving our balance sheet as acquisitions were funded primarily with the sale of low cap rate, low-growth assets. We have significantly improved the quality and durability of our cash flow as the addition of strong credit, highly desired anchor tenants have come online, and we have increased shop occupancy to nearly 93%. As we look ahead, we remain focused on driving long-term growth while maintaining a strong track record of prudent capital allocation. With that, I'll turn the call over to the operator for Q&A. Operator: The first question is from Michael Goldsmith from UBS. Michael Goldsmith: Maybe starting with this acquisition, it sounds like there's some better opportunity for growth and then also opportunity for redevelopment over time. So just to get a better sense of the time line for that, are you able to kind of size when the leases expire or so that you could start to monetize some of the opportunities at that site? Jeffrey Olson: Yes. I mean, literally, we see over the next 10 years, there's term on a lot of the leases. I think all the leases expire in 22 years. So we definitely have some time. But over that 22-year time period, we feel very confident that we'll exceed 3% NOI growth based on everything in place. And maybe we'll get to it sooner, if we're able to negotiate a deal with the current tenants, but I think I said in my comments, it's a textbook covered land play. Indeed, it is. If we could own 72 properties like this, I think we'd all be very happy here. By the way, I'm very happy to see you covering the stock, Michael. When I read the report this morning, UBS, as you know, I was a former analyst at UBS. I was looking for my name on the report. But I have to chuckle because my name tied to a neutral rating on Urban Edge properties wouldn't. Anyway, we hope to get you there someday. Michael Goldsmith: We'll work on that. And then, as a follow-up, just as we look forward, can you provide a breakdown of some of the onetime items you recognized in 2025 so that we could strip that out of the 2026 run rate? And then also, I think real estate tax and G&A have been benefits this year. So how can we think about those as we look forward? Mark Langer: Yes. I think, Michael, the things that we've talked about on some prior calls and to answer your question, in terms of some items that we don't see recurring at the same levels, we had some onetime collections that related to some very old receivables, including, as you heard in my prepared remarks, this quarter, we had some. So I think for the full year, we believe that's about $2 million and then probably about $1.5 million related to some of the CAM recovery billings that we've had that related to some old prior periods as well. So I think those are the 2 biggest things I would highlight. Michael Goldsmith: Yes. Anything on real estate taxes and G&A going forward? Mark Langer: No, real estate taxes, I feel good. Our run rate, we have a repetitive process in place where we challenge and appeal those where we believe it's warranted. And to the extent we had anything that was really material or outsized, Michael, we would call your attention to it, but I don't see that. On the G&A front, I can tell you, we've worked very hard over the last few years to continue to do everything we can, whether it's rightsizing the enterprise, looking at efficiencies. And so you are seeing a downward trend that is what's tied to our guidance. There will be some reversion next year just because headcount will stabilize, we'll have normal inflationary increases, but I don't see it having any material move. Operator: The next question is from Michael Griffin from Evercore ISI. Michael Griffin: Jeff, maybe you can talk about the opportunity set within Shoppers World. I know you recently got the mortgage refinance there. If I remember correctly, there's a Kohl's box that you could be looking to do something with, whether it's redevelopment into other uses or things like that. But maybe give us a sense of what the opportunity is there and what we could be seeing in the hopper for that property. Jeffrey Mooallem: Michael, it's Jeff Mooallem. I'm going to try to take that one, if I can. Yes, I mean, Shoppers World, we acquired it in October of 2023. It was our first sort of really meaningfully large acquisition in Boston. We were very excited to get our hands on it. As you know, it's kind of one of the most unique and irreplaceable properties in that trade area. And we acquired it all cash at the time, which was a wise move because 2 years later or a little less than 2 years later, we were able to secure the financing that Mark referenced. Important to note that in that financing, the Kohl's parcel is not included. So we do have some flexibility to work with the Kohl's parcel alone without impacting the mortgage that we took on the main Shoppers World parcel. As we get into the Kohl's conversation, we'll let you know. We do have an agreement with Kohl's, where we have the ability to get that back early if we want to. So we have been studying some different ways to work with the building. We've looked at some mixed-use opportunities. We've looked at retenanting it to other tenants. We feel confident that we're going to be able to do something accretive and positive there, not just economically, but for the overall