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Operator: Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the ASM International Third Quarter 2025 Earnings Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Victor Bareño, Head of Investor Relations. Please go ahead, sir. Victor Bareño: Thank you, operator. Good afternoon, and welcome, everyone, to our 2025 Q3 earnings call. I'm joined here today by our CEO, Hichem M'Saad; and our CFO, Paul Verhagen. ASM issued its third quarter 2025 results yesterday at 6:00 p.m. Central European Time. The press release is available on our website. With our latest investor presentation, we remind you, as always, that this earnings call may contain information related to ASM's future business and results in addition to historical information. For more information on the risk factors related to such forward-looking statements, please refer to our company's press releases and financial statements, which are available on our website. Please note that the profitability measures mentioned in this call today will be primarily based on adjusted non-IFRS figures. For the reported results as well as the reconciliation between reported and adjusted results, please refer to the quarterly results press release. And with that, I'll now hand the call over to Hichem M'Saad, CEO of ASM. Hichem M'Saad: Thank you, Victor, and thanks to everyone for attending our third quarter 2025 conference call. First off, I'd like to thank all our investors and stakeholders who joined us for Investor Day last month. It was great to see so many of you. For today's call, we'll be following the usual agenda. Paul will begin with an overview of our second quarter financial results. Next, I'll discuss the market trends and outlook, followed by the Q&A session. I will now turn it over to you, Paul. Paul Verhagen: Thanks, Hichem, and thanks, everybody, for joining our call today. Let me start with revenue. The revenue in the third quarter of '25 amounted to EUR 800 million, up 8% year-on-year at constant currency. And compared to the second quarter, sales were flat at constant currency. This was at the high end of a guided range of flat to down 5%. Equipment sales increased 10% year-on-year at constant currency and were led by ALD followed by Epi. Spares and service sales were up 2% at constant currency. Year-on-year growth in spares and services was lower than in the past few quarters, and this is explained by the accelerated above trend demand in China in the second half of last year. Growth in our outcome-based services continues to be healthy. In terms of customer segments, revenue was led by logic/foundry, followed by memory and then power/analog/wafer. Logic/foundry continued to account for the majority of sales. Advanced logic/foundry sales for the largest part 2-nanometer related were up substantially compared to the third quarter of last year and approximately similar to Q2. Mature logic/foundry sales mostly in China, were up year-on-year and down from the second quarter. Memory sales decreased compared to Q3 of last year and were roughly similar to Q2. of this year. ALD sales for advanced HBM-related DRAM applications represent a larger part of our memory sales. The year-on-year decrease was mainly explained by some lumpy and relatively high sales and orders from memory customers in China in Q2 and Q3 of last year, as we also discussed in previous quarters. Sales in the power/analog/wafer segments were up slightly but still at relatively low levels, reflecting the continued downturn in these markets. Gross margin in the third quarter remained strong at 51.9%, roughly similar to Q2 and up from 49.4% in the third quarter of last year and again supported by a positive mix. As mentioned in the press release, we expect a less stable mix in the fourth quarter, which should bring the gross margin to around 51% for the full year. One of the mix factors was revenue from China, which decreased both year-on-year and compared to Q2 but still represented a solid level in Q3. We still expect China sales in the second half to be lower than in the first half with a more substantial drop in Q4. As discussed in the last quarter, our forecast for the gross margin excludes the impact from potential new U.S. tariffs. Our industry is currently still exempted, but it remains unclear what any new tariffs will be. We have several contingency scenarios in place to help mitigate potential direct impacts including the option of expanding localized manufacturing in the U.S. SG&A expenses were 10% lower year-on-year. This reflects lower variable spend and our continued cost focus. For the full year, SG&A is still expected to be somewhat below prior year. Gross R&D was up 10% in Q3, reflecting ongoing increases in our R&D programs. This increase plus the inclusion of a EUR 4 million impairment was partially offset by a relatively higher increase in capitalized development expenses, leading to an increase of 3% in net R&D expense. At 30.9%, the operating margin continues to be strong, supported by the solid gross margin and the year-on-year decrease in SG&A. Below the operating line, financial results included a currency translation gain of EUR 11 million, and this compares to a currency loss of EUR 60 million in the second quarter and a loss of EUR 48 million in the third quarter of last year. As a reminder, we hold the largest part of our cash in U.S. dollars. Let's quickly switch to ASMPT. Our share in income from investments, reflecting our stake of approximately 25% in ASMPT amounted to a loss of EUR 7 million in the third quarter, which is explained by one-off restructuring costs taken by ASMPT in the quarter. Our net results in Q3 also includes an impairment reversal of EUR 181 million, driven by a recovery in the market valuation, our stake in ASMPT in the quarter. With that, the impairment charge of EUR 250 million that was recognized in Q1 of this year has now been fully reserved. Let's go back to ASM now. Order intake. Our new orders amounted to EUR 637 million, a decrease of 7% compared to the second quarter and a decrease of 7% compared to the third quarter of last year at constant currency. With the Q2 results, we already indicated that book-to-bill would be below one in Q3. As an expected rebound in advanced logic/foundry orders will be offset by a sharp drop in China orders following a very strong first half of the year. In our update last month, we indicated advanced logic/foundry orders would still be up, but not as strongly as previously expected due to very mixed trends per customer and also that power/analog/wafer orders came in somewhat lower than expected. Looking at the breakdown by customer segments, logic/foundry was the larger segments, followed by memory and then power/analog/wafer. Logic/foundry orders decreased slightly year-on-year and compared to Q2. As just mentioned, a solid increase in advanced logic/foundry compared to Q2 was offset by a sharp drop in mature logic/foundry orders mostly in China. Memory orders dropped compared to last year and were relatively steady compared to Q2. And the largest part of memory orders was for advanced DRAM applications. Let's turn now to the balance sheet. ASM's financial position remains in good shape. We ended the quarter with EUR 1.1 billion in cash, up from EUR 1 billion at the end of June. Days of working capital dropped to 37 days at the end of September, down from 43 days end of June. This level is relatively low and also below the longer-term target range. As previously explained, this is due to a relatively high level of contract liabilities for a large part in China, which is expected to gradually normalize over time. CapEx amounted to EUR 38 million in the third quarter due to phasing of investments for our new Arizona facility, CapEx in the fourth quarter will be higher. And for the full year, we still expect CapEx of EUR 200 million to EUR 250 million. During the quarter, we also paid EUR 100 million in earn-outs related to the acquisition of LP in 2022. In total, free cash flow amounted to EUR 139 million in Q3. Excluding the earn-outs, the free cash flow amounts to a stronger level of EUR 239 million in Q3 and EUR 628 million in the first 9 months. During the third quarter, we spent EUR 109 million on share buybacks as part of our EUR 150 million program that was completed on July 25. And lastly, let me recap the 2030 financial targets we shared during the last month's Investor Day. Growth prospects for ASM remains strong on the back of rising ALD and Epi intensity in the logic/foundry and DRAM markets and new opportunities in, for instance, PECVD and advanced packaging and continued double-digit growth in spares and services. We expect the revenue to grow to more than EUR 5.7 billion by 2030, and this represents a CAGR of at least 12% from 2024 through 2030, twice the rate expected for the wafer fab equipment market. We raised our gross margin target to a range of 47% to 51%. And as part of this, we discussed a number of initiatives that will drive efficiency and productivity improvements. One of the key initiatives I'd like to highlight again is the successful launch of a new ERP and PLM systems. We went live 3 months ago and the transition was executed smoothly without any disruption to operations. This milestone lays a solid foundation for future efficiency improvements, including the rollout of real-time analytics and other digital transformation efforts. We will remain disciplined regarding operating expenses. Combined with the operating leverage effects, we expect SG&A to drop to less than 7% of revenue by 2030. We intend to increase R&D investments. This is our lifeline as the opportunities continue expanding in the next nodes. The target is to keep net R&D in a low double-digit percentage range of revenue. This will all lead to solid operating margin of 28% to 32% in the coming years and from 2030 onwards of more than 30%. In terms of CapEx, we expect an annual level of EUR 150 million to EUR 200 million during years of infrastructure expansion and EUR 100 million to EUR 200 million in years without such an investment. Combined with improving profitability, we project free cash flow to increase to more than EUR 1 billion by 2030. During Investor Day, we also reiterated our capital allocation policy. #1 priority remains investing in the growth of our company. That includes R&D and infrastructure investments and also M&A in case of attractive opportunities. In addition, a strong financial position remains important with at least EUR 800 million in cash as we remain committed to our dividend policy and to return excess cash in the form of share buybacks. And with that, I'll turn the call back over to Hichem. Hichem M'Saad: Thank you, Paul. Let's now continue with a review of the market and business trends. Starting with the end market conditions. The overall picture continued to be mixed, similar to the previous quarters. In various parts of the semiconductor market, the recovery continues to be held back by uncertainties around the economic outlook and geopolitics. It's clear that AI remains the bright spot across multiple sectors and markets, adoption of AI is being accelerated as a key driver of innovation and productivity gains. The surging demand has been highlighted by recent strategic partnerships and announcements from industry leaders aimed at expanding AI data center capacity. In terms of wafer fab equipment, the growth in AI is expected to drive significant and structural growth in the advanced logic/foundry and DRAM markets. These strengths play to ASM's strength. If we first look at our advanced logic/foundry business, overall demand continues to be healthy even though trends by customer has been very mixed. As already mentioned, these mix trends had some impact on Q3 bookings and will also impact sales in the second half. For the full year, we still expect a very strong increase in our gate-all-around related sales. The 2-nanometer transition continues to be a strong driver for our company. In the Investor Day last month, we reconfirmed the $400 million SAM increase in the move from FinFET to first-generation gate-all-around. We also reconfirmed that in this transition, we at least maintain our ALD market share and expanded our share of Epi layer accounts from 22% to 33%. Our customers continue to report strong demand for 2-nanometer for both AI and smartphones. We expect this to support continued investment in 2-nanometer capacity expansions in 2026, including new sub nodes, such as the backside power distribution. At the same time, customers continue to progress steadily in the development of the upcoming 1.4-nanometer node. In the second half of 2026, we expect the first 1.4-nanometer pilot line investments, followed by the start of volume production in 2027 and 2028. As also shared in our Investor Day, we expect a SAM increase of $450 million to $500 million in the 1.4-nanometer transition. Based on the intensity and breadth of our R&D engagement, we expect again to at least maintain our market share in the transitions to the next 1.4-nanometer node. We expect new ALD layers in [ backside ] power in NIMCAP and metal ALD layers in the middle-end-of-line. However, the biggest area of increasing ALD intensity continues to be in the transistor area, the front end of line. This is the heart of the chip where the overall device performance is defined by functional materials such as the high-k and electric dipole layers for multi-DC and work function layers. As a percentage of total ALD layers, we expect the number of layers in front end of line to increase from 50% in the 2-nanometer node to 60% in the 1.4 nanometer node. This is an area where our company holds strong market share position. Let's now review the memory business. High-bandwidth memory, HDM-related DRAM continues to be the main driver. Fueled by strong demand for AI data centers, customers are expanding manufacturing capacity for the most advanced DRAM devices for HBM applications. These devices require ALD High-K Metal Gate technology in which ASM has a leading position. Looking at the year-on-year performance, despite the good momentum in high-end DRAM, it's important to note that our memory sales last year included elevated sales from Chinese customers, which are not repeated this year. As a result, we still expect our memory sales to be lower than last year at less than 20% of overall equipment. The outlook for CD NAND, which is the smaller part of our memory business, has been improving somewhat, and we continue to be well placed with our ALD death field solutions with key customers. We expect DRAM investment to further increase in 2026. In the next couple of years, we expect a further gradual increase in the number of ALD layers in advanced DRAM. In the press release, we highlighted new wins in Epi and ALD dipole and work function-related layers in DRAM HBM for most expected to ramp in 2026 and 2027. Starting in 2028, we anticipate a significant increase in our SAM in DRAM driven by 2 major technology transitions. The move to 4Fsquare architecture and the adoption of FinFET in the periphery. In 4Fsquare, the channel structure becomes vertical, and producing a more complex 3D architecture. This shift will require additional ALD layers for gap-fill, oxides and metals and we'll also increase the role of Epi as an enabling technology. Shortly thereafter, the transition from planar to FinFET in the periphery will further increase demand for logic like ALD and Epi layers. At our Investor Day, we quantified the SAM expansion in DRAM at $400 million to $450 million as a result of this multi-node transition. In addition, this presents a compelling opportunity for ASM to grow our ALD shares in the DRAM market and to accelerate the expansion of our memory business. Next, the power/analog/wafer segment continued to experience weak market conditions. While there were early signs of end market recovery at the end of Q2, it became evident over the past 3 months that investment level in this segment will not rebound in the second half of the year. Assuming no adverse economic development, we expect spending in these markets, starting from a low base to gradually improve over the course of 2026. Thanks to innovative products that we launched in recent years, we are well positioned to benefit from this recovery. One example is our Epi Intrepid ESA tool which has helped us secure several new customers and position in 300-millimeter power and wafer applications. It's important to note that our outlook for gradual recovery excludes the silicon carbide market, where market conditions remain more challenging. Looking at China. Revenue was still at a solid level in Q3, but bookings dropped significantly. And as Paul already mentioned, this was the main reason for the sequential drop in our overall bookings. China bookings were still strong and very much concentrated in the first half of the year. On top of this, we incurred some additional impact from the export restrictions that were announced earlier this month. The impact on a total annualized sales is expected to be around 1% to 2% negative. With a stronger drop in Q4 sales, we project sales from China to be lower in the second half compared to the first half. Equipment sales from China will also be lower in the full year of 2025 and expected to account for approximately 30% as a percentage of total ASM revenue. Looking forward, we expect a gradual normalization in China demand in 2026 and subsequent years, in line with our previous view. This follows on a number of years of very strong spending, particularly in the mature logic/foundry segment. For 2026, the contribution from China is projected to remain meaningful, although sales are to decline by double digits. Before moving to the guidance, I'd like to repeat a few more of the takeaways and strategic priorities we shared in our Investor Day. ALD and Epi remains key growth markets for our company. We project a CAGR of 9% to 13% for both markets in the period of 2024 through 2030, which is clearly ahead of the 6% growth expected for the WFE market. This growth is driven by increasing complexity and increasing ALD and Epi layers to address challenges related to more 3D structures and new materials in these nodes, both in logic/foundry and DRAM. Advanced packaging is emerging as a key midterm growth driver for ASM, with the market projected to grow at an attractive CAGR of 15% through 2030. Although it currently represents a smaller portion of our business, upcoming generations of advanced packaging featuring finer pitches will demand more sophisticated solutions were aligned with our strength in chemistry, innovation and surface preparations. We've recently secured new ALD wins for TSV liner applications, and we are currently pursuing initiatives aimed at doubling our served available market by 2030. At the Investor Day, we also introduced growth targets for our spares and services business. For the period of 2024 to 2030, we expect a continued strong CAGR of more than 12%. The main engine of this growth is our outcome-based services, which we target to account for more than 50% of our sales and service sales by 2030. These innovative services deliver guaranteed outcomes to our customers, such as improved tool performance and availability. One example is our new dry cleaning solutions for refurbishing critical tool parts. Compared to conventional cleaning technologies, this approach improves defectivity performance and extended parts lifetimes, thereby reducing costs for our customers. It also contributes significantly to sustainability with a 67% reduction in CO2 emissions versus traditional wet cleaning methods. Another example is the use of automation in services by developing robots to place replacement parts in reactors, we achieved far greater precision than manual placements. This enables customers to operate our tools with action level precision, essentials as geometries shrink and nodes become more complex. Last but not least, we remain focused on driving operational excellence, maintaining a flexible footprint and as Paul also emphasized delivering improved financial performance. Let's now have a look at the guidance as outlined in our press release. For Q4 2025, we expect revenue to be in the range of EUR 630 million to EUR 660 million. For the full year 2025, we continue to expect revenue growth at close to 10% at constant currencies. Despite the projected slow start in 2026, we expect ASM revenues to grow in 2026. In terms of orders, we expect the trend to bottom out in Q4 at a slightly higher level than Q3. And looking at next year, we project quarterly orders to pick up again as 2026 progresses. With