benefit of the asset. So I would say that we're very excited for this sort of next generation of Shoppers World. There's good demand for some of the other space as well. We don't have any more space left at the moment, but we're trying to find ways to increase the main Shoppers World parcel as well. And on the Kohl's piece itself, stay tuned, but I think hopefully, early next year, we'll have something cool to announce there. Michael Griffin: Jeff, that's some helpful context there. And then maybe you can give a little bit of color around the rent spreads in the quarter, particularly as it relates to the new leases. It looks like it was up about 60% year-over-year. Was one lease skewing that, that maybe absent that, it's probably in the 20% or 30% range? Or is that really indicative of, I guess, the demand that you're seeing within the new lease part of the leasing pipeline? Jeffrey Mooallem: I would love to tell you that 60% rent spreads are a consistent run rate going forward, but we did have a unique situation. I mean, first of all, with our size, the data set is somewhat limited. So you got to take that into account. In the third quarter, though, we did sign anchor leases with one with HomeGoods and one with Ross in spaces that were previously occupied by Big Lots and buybuy Baby. So they were sort of the byproducts of those bankruptcies. And if you recall, we've been saying now for a couple of years, boy, if we get some of the space back, we're pretty sure we can make a lot of money on it. And that's the proof right there. I mean, you're talking about rent spreads on those 2 boxes alone that really drove that 60% number. There were some positive shop leasing spreads as well, but those 2 deals, in particular, were what got us into that 60% range. Going forward, I think it's reasonable to assume that we'll be comfortably in the double digits, and we like to be north of 20%, but probably not 60% every quarter. Michael Griffin: And Jeff, just real quick, what is the expected time frame between executing those leases on those backfilled anchor boxes versus when the new tenant is going to commence occupancy? Jeffrey Mooallem: That's part of the reason, Scott and I were out on the road the last 45 days, was to try to reiterate to our retailers how much we'd like to get them open as fast as possible. And what I would tell you is when two -- both parties are motivated, it can happen pretty quick. We'd love to get HomeGoods and Ross in those cases, both open for business in 2026. We're confident that one of them will open probably in the first half of the year and the other one, hopefully, in the second half of the year. Operator: The next question is from Floris Van Dijkum from Ladenburg. Floris Gerbrand Van Dijkum: Jeff, Jeff Mooallem, that is. I had a question on the comments you made about splitting an anchor box. Can you talk about the opportunity to create more shop space in your portfolio? How many more opportunities are there available to take anchor and split it? And what are the returns for that kind of capital? Jeffrey Mooallem: Floris, it's a great question. I mean it's something we're studying all the time. In this particular case, it was a relatively small box, only 11,000 feet, but it qualifies as an anchor under our 10,000 square foot threshold. And it was a fairly logical and easy split, and we were able to get a great national tenant, a fitness user to take the corner piece and that will really drive the leasing of the rest of it. If we had half a dozen or a dozen more of those, we would be doing them right now. A lot of the anchor space that we have left, given our high anchor occupancy is somewhat more challenged space, whether it's single or mid-teen rent kind of space. And if it's deep, it does make it challenging to turn it into shop space. So a lot of our anchor space, like if you look at the at-home in Ledgewood, for example, which we talked about, probably gets cut up into 2 or 3 anchor tenants and not into a lot of shop space. Having said that, this is something we talk about literally every week in our development and our leasing meetings, where else can we create more shop space? We have great demand for shop space across the portfolio. I mentioned some of the names of some of the shop tenants we've opened this quarter, Sweetgreen, Starbucks, Cava, the fitness deal we just signed in Melbourne, these are tenants who can pay rents in the 40s, 50s, 60s, and the economics start to make sense to create shop space when we can. Jeffrey Olson: It's not just shop space, too, right? It's also pad space, which... Jeffrey Mooallem: And pads, yes. Jeffrey Olson: They were valuable. The rents are so much higher. Jeffrey Mooallem: Right. So we're creating a pad, maybe two pads at two different shopping centers. We think that there's an opportunity set there, maybe 4 or 5 of our assets could get additional pads for multi-tenant shops or even for a single-tenant food user. Floris Gerbrand Van Dijkum: Great. Maybe a follow-up question. Talk a little bit about the acquisition environment, and also maybe the ability to fund acquisitions as well. I know that New York and Boston are pretty competitive markets. I would imagine it's pretty tough to find a product that fits your criteria. Maybe talk a little bit about what you're seeing, what's