that, we have finished our introduction. Let's now move on to the Q&A. Victor Bareño: We'd like to ask you to please limit your questions to not more than 2 at a time so that as many participants as possible have a chance to ask a question. Operator, we are ready for the first question. Operator: Thank you. This is the Chorus Call conference operator. [Operator Instructions] The first question is from Didier Scemama, Bank of America. Didier Scemama: Maybe a first question for Hichem. Can you maybe give us a little bit more color as to what's already in your backlog? Because we've seen, of course, over the course of the last few weeks, a significant improvement in the picture for AI CapEx or logic chips, but also HBM, but also commodity DRAM. We've seen, of course, one of your customers this morning talking about a substantial increase in CapEx next year. So is that already in your backlog? Or is that yet to come and sort of give us confidence that your bookings have to materially improve from here? I've got a follow-up. Hichem M'Saad: Yes, Didier, I'm going to have Paul answer your -- this question, okay? Paul Verhagen: Yes, Didier, thanks for the question. You've seen our backlog, which came down further on the back of book-to-bill below of one, to be precise 0.8. So what's in the backlog, as you know, we have a relatively short-term backlog, if you compare it to let's say, one of our companies here in the southern part of the Netherlands, 3 to 6 months, typically. We also said that we expect a relative soft start of 2026. So not everything that you are referring to is already in our backlog. Of course, some elements are -- I'm not going in detail what is precisely in or out. But given the relative low bookings that we have, which we also guided for after the -- or at the Investor Day, you can imagine that not all of that is in the backlog at this stage. Didier Scemama: Okay. Got it. And I think in the last 12 months or so, commodity DRAM and commodity NAND, which historically are reasonably small part of your revenues, have been very, very low in terms of capital investments. If we were to see greenfield capacity addition for 3D NAND, but also investments in DDR5. Do you think that could become a meaningful driver in '26? Or is your participation in those markets fairly de minimis? Hichem M'Saad: Yes, I can take this question. I think that as DRAM devices will -- will improve, increase, there is more and more ALD layers. And with that, we expect an increase in our business from that point of view. Didier Scemama: I think you said 25% is memory? Is it like a really small sliver of your revenues today that's basically ex-HBM? Hichem M'Saad: So most of the revenue right now is actually in HBM, Didier, okay? That's what... Operator: The next question is from Tammy Qiu, Berenberg. Tammy Qiu: So the first question is on GAA. I remember earlier this year, you were saying that GAA order would be up quarter-on-quarter in 2025. So now we have a little bit of timing-related issues. So going to 2026, would you say that GAA would be still grow year-on-year versus 2025 level? And how should we be thinking about this pattern on the -- from an order perspective? Hichem M'Saad: So we see that 2026 is going to grow in GAA versus 2025. I think in 2026, there's going to be 2 things happening. First 2-nanometer production will continue in gate-all-around. But also, you see the 1.4-nanometer node will also start in pilot production in the second half of the year. The other thing that we see happening is that also there is going to be more customers in a 2-nanometer technology node in 2026 versus 2025, which is also driving some new business, especially in the U.S.A. Tammy Qiu: Okay. And was 1.5 -- sorry, 1.4-nanometer, you mentioned, the first batch of order for pilot line should be starting to be seen in next year. So is that coming from all the customers? Or this is only from one customer? And also, when would you expect the volume kind of ramp-up phase for 1.4 nanometer start to be seen? Hichem M'Saad: So to answer your question. So right now, for the 1.4 nanometer in our numbers, what we looked at is one customer in 1.4 nanometer in the second half of 2026. I think the -- we hope that there's going to be another customer in 2026, then that would be also a better business for us in 2026. Tammy Qiu: And -- sorry, the volume ramp-up time frame? Hichem M'Saad: So the volume ramp-up is going to be very small. It's the pilot production in the second half of 2026. That's what we put in. And we -- the 2-nanometer node that we mentioned is a very long node. So 2-nanometer is going to continue in 2026 and also 2027, it's a very long growth. As you know also the 2-nanometer node has sub-nodes and with different structure -- like different structure like a midcap that backside power distribution and so on and so forth. So for 1.4 nanometer, I think the big production start will be 2027 and 2028. Operator: The next question is from Robert Sanders, Deutsche Bank. Robert Sanders: Maybe a question on the gross margin. You're looking for a double-digit decline year-on-year in 2026. When I plug in a kind of estimate for China gross margin, that means that the consensus gross margin looks too high by quite a big margin. So is there anything that could mean that the gross margin is not well down next year as I think about next year? Paul Verhagen: I'm not sure I understand the question. What you say, a double-digit decline in gross margin? Hichem M'Saad: In China sales. Robert Sanders: You put in your release a double-digit decline in China sales. I look at the consensus. And the consensus is pretty optimistic on gross margin for next year despite the China mix being a headwind. So I was just wondering if there's any reason why the gross margin ex China would improve? Paul Verhagen: Improve compared to what? Robert Sanders: Calendar '25. Paul Verhagen: Yes. Then I think I have to disappoint you because I don't see it improve compared to '25, to be very honest. We have -- I mean, in '25, we have a few things that are very important. One, we have a pretty still strong level of China sales over the full year, with H2 below H1, Q4 below Q3, et cetera. But still, if you look at full year, a pretty strong level of China sales, and we expect to meet a double-digit decline next year, which everything else equal will have impact. Two, we have a very strong product mix, especially with, of course, 2-nanometer ramping to have a lot of leading-edge products and relatively spoken, lower, let's call mature products, power/wafer/analog, et cetera. So next year, when we also expect, of course, still continued growth in leading edge as Hichem just explained, but we also expect growth in, let's say, the power/wafer/analogs are relatively spoken, the rate of that segment will increase a little bit. That doesn't mean that every product in that segment has a lower margin and leading-edge product. But on average, I think it's fair to say that leading edge, we can demand higher margins than in that segment. So if you add it all together, lower China sales and a slightly different mix relatively spoken, you very likely get to a lower margin than in 2025. How much lower? I'm not going to tell you. Hichem M'Saad: But that's also at the end of the day, really, it all depends on customer mixture, and product mixture. And I think that as Paul has mentioned, okay, we have made some efficiency in our business and also our cost structure in such a way that we fundamentally improved our gross margin from previous years. So it's still well -- we're going to see what's going to happen in 2026. But we are very happy with really what we achieved this year. For us, 51% for 2025, this is a record for ASM, really a record. And that's an indication of the -- first, our position in the market, our competitiveness, but also in our cost control and better operational efficiency. And we will continue to really drive that in the future. We're not stopping right now. Paul Verhagen: And maybe to add, Rob, that was also the reason why we have increased our margin guidance during the Investor Day from 46% to 50% to 47% to 51%. So overall, indeed, we see improvements based on everything that Hichem also just once more emphasized. Operator: The next question is from Francois Bouvignies, UBS. Francois-Xavier Bouvignies: So my first question, Hichem, on your new wins in Epi and ALD dipole and what function that you talked about in the DRAM HBM. So can you just provide more details on that design wins? Did it happen in the quarter? Was it competitive? And I mean you said in your remarks that it was for '26, '27 time frame, which I thought it would be more like '27. So is it like earlier than you expected? Maybe these wins and how many layers are we talking about? So I know it's many questions within that, but basically, giving more color on this Epi and ALD dipole design wins you had this quarter? Paul Verhagen: Yes. And we're very excited about the wins that we have made in both Epi and ALD in the last quarter. So this is really work we've been doing with our customer for the past couple of years, and we've been able to become POR for this business. And with starting HVM high-volume manufacturing in 2026 and beyond. As I mentioned, we're really working with many customers and on more and more layers and products. I think what we have seen right now in the industry is really pull-in in a way in some of the high-performance. I think the AI market is becoming super-hot on that point of view. And we see that the customer really want to have a higher performance. So with a higher performance, we see some of these things have been a little bit pulled in. But I think the majority of the business, the bigger business for us really would happen when the move of DLM to FinFET, I think that would be great. But also we see many of the memory customers also very much using advanced packaging. And we're working with many of those right now on some of advanced packaging applications. But I think we see that 2027 and 2028 where things will become much more positive from that point of view. So 2036 will be the start and '27, '28... Francois-Xavier Bouvignies: How many layers did you win specifically for that this quarter? Paul Verhagen: [indiscernible] how many layers, but to be honest with you, we have many customers right now. We're actually working with all the DRAM customers. And you will hear in the next few quarters, more and more wins as those materialize. Francois-Xavier Bouvignies: That's great. And maybe China. I mean China, you forecast double-digit percentage growth. It seems that everybody is seeing the same thing, the double-digit decline, sorry, percentage next year for China business, LAM is seeing the same. [ ASML ] is seeing the same. So how do you build your forecast, I mean, out of interest? Because I mean, my understanding is China is quite low in terms of visibility right now. You had some restrictions that only impact 1% to 2% of your sales, obviously, it's more bigger of your China business. But how do you build this forecast out of interest? Because it's very difficult to know where China is going to be next year. And when I look at the retail imports are increasing significantly in the second half of the year versus H1 this year. I would think that you should see decent year from a deposition and etching point of view. So just wanted to understand how you forecast China? Paul Verhagen: Yes. Let me take that question, Francois. Actually, the very short answer is customer intel. So we have people on the ground. We get, of course, we try to get, of course, as much as we can insights into the plans various customers have into new fabs that are being built or not being built. So every year, we have an idea, but you're correct, there is limited visibility. That's also true for next year. So there's no change from that point of view, but still based on the number of new fabs that you think might start based on inputs in that respect that we get from customers. We had one year, it's maybe higher than the other year. That's an important input for us. Also last year, we had that input for this year. We're actually at the beginning of the year, we were -- I mean we were maybe a little bit prudent. Looking back now, China did a little bit better than what we anticipated but not to the extent that it was better than the year before. So also for next year, I mean, it could be slightly higher, slightly lower than what we currently think. But in any case, what we see based on all the intel that we have is what we guided and what we said in the press release. So that is, let's say, the best guidance we can give you based indeed on the limited visibility we have, but it's still supported by as much as possible customer intel that we can get. Operator: You next question is from Jakob Bluestone of BNP Paribas Exane. Jakob Bluestone: I had a slightly similar question actually. I mean, you say that you expect the order trend to bottom out in Q4 at a slightly high level than in Q3 and then sort of gradual recovery through '26. And I guess, just interested in the sort of broader business, where do you get the confidence from that? Is that what you're starting to hear from your customers? Or was that just sort of more from the various announcements that have been made? So just to get a sense of how concrete is your confidence on that trajectory that you've laid out for the improvement in orders? Hichem M'Saad: So I'd like to -- what Paul has mentioned earlier, we are very close to our customers, especially we are extremely close to our logic customers. Since we're working with all the top larger company, leading edge -- in leading edge logic and foundry. And then so that's the information really we're getting it from them. I think they have their investment plan for 2026. And based on that, okay, we are talking to them, and we know what kind of business we're going to achieve from them. So we feel confident from that point of view, okay? Jakob Bluestone: Understood. And if I can just ask a quick follow-up as well. Just on lead times. Can you comment on whether the lead times, particularly for advanced logic are changing or have they stayed the same? Hichem M'Saad: Lead time for us as a company, we always said that our lead times like used to be 6 months. But as I mentioned during the Investor Day, actually we have made a significant improvement, whereby we can reduce our lead time to about 3 months right now. So we took -- like we mentioned, we have made significant efficiency in our business processes, in our manufacturing and operations in such a way that we can be very fast in really being able to meet customer expectations. Operator: The next question is from Nigel van Putten, Morgan Stanley. Nigel van Putten: I guess another question on your sense of growth into '26. So what are the areas you are seeing the biggest certainty and uncertainty in terms of materiality both on positive and negative. Now my guess is that the advanced foundry is pretty predictable and a strong positive into next year. And it seems to be that maybe more advanced logic and also power/wafer/analog are maybe a little bit more uncertain. Am I in the right ballpark here? And also, do you think that you could still grow if these 2 areas do not show growth next year? That's my first question. Paul Verhagen: Yes. So I think you're directionally correct, Nigel. So I think where we -- as Hichem also said, where we have, let's say, the most reliable -- maybe too strong, but we work the forecast with customers and especially the large customers and especially with the leading edge logic/foundry, the quality of the forecast that we get is better, I would say, than with quite a few other customers. So that's one. So there, we have, I think most confidence. That does not necessarily mean that things cannot change. Things will always change. For sure, pull-ins, pull-outs, et cetera, will always happen. But will also happen next year. But -- and that's the area where we have most confidence. Two, I think in DRAM, given everything that is happening there, if you read all the market intel, I mean there is capacity shortage, I would say, demand is higher than supply. I think we're relatively confident on what we can achieve there. So there, we have quite some visibility. We just talked about China. We do believe China will come down, as we said, there is limited visibility, but it's not that we steer completely in the dark. We have still reasonable customer intel, but not as good as what we have from the logic/foundry customers. And then for the power/wafer/analog, I would say it's maybe most uncertain. That market is now 7 quarters and by the end of the year, 8 quarters in a cyclical downturn. So it is more based on the fact that at a certain moment in time, that market should also start to see a turning point. But there, we do not yet see that in orders coming in, but we do expect that to come in and partially also based on, I guess, on customer intel, but that, I would say, is maybe the most uncertain one, but we would expect that to happen somewhere in the course of next year. Nigel van Putten: Got it. I'm going to use my follow-up then to still maybe press a little bit on sort of the dynamics you've also pointed out this quarter that there is still quite a bit of difference between one and the other. So maybe just for your forecast, are you sort of assuming multiple customers to grow next year in a material way? Or is that not your base assumption at the moment? Paul Verhagen: Yes. Basically if you talk leading edge for customers at this moment. I think 2 of them, and I'll leave it up to you to guess which one. We are reasonably confident that they will grow. One of that is still uncertain, and it's not an important one. But yes, we'll see what will happen there. We have, of course, a certain view baked into these projections that we have given, but at least 2 and maybe 3. Hichem M'Saad: Yes. But I think if I add something to what Paul has mentioned, I mean we see customer concentration has increased in the recent quarter for advanced logic and foundry and we think it will continue in 2026. Operator: The next question is from Stephane Houri, ODDO BHF. Stephane Houri: Yes. Actually, I have a question about 2027. I know you gave -- just gave sense of guidance for 2026, with a very low point apparently and so it means that there is a need for an acceleration in the second half. Overall, we should expect probably a growth kind of low growth next year or mid-single-digit growth, I don't know. But it means that you reach your 2027 target, you need to have a double-digit growth in '27 at least. So what are the pieces of the puzzle we should look at to understand if you're in the good trajectory or not? Paul Verhagen: Fair to say, Stephane, I think firing on all cylinders is the right description here. So one, as I think Hichem already said at the beginning of the call, end of this year or middle of the second half of this year, we expect pilot -- investments in pilot for 1.4 and then going into HVM in '27. That's of course, a big driver. You've seen the SAM increase that goes with it. Two, of course, we would expect memory to continue to be good on the back of, in particular, AI, which now, by the way, is driving both HBM also, let's say, conventional more high performance in DRAM, in particular, which should be good by '27. I mean, if power/wafer/analog by then is still not recovering then, okay, I don't know what is happening there, but we would expect logically that's also there. By that moment in time, you would see a turning point. So -- and also spares and service business will continue to grow as we -- based on outcome-based services, as we said, during the Investor Day. So firing on all cylinders would be, I think, the right description here. Hichem M'Saad: Yes. One thing I would add to what Paul has mentioned is also what we see in 2027 is in logic, you're going to have 2-nanometer continued investment in capacity, but also the capacity increase in 2027 for the 1.4 nanometer node, okay? So you're going to have really leading edge 2-nanometer and 1.4-nanometer significant investment in those 2 technology at the same time. Because 2-nanometer is actually a very strong -- it's a very strong node, it's a very long node. That's what our customers are telling us. And as you know, there's many sub-nodes in 2-nanometer. So investment in 2-nanometer is still going to continue at a very healthy level in 2027. At the same time, you have the 1.4 nanometer expansion in that same year. Stephane Houri: Okay. Okay. And I just wanted to come back on China where you see double-digit decline next year. Are