out there, and your appetite for transactions going forward? Jeffrey Olson: Look, Floris, it's a very competitive market. There are a lot of new players in the market, whether it's private equity, family offices or institutions. And their recent interest is really driven by more and cheaper debt availability. And then as you know, shopping centers also offer higher cap rates than some of the other product types, including resi, industrial and data centers. So what's attractive to so many is that out of the gate, shopping centers offer attractive leverage returns when you buy the asset and then durable and growing cash flows over time. So the sector has a lot of interest from a lot of people, and it's been building up over the last year or so, and now we're starting to see that in the bids. We're underwriting about $200 million of assets right now. We have nothing under control. I think we've lost 3 shopping centers in the last 90 days that we liked, but we were maybe the #2, #3 or #4 bidder. And we ended up losing probably by 25-ish basis points, which we're happy to do because we're going to be disciplined. We're also in the market with certain centers that we own, trying to test that market to see if we can achieve our pricing. And if we do better in that regard, then maybe we're willing to pay up a little bit more for something else, but we really want to pair most of our acquisition activity with disposition activity. I think we've been the leader in capital recycling within the space over the last 24 months, and we hope to continue that to the extent that we can. Operator: The next question is from Michael Gorman from BTG Pactual. Michael Gorman: Jeff, maybe kind of continuing on with that right now. I'm kind of interested when you think about Brighton and some of the other deals that you've done, they're a little bit nontraditional, right, whether it's covered land play, redevelopment opportunity. And I'm curious, do you see the same level of institutional competition for those maybe nontraditional shopping center assets that have additional upside for a sophisticated operator? Or is that kind of the niche where you're finding more success right now because the institutional capital can't go there as easily? Jeffrey Olson: I think it depends on the deal. I mean, at Brighton, there were lots of people that were interested, I think at least a dozen. So -- because that one was fairly easy to understand. There are only 5 tenants there and the land values are what they are, but yes, we do have a platform that is seeking value-add opportunities that does limit the buyer pool out there. I do think we're differentiated in that regard. Is it helping? Yes, I think it's helping on the margin. Michael Gorman: Okay. Great. That's helpful. And then maybe just on the tenant environment for a minute. Jeff, you highlighted some of the small shop tenant demand and rattled off 3 food concepts. We saw a stat recently floating around that almost 50% of food spending now is outside of the home. I'm wondering how you balance the demand you're seeing from the restaurant side of the business with what you're seeing from your grocers, which also continue to have strong sales. I mean, how does that dynamic play out? Is there any end to the demand for the food concepts? I'm just curious how you see that trending in your portfolio. Jeffrey Mooallem: Michael, good to hear you on this call. Yes, this is something we're constantly thinking about and talking about like at what point is too much with restaurant space. I'll give you an example of Bergen Town Center, which you know we have a restaurant space that was a sticky fingers that went Chapter 11 about 6 months ago, and we have lots of great conversation about how to retenant that space, and we're actually thinking about re-tenanting it with a boutique fitness operator who's stepping up to a very aggressive rent because we are adding so many more restaurants at that center that we are sensitive to over fooding our properties, it's something we're worried about. As it relates to the grocers, I can just tell you that when you talk to Trader Joe's, when you talk to Wegmans, when you talk to Walmart, when you talk to Sprouts or Aldi, so really all ends of the spectrum from traditional grocers to big box and discounters to the more specialty guys, they are still looking for stores, and they're still in expansion mode. So we're not seeing a lot of push-pull tension between adding grocers versus adding QSRs. What we are seeing and what we're very sensitive to is modifying and limiting the amount of QSRs to give everybody a chance to be successful. If you look at the data that's come out of Cava and Sweetgreen and Chipotle and companies like that, we probably will see that business maybe slow down a little bit. I don't think they'll be opening stores at the same velocity they have in the last 3 years, but we're still very comfortable doing deals with all of those tenants. Michael Gorman: Great. That's helpful. And then maybe just last one for me. Whether it's on the investment side or the discussions with tenants, has there been any shift in tone or demand or preference around the D.C. Metro area, understanding it's a long-term business, but with some of the volatility here in the near term that could continue for a couple of