you sure that this is only the market and that you are not facing an increased level of local competition. There is more and more noise about the efforts they are making and the quality they are obtaining. So can you maybe describe the situation there and the sustainability of your market share? Paul Verhagen: That's a good point. I think it's a combination of both things. One, China, we've seen everybody actually also appears to have seen a very high level of investment in the last 2 years or so, 2.5 years. So we've already communicated, I think, end of last year that we would expect this to gradually normalize, whatever that means. Two, with recent, let's say, announced export controls, that also has impacted us to a certain extent, but also our peers, although it's maybe not materialized 1% to 2% of our annual revenue globally, but it's still a few percent, of course, of our China revenue, which again leaves a vacuum for local competition to step in. So yes, local competition will for sure, benefit from this, will get on a quicker learning curve because, yes, the unfortunate reality is that because of all these restrictions, yes, there is a playing field -- an unleveled playing field where local competitors can step in with what we would say inferior products compared to our products, but at the same time, learn at an accelerated pace compared to the situation if they would not have been able to get their products into customer fabs. So it's a combination of these 2 things, I would say. Hichem M'Saad: And one thing I would add to what Paul has mentioned, okay? We think that we are very competitive in China vis-a-vis the Chinese competitor. We don't see our position to be really worse than what it was before. I think our products are very good, and we continue innovation unabated which really gives us an edge from that point of view. In China, what really -- what 2026 shows for us right now, we have really very low visibility on how some of the part of the market is going to materialize. I talked today in my prepared remarks that we have won some significant business in Epi Intrepid ESA in the power/wafer/analog and some of those actually businesses is happening in China. So depending on what that -- so that shows really our competitiveness in that market. And I think if the market -- if the power/wafer market analog recovers, that's going to be also very positive for us in the future. And as you know, in the power/wafer/analog, visibility is very -- it's not very long. That market can go down immediately and go up at the last minute. So that's really a question we're going to find out in 2026, but we are very competitive. We think we can compete very well in that market. And it's an important market which we're going to continue to address. Operator: The next question is from Adithya Metuku, HSBC. Adithya Metuku: I had 2. Firstly, look, when I look at your growth, you've always tended to outperform WFE given the company-specific growth drivers. As I look out to 2026, is there any reason why you will not outperform WFE next year? I just wanted any -- is there any headwind that we should keep in mind? Any color there would be helpful. And then I've got a follow-up. Paul Verhagen: I think on the outperforming the wafer fab equipment, we have mentioned that in our Investor Day that we will outperform the wafer fab equipment when going from '24 to 2030 -- from 2024 to 2030. It doesn't mean, okay, we're going to outperform every year. So still I'm sure about that. I mean we already announced saying that the 2026 for us is actually a growth year, which we are very confident about it. But to answer the -- whether we're going to outperform it in 2026, that's too early to say. But what we can tell you that from 2024 to 2030, we will outperform the WFE market. Adithya Metuku: Got it. Maybe just on that, I mean, if you were to underperform given where you sit today and your visibility into the different end markets that you talked about on this call before, if you were to underperform what would be the reason? I struggle to see what -- I don't see any reasons, but I'm just trying to see if I'm missing something here. Hichem M'Saad: It depends really on the WFE mix. What's the mix of products, memory versus logic versus power/wafer/analog. It's really mix dependent. Adithya Metuku: Okay. Got it. And just as a follow-up. Paul, I just wondered if you could give us some color on OpEx in 4Q. I know you commented on SG&A, but I don't think you commented on R&D. And also if you could give any color on how we should think about OpEx into 2026? That would be super helpful. Paul Verhagen: Yes. So R&D for Q4, I think, there will be similar to Q3 gross R&D and most likely also net R&D. SG&A, Q3, we mentioned that there was relatively low variable expenses, where we made an adjustment based on certain accruals that were made. So I think the Q2 is more of an indication than Q3 going forward and into '26, and we've given guidance in the Investor Day. We will continue to invest in R&D, which is a lifeline. So there, you will see gradual increases compared to this year. And SG&A, we will keep very tight. And as a percentage of revenue, with revenue growth, we would expect that to come down a little bit further. Victor Bareño: Can we have the next caller, please? Operator? Operator: The next question is from Timm Schulze-Melander, Rothschild & Co Redburn. Timm Schulze-Melander: My first one just very big picture, maybe a question for Paul. 2026, do you -- should we expect the aftermarket side of your revenues to outgrow system sales? And then I had a follow-up. Paul Verhagen: I have a view, I'm not going to tell you because it's too early to tell. But what I can say is that we do expect a healthy growth in our spares and service business in '26 compared to '25. It's too early to already say it will be higher or lower. But we do see what we believe will happen is that we will continue to see a very healthy growth in spares and service business. Timm Schulze-Melander: Okay. That's helpful. Maybe just one other one. If we just -- you talked a lot about how important mix is to the outlook in 2026. Could we just when we think about your ALD business, I know you've talked about it being more than half of your system sales, but could you give us a kind of 5% to 10% range kind of what that ballpark looks like for 2025? Paul Verhagen: No, we were not going to give very specific guidance other than what we've given. We've obviously had ALD is more than half of our equipment business, which indeed it still is and maybe this year more so given the ramp-up 2-nanometer. It's also one of the reasons why the margin is where it is. Also given that, again, the more power/wafer/analog market is down. So relatively spoken, a lower percentage of the overall mix. And of course, still China is strong, although below last year, was still strong. So adding that all up, that's what you get, what we have, but we're not going to give specific guidance within a few percentages, what -- where we stand with ALD. Timm Schulze-Melander: Okay. But given your prior comment about power/analog and some of the other mix, then as a percentage of sales, ALD might be flat or down as a percentage of your equipment sales in '26? Paul Verhagen: Depending on what we assume and depending on how much the relative markets grow, there might be indeed relatively spoken, a -- but now we're really talking scenarios, there might be relatively spoken, slightly lower share of ALD compared to power/wafer/analog if -- and it's a big if, if power/wafer/analog will grow more fast or faster than ALD, but that's still to be seen as well. So it's really too early tell. I really don't know. We have, of course, certain scenarios and assumptions, but it's too early to give external guidance on that. Operator: And the last question is from Marc Hesselink, ING. Marc Hesselink: Yes. I have 2. Actually, on 2 bit smaller categories. Firstly, advanced packaging that you also now point out again in the press release, also at the Capital Markets Day spent some time of it. The fact that you're really focusing on it, does it show that this is something that can be material as well over the coming years? And how do you expect that then to ramp into your revenue numbers? Hichem M'Saad: So I think we mentioned -- thank you for the question. I think we mentioned that we have made some wins in advanced packaging the past quarter, which we are really very excited about. We really think that advanced packaging is very enabling. We think that as a company, we can provide meaningful innovation and disruption to the market in the area of new materials and in the area of surface preparations and based on our experience in both ALD and also chemistry. We have a significant engagement in the past actually a few quarters with some key customers in both memory and logic, high-end logic to develop some of those films. We're very excited about this part of the business. And hopefully, we see more and more wins in the next few quarters, and we'll keep you updated of those when time comes. Marc Hesselink: But maybe to add, is it then material? Or is just the first start of something that can be material in the future? Hichem M'Saad: It's really the first start. It's really the start right now. And that's why we're excited about the future of the company, and I think that would be something that, let me say, very excited about it, to be honest with you. I think there's -- we see customers putting in very hard. I think the -- as you know, in both memory and logic, heat generation is a big problem. So we're developing some films that really would reduce the hotspots with higher conductivity capability. We see films in actually the microphotonics area team developing films that can reduce light dispersion. So it's really one area that becomes very important for both the logic and the memory customers. And that's an area that, hopefully, is going to be very accretive to us in the future. Marc Hesselink: Great. And the second question is on -- actually on LPE. So you paid the earn-out in the quarter. So you did hit the milestone for that one. I mean I think in the press release, you can still read that it is very, very weak at the moment and also no recovery into next year. So can you then still talk about the building blocks, why did you still reach the milestones? And when do you -- are you still confident on this one to pick up maybe in the longer term? Paul Verhagen: Simple answer. The milestones are based on 2024. And 2024 was a star year for us with almost, I would say, explosive growth in silicon carbide. So if it would have been -- if the milestones would have been based in 2025, they would not have been met. But yes, the reality is that they were based on '24 and '24 is a very strong year for silicon carbide. Marc Hesselink: Okay. And no visibility on that improving in the beyond '26 period? Paul Verhagen: We, of course, expect that markets to come back at a certain moment in time, not yet for next year, at least we see no evidence for that to start to happen next year. But we still believe that there is a market for us, a good market for silicon carbide that we will start seeing come back, hopefully, also in 2027, but that's as again, it's too early to tell. Operator: Gentlemen, there are no more questions registered at this time. I turn the conference back to the management for any closing remarks. Hichem M'Saad: Thank you all for attending our call today and also on behalf of Paul and Victor. We hope to meet many of you again in the upcoming investor conference and other events. Thanks again, and goodbye. Operator: Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.