years, has there been any shift there, like I said, either on the institutional capital demand side or on the tenant side in that MSA? Jeffrey Mooallem: I mean, I can tell you from the tenant side, there has not been any shift. Our centers in D.C. are performing, and we continue to see demand and good opportunities to add there. We recently added a Cava at our property in Towson, Maryland. We don't have a ton of assets in D.C., but we'd like to have more, but the ones that we have are all performing very well. We have a safely anchored center outside of Annapolis that we could probably lease 2x over if everybody vacated. So I haven't seen it on the tenant side. As far as institutional capital, are you talking more about like the buyer market for D.C. assets? Or are you talking about lenders? Michael Gorman: The buyer side, yes. Jeffrey Mooallem: Yes. I mean those deals are frothy. I would say Boston and New York are probably more in demand, but that's not a new thing. Boston, because there's such a supply-constrained market and New York because of all of the challenges with buying assets around here are always generating a higher level of institutional interest than maybe Philly or D.C. traditionally have. So I don't think that's necessarily a sign of where we are in the political cycle, more so just the way those markets trade. Operator: Next question is from Paulina Rojas from Green Street. Paulina Rojas-Schmidt: The industry is really highly leased. So what do you think the retailers are seeing that is different and will allow perhaps to sustain these high levels of occupancy for some time, instead of -- as it has been more frequently the case of peaks following almost like an inevitable slowdown in occupancy, another metric? Jeffrey Mooallem: Paulina, it's Jeff Mooallem. I mean, the biggest thing is the supply and demand metrics are not changing anytime soon. This country built 60 million, 70 million square feet of new retail a year up until 2008, 2009, 2010, and it has leveled off to the 10 million to 20 million square feet of retail a year being built, and a lot of retail coming offline. And eventually, that lack of supply, the demand catches up. We are in that moment right now. Traditionally, in most businesses, the way to change that moment and send it back towards a higher supply, lower demand market is to build more space, and that's going to be very difficult to do in our product type and in our markets. And we've talked about this before, but surface park single-level retail centers, especially in the Northeast, there's just not going to be a whole lot more of them, so we think we have pricing power with the ones we do own. Now will there be short-term fluctuations as certain tenants who have outdated concepts come out and other new tenants come in? Will some centers become functionally obsolete and turn into other things over time? Sure. But the greatest tailwind we have as an industry, and what gives us the most conviction as an industry is that the supply and demand metric should continue to stay in our favor for a long time. Paulina Rojas-Schmidt: Do you think you're able to single out anchors that are leading the expansion in the Northeast? Or it's really too dispersed to highlight a few names? Jeffrey Olson: Yes. I mean, I think it is very dispersed. But certainly, Ross is a new entrant to the market. And they're being very flexible. They're paying the rent that's required that will give us a good return for putting them in our centers. So that's helpful, but all the TJX concepts are expanding widely in the Northeast. And you have to remember, the Northeast market is so densely populated that most national retailers are generating the highest sales in these locations just because of supply constraints, and they've run out of opportunities to find high-quality spaces. So there's almost an inverse relationship taking place, where if you can provide a retailer with a high-quality 25,000 or 35,000 square foot box that rent can be pushed a lot more than it used to just because there aren't many of those available as compared to the thousands of shop spaces that are out there that are more fungible. Paulina Rojas-Schmidt: And my last question is, you still clearly have a path of growth coming from the signed not open pipeline. But looking past that, what do you think is Urban Edge's same-property NOI growth on an occupancy-neutral basis, given all these positive background that you have described? Jeffrey Olson: Look, I mean, we still have a few years left of getting to this SNO pipeline, which, as you know, represents 7% of our NOI. So we have some tailwind there. We will certainly look to do some more capital recycling, too. I think this small deal, but an important one of selling $40 million, $50 million of assets with relatively flat growth, replacing it with 3% NOI growth. I think as a goal, we're going to look to be a company that can generate sustainable 3% plus growth. And I think we have some time to get there, same property growth. Operator: There are no further questions at this time. I would like to turn the floor back over to Jeff Olson for closing comments. Jeffrey Olson: Great. Thank you for your time and attention this morning. We look forward to seeing you soon. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.