Operator: Good morning, and welcome to Criteo's Third Quarter 2025 Earnings Call. [Operator Instructions] Please note this event is being recorded. And I would now like to turn the conference over to Ms. Melanie Dambre, Vice President, Investor Relations. Thank you. Please go ahead. Melanie Dambre: Good morning, everyone, and welcome to Criteo's Third Quarter 2025 Earnings Call. Joining us on the call today, Chief Executive Officer, Michael Komasinski; and Chief Financial Officer, Sarah Glickman, are going to share some prepared remarks. Joining us for the Q&A session is Todd Parsons in his role as Chief Product Officer. As usual, you will find our investor presentation on our Investor Relations website now as well as our prepared remarks and transcript after the call. Before we get started, I would like to remind you that our remarks will include forward-looking statements, which reflect Criteo's judgment, assumptions and analysis only as of today. Our actual results may differ materially from current expectations based on a number of factors affecting Criteo's business. Except as required by law, we do not undertake any obligation to update any forward-looking statements discussed today. For more information, please refer to the risk factors discussed in our earnings release as well as our most recent Forms 10-K and 10-Q filed with the SEC. We will also discuss non-GAAP measures of our performance. Definitions and reconciliations to the most directly comparable GAAP metrics are included in our earnings release published today. Finally, unless otherwise stated, all growth comparisons made during this call are against the same period in the prior year. With that, let me now hand it over to Michael. Michael Komasinski: Thanks, Melanie, and good morning, everyone. Thanks for joining us today. What excites me most about this quarter isn't just the strength of our results, but how our business is growing into a platform that reaches far beyond any single channel or format. Consumer attention is more fragmented than ever across websites, apps, social feeds, connected TV and now AI-driven assistance. That fragmentation creates complexity for advertisers, but it creates opportunity for us. Criteo is built to meet shoppers wherever they are and deliver the outcomes brands care most about. Progress we're making in Performance Media, in Retail Media and in agentic AI shows our strategy is working, and our opportunity is only expanding. Since stepping into this role, I focused on getting close to our teams, our clients and our partners. And what I see gives me confidence that we are on the right path. We're building on our strengths and sharpening our focus, and we're seeing early results from our push for greater decentralization and agility. Our purpose is clear. We power shopper journeys that unlock commerce outcomes. We help brands, agencies and retailers connect with consumers wherever they are across every channel and every device. We've evolved from being an open web company to a diversified multichannel platform with about 85% of our media spend now happening outside of desktop display. Retail Media represents roughly half of our spend with strong growth across mobile, social and video, including CTV. This cross-channel diversification continues to set us apart from single-channel ad tech players and walled gardens. Criteo's diversified reach across these channels is a core strength that's often underappreciated. Our platform enables consistent, measurable returns across channels, delivering stronger performance than siloed alternatives. As advertisers focus on outcomes rather than media buying, they're looking for the ability to accurately measure performance across a variety of consumer touch points. Our data, our AI and our global reach create a foundation that gives us a distinct competitive edge to deliver measurable outcomes for our clients. With this strong cross-channel foundation in place, we're now focused on the next major shift shaping our industry, the rise of agentic AI. This is a natural extension of our strategy. Intelligent assistants are starting to guide people through their shopping journeys, helping them discover, compare and choose products in new ways. We see this as another channel where brands will want to engage because every major shift in digital has created more fragmentation, not less. We're moving fast to prepare for this future. Our MCP server is live and has powered our first client campaigns, proving the flexibility of our platform and new workflows. In Performance Media, we've developed new agents that let brands generate audiences or surface insights instantly, removing friction from data workflows. In Retail Media, we're piloting sponsored recommendations within retailer agents. These are clear signs of how our platform adapts to new behaviors and new channels. Looking ahead, the opportunity is to bring together the proven performance of recommendation systems with the usability of large language models. Our performance engine keeps getting stronger with every AI innovation we deliver, including our latest deep learning bidding model, and it's powered by one of the most complete sets of commerce data in the market. We combine normalized product information from thousands of e-commerce players with a global map of how people search, browse, consider and buy across categories. This curated view of products and shoppers reveals the connections that predict intent and enable precise product recommendations. It gives us a data set that is uniquely structured, granular and scalable, making our recommendations more accurate, more actionable and ultimately more valuable for clients and partners. And it's an advantage that is very hard to replicate. We're thrilled to be partnering on a proof of concept with a major AI-powered assistant to explore how our technology can seamlessly integrate into their ecosystem, a strong signal of how relevant we believe Criteo will be in the next phase of digital commerce. This includes exploring how integrating our product recommendation API into product level search can drive incremental performance and relevance for users. Turning to Performance Media. This part of our business is in the midst of an exciting transformation. We're moving from a managed service model to a self-service AI-first platform that can serve customers more broadly and capture a greater share of their budgets. This shift matters because self-service not only lowers cost to serve, but also opens the door to a much larger market by allowing our technology to integrate within partner ecosystems and reach a broader universe of SMB advertisers. At the center is our GO solution, where momentum is building quickly for our small and midsized clients. For example, 1 in 4 campaigns from small clients now run through GO, up from just 10% last quarter, and we expect that to double again by year-end. GO simplifies performance marketing through automation and built-in optimization, driving higher spend, lower churn and stronger return on ad spend. GO is also accelerating adoption in social, which now accounts for approximately 35% of our GO campaign revenue. As we continue to expand cross-channel access and full funnel capabilities, we see significant opportunity ahead. Progress we're making reinforces our confidence that Performance Media will become an even stronger growth engine for Criteo going forward. Our engine is purpose-built to optimize performance holistically across channels and throughout the full buyer journey. Social is a great example. With more than 3 billion daily active users, its share of Performance Media business has nearly tripled since last year. Cross-channel, full funnel campaigns for large enterprise clients drove 5x more new users and positive incremental return on ad spend, proving that our engine delivers true performance lift across CTV, social and video. We're also extending into connected TV, which is emerging as a new performance channel. Marketers can activate CTV campaigns through our Commerce Growth Demand solution or our Commerce Grid supply side platform, and the results are compelling. A food brand tripled household exposure and a luxury fashion brand lifted transactions per user by 50%, revenue per user by 25% and new buyers by 7%. With Criteo still underpenetrated in the second fastest-growing part of the digital advertising ecosystem, CTV represents a significant multiyear growth opportunity. Another area where we see significant opportunity is with our marketplace offering, which allows marketplaces to offer their merchants Criteo's targeting and retargeting tools. Marketplaces now account for more than half of global e-commerce sales, and our solution helps them unlock incremental ad revenue while strengthening merchant retention. This is a scalable new channel of distribution that accelerates adoption of our platform across a broader commerce ecosystem. Turning to Retail Media. It continues to be a powerful growth engine despite the near-term headwinds that we expect to work through in the coming quarters. This quarter, we drove over $450 million in media spend, up 26% year-over-year with more than 4,100 brands worldwide. We're making it easier for brands and agencies to plan, buy and optimize retail media spend through partnerships with Google, Microsoft and Miracle while also deepening agency relationships and bringing more brands onto the platform. Our new partnership with DoorDash underscores the strength of our demand generation engine. Our new API integration with Google is live. It is especially important because it captures brand search budgets that have historically sat outside of retail media, opening new spend opportunities. As Google's first on-site retail media partner, we're seeing strong interest from both existing and new retailers looking to take advantage of this integration. Search is one of the largest pools of digital ad spend. And as we roll out this offering through Google Search Ads 360 in the Americas in Q4, it gives us access to an estimated $172 billion in addressable spend, a portion of which we expect will move into Retail Media over time. While still early, we see this as a multiyear growth driver starting in 2026. We're also encouraged by the early traction of our Miracle partnership, which is opening up demand from mid- to long-tail advertisers and helping us expand with retailers, including Lowe's and Ulta Beauty as they grow their marketplaces. With Microsoft, we're excited to begin testing this quarter. We're rolling out scalable real-time bidding solutions that enable programmatic buying while ensuring retailers retain full control over their data and site experience. On the supply side, we're executing with strong momentum, led by the rapid success of our auction-based display format, which has quickly become the fastest-growing ad format in Retail Media. On-site display spend grew 42% this quarter and retailer adoption more than doubled with 41 retailers now live and more coming in Q4. It now represents 12% of our Retail Media business, up from 9% last quarter with meaningful upside as it can reach 30% to 40% of our clients' media mix. Our global retailer network continues to expand, now at 235 retailers, including Sephora, Fragrance Shop in the U.K. and Zepto in India and new market entries with Migros and Interdiscount in Switzerland and mass market (sic) [ Massmart ] in South Africa. Shoppable video is gaining traction, too, and contributing to the success of full funnel on-site strategies to drive over 5x higher conversion and 5x more new buyers than sponsored products alone. We're expanding offsite with Superdrug as our latest client to adopt the solution, and we see opportunities to extend Retail Media off-site into CTV and social. All of this reinforces our confidence in the long-term growth trajectory of Retail Media. Overall, we delivered solid results this quarter. Media spend grew 4%, representing a 400 basis point improvement from last quarter. Contribution ex-TAC increased 6% year-on-year and adjusted EBITDA margin came in above guidance. We have the right team and strategy in place to reaccelerate growth over the next few quarters, and the foundations we're building will drive multiyear benefits. As part of that effort, I am thrilled to announce that Ed Dinichert as our new Chief Customer Officer, a key addition to our leadership team who will further strengthen execution and ensure client success remains central to everything we do. This morning, we also announced our intention to redomicile Criteo to Luxembourg and replace our current ADS structure with a direct listing of our ordinary shares on NASDAQ. We view this as an important strategic step toward unlocking significant and sustainable shareholder value, which reflects our commitment to ensuring Criteo has the optimal corporate structure. It is expected to offer significant advantages over our existing structure, including eliminating most of the legal complexities currently applicable to Criteo, enhancing flexibility in capital allocation and broadening our shareholder base, and Sarah will provide additional details on this shortly. To close, Criteo has real momentum. We're executing with conviction, building on a durable strategy and positioning ourselves to capture the most important shifts in commerce and advertising. We're confident that this will translate into sustained growth and long-term value for our shareholders. With that, I'll hand it over to Sarah for more detail on our financial results and outlook. Sarah Glickman: Thank you, Michael, and good morning, everyone. We delivered strong Q3 results with significant operational leverage driven by top line growth and disciplined cost management. Revenue was $470 million and contribution ex-TAC increased to $288 million. This includes a year-over-year tailwind from foreign currencies of $6 million. At constant currency, Q3 contribution ex-TAC grew by 6% year-over-year, representing 15% on a 2-year stack. Client retention remains high at close to 90%, underscoring the resilience of our model. Macro trends remained stable throughout the quarter and during the back-to-school season. We saw higher advertising spend year-over-year across several key categories, including office supplies, furniture and personal care. In Performance Media, revenue was $403 million and contribution ex-TAC was $222 million, up 5% at constant currency and 10% on a 2-year stack. This was driven by our Commerce GO solution, up 6%, which leverages our large-scale commerce data and AI-powered audience modeling technology to connect advertisers within market shoppers. We also benefited from incremental AI-driven performance enhancements on top of the strong AI improvements we implemented last year. Ad Tech Services reduced Performance Media contribution ex-TAC growth by approximately 100 basis points due to lower spend in our media trading marketplace. Overall, we benefit from a diversified client base and a global footprint. By region, we saw media spend growth in Asia Pac and EMEA and softer but improving trends in the U.S. Travel remains our fastest-growing vertical, up 24%, with classifieds up 14% and marketplaces also performing well. Retail med spending was softer, including an 11% decline in fashion. In Retail Media, revenue was $67 million and contribution ex-TAC grew 11% at constant currency to $66 million, up 34% on a 2-year stack. Growth was driven by continued strength in Retail Media onsite. We benefited from the traction of our auction-based display offering and the addition of newly signed retailers. We continue to win new retailers across all regions. Media spend in Q3 grew 26% year-over-year, outpacing the market and reflecting share gains. We saw continued expansion with CPG and smaller brands, and we onboarded 100 new brands this quarter. Momentum with agencies also remained strong, and our 4,100 global brands are prioritizing Retail Media as a key performance channel. We delivered adjusted EBITDA of $105 million in Q3 2025, up 28% year-over-year, resulting in adjusted EBITDA margin of 36%, up 500 basis points year-over-year. This reflects strong operational leverage from top line growth, AI-driven productivity gains and cost discipline as well as lower-than-expected social charges for RSUs. We also benefited from approximately $8 million due to the timing of certain marketing expenses shifting into Q4 and lower bad debt expense. Non-GAAP operating expenses were flat year-over-year at $158 million in Q3, reflecting our disciplined resource allocation while enabling continued investment in product innovation. We continue to build on our strong operational fitness to enable greater scale and efficiency, including driving productivity gains through Commerce Go and AI-powered tools. Moving down the P&L, depreciation and amortization was $30 million in Q3 2025. Equity-related compensation expense was $15 million compared to $35 million in Q3 last year. Our income from operations was $52 million, up sharply compared to $10 million in the same quarter last year, and our net income improved to $40 million, reflecting both revenue growth and operational leverage and lower equity-related compensation expense. Our weighted average diluted share count was 53.8 million compared to $58.4 million a year ago, which resulted in diluted earnings per share of $0.70. Our adjusted diluted EPS was $1.31 in Q3 2025, up 36% year-over-year. Free cash flow was $67 million in Q3, up 74% year-over-year. We are delivering consistent upward momentum in adjusted EPS and free cash flow per share, demonstrating long-term value creation. We expect to deliver free cash flow conversion above 45% of adjusted EBITDA this year, excluding nonrecurring items. Criteo is a well-managed, resilient cash-generative business with the financial strength to invest for growth and return capital to shareholders. We closed the quarter with $811 million in total liquidity and no long-term debt, giving us the flexibility to execute our strategy and pursue disciplined balanced capital allocation. We are confident in our business strategy and the priorities remain clear: invest in organic growth, pursue value-enhancing acquisitions and return capital to shareholders. We deployed $11 million towards share repurchases this quarter, buying back about 0.5 million shares, reflecting our current constraints related to French law limits for share buybacks. Year-to-date, we have allocated $115 million to share repurchases and anticipate resuming our buyback program in Q4. We had $104 million remaining in our Board share buyback authorization as at the end of September. Turning to our financial outlook, which reflects our expectations as of today, October 29, 2025. We are reaffirming our full year contribution ex-TAC guidance and raising our adjusted EBITDA margin guidance to the high end of our range. For 2025, we continue to expect contribution ex-TAC to grow 3% to 4% year-over-year at constant currency. We estimate ForEx changes to have a positive full year impact of $12 million to $15 million. In Performance Media, we expect contribution ex-TAC to grow mid-single digits at constant currency in 2025. This reflects our solid performance in the first 9 months of the year, continued traction with advertisers to drive performance throughout their buyer journey and the ramp-up of Commerce Go, partially offset by lower ad tech services. In Retail Media, we expect to drive media spend growth ahead of the market and contribution ex-TAC growth is now expected to be at the low end of low to mid-single-digit growth range at constant currency. As previously communicated in Q4, we anticipate lower revenue due to scope changes with 2 specific clients, and we lap onetime tiered fees for our largest retailer in December 2024. Excluding these 2 clients, underlying Retail Media contribution ex-TAC growth for 2025 is expected to be in the mid- to high teens range, reflecting a slower ramp-up from certain new clients in Q4. We now project an adjusted EBITDA margin of approximately 34% for 2025. This reflects our confidence in operational leverage from top line growth, AI-driven productivity, continued cost discipline and the ongoing transformation of our operating model as we continue to invest in areas of growth, including agentic AI innovation. These investments will support continued top line growth and strong cash flow generation for the coming years. We expect a normalized tax rate of 22% to 27% under current rules and capital expenditure of approximately $110 million for the year. As a reminder, Criteo operates its own data center infrastructure, which supports our stability, flexibility, performance and cost efficiency. In 2026, we anticipate higher CapEx related to the renewal of certain large data centers. For Q4 2025, we expect contribution ex-TAC between $325 million and $331 million, down 3% to 5% at constant currency. We estimate ForEx changes to have a positive impact of $5 million to $8 million per year year-over-year impact from contribution ex-TAC in Q4. We expect adjusted EBITDA between $113 million and $119 million. This reflects continued high ROI growth investments in our platform and foreign exchange rate headwinds on our European cost base. It also reflects our return to office transition and higher Q4 marketing spend tied to product launches. Importantly, we anticipate that our Q4 trends do not represent our run rate for 2026. While we are not giving formal guidance for 2026, we currently anticipate overall low growth given the temporary retail media impact with a low point expected in Q1 given the onetime revenue from tiered fees in January 2025. Before I close, I'd like to touch briefly on our intention to redomicile to Luxembourg and list our ordinary shares directly on NASDAQ. This change is designed to enhance our capital management flexibility, eliminating restrictions that Criteo currently faces in relation to share repurchases and position us for potential inclusion in major U.S. stock indices. We believe it would expand our access to passive capital, triggering associated benchmarking from actively managed funds and broadening our shareholder base. We expect this process to be completed in the third quarter of 2026, subject to the prior consultation of Criteo's Works Council and shareholder approval. Looking ahead, we intend to pursue a subsequent redomiciliation to the United States, potentially as early as the first quarter of 2027 to further broaden our access to U.S. capital markets. In closing, our results reflect a resilient company with strong execution and consistent cash generation. Innovation and AI are deeply embedded in our DNA and drive how we deliver performance, scale and value for our clients. We are confident in our strategy, our team and our ability to drive growth, profitability and long-term value for our shareholders. And with that, I'll turn it over to the operator to begin the Q&A session. Operator: [Operator Instructions] And your first question comes from the line of Justin Patterson from KeyBanc. Justin Patterson: Great. Michael, I was hoping you could elaborate on just how your clients have responded to your agentic products. I know it's early, but would love to hear more about how you're thinking about that. And then as just a quick follow-up. You also called out CTV as a multiyear growth opportunity. What are some of the investments you need to make so that can become more material over the next few years? Michael Komasinski: Thanks for the question. Yes, we'll take both of those. On agentic, really, I'd say our opportunities are threefold, if I try to categorize them a bit. We have delivered internal agentic products around our current workflows. For example, the audience agents that advance how audiences are built and activated. We're moving towards real-time intelligence audience creation. It's less work, it's faster. And really, the goal is to enable brands and agencies to generate the right audience instantly without delays, and that's in market today. Similarly, campaign agents, right, where we build tools for agencies where they can access our growth engine directly. We can create and manage and optimize full funnel, cross-channel campaigns, just much simpler prompt-based interface really drives the modernization of that product. Second category would be how we integrate sponsored ads into retailers' own agentic chat-like experiences. So think of how we power Retail Media networks today, all retailers are going to need to beef up their agentic capabilities to create easier shopping experiences, and we can power that with a lot of the feeds and technology that we use to serve ads today. And then lastly, the one that we highlighted in the script is the potential partnerships with AI platforms that bring our product recommendation capability into their responses and make them better and more informed because of the breadth of data that we have in our engine combines nicely with the semantic capability that really is the way that the responses are generated in AI platforms. We put a blog post out on this and some social post a few weeks back, and that's the thesis that we're really working on now with one of the large platforms to test that theory and see the results. And then on CTV, I think I'll hand that one over to Todd, and he can elaborate on some of the investments required to scale that channel. Todd Parsons: Great. Thanks a lot, Justin. Just a couple of points on CTV. We have been investing on the supply side, specifically in the United States, but also beginning to fan out globally with direct relationships with CTV providers that are scaled. That gives us a basis for bringing cross-channel, full funnel tactics into play where CTV can help with product discovery at the upper funnel, customer acquisition in the middle funnel and obviously, performance, which we're seeing show up in GO, for instance, with social. We would expect the same thing with CTV. So we're doing 2 things: supply side integrations and on the demand side, working with our tactics to make sure that CTV shows up in each of those 3 categories so that our advertisers get to net new incremental audiences that are on CTV can be acquired. And then on the performance level can be reactivated in a variety of different lower funnel tactics. Measurement underpins all of this. And of course, for us, making sure that advertisers see performance at a constant level across their entire marketing mix is a very key point in bringing these 2 worlds together. Those are the 3 key investments, I would say. Operator: And your next question comes from the line of Ygal Arounian from Citi. Ygal Arounian: First, just a follow-up on the third opportunity like Michael or Todd or whoever, just on the partnership with the AI platforms. And I guess a ton of debate from investors on how agentic Commerce changes e-commerce product discovery and kind of where the transaction is owned. And it sounds like you're kind of integrating to be part of that. Just philosophically, how do you see that playing out? And is there any more you could share? I know you're not going to share the economics specifically, but how that model would work for you guys if more and more of the transaction is moving into that agentic AI platform? Michael Komasinski: Yes, sure. Ygal, great question. Certainly, the debate in the weekly press week-to-week. Look, we see the monetization strategies for those platforms probably skewing towards a native advertising solution. There definitely has been some headlines here recently with the commerce capability for single product checkout, which we think is interesting. But I think ultimately, those platforms probably move towards a native advertising solution, think of it as the modernization of paid search. And really, our solution works either way. It's sort of not dependent on that. What we're trying to do is bring an API data feed that allows product-oriented responses to simply be better. And so as AI platforms are competing for market share based on user experience and quality of response, data feeds like ours that are proprietary, deep, complete, really start to differentiate the types of outputs that those platforms are able to generate. And so we see them being interested in it sort of no matter what their monetization strategy is. And I'll hand it over to Todd, maybe just to kind of talk about some of the hypothetical economic models that might support that. Todd Parsons: Yes. I would say this, we see the affiliate model as being sort of an underpinning to the trading that will occur regardless of the native ad format and how it might present itself, Ygal. I think what's not happening in the dialogue today is enough attention is being given to how a merchant is going to participate and show up in that clearing. So when you don't know what the format is or how it's going to be traded, it's easy to neglect how a merchant might play. So we're spending a lot of time with data feeds, as Michael pointed out, working with our retailers, with our marketplace partners to help them get ready to show up in answers in a way that native formats might be agnostic to. So there's a very big investment on our end to make sure that retailers are ready to play regardless of format. And we think that some affiliate type setup will be the clearing capability for economics, but we're not sure of that either. What we're really focused on now is making sure that retailers are going to show up in Answers the right way. And that's the work that we're doing on the platform side or exploring with different platform partners. So we have a real advantage in that regard. Ygal Arounian: Great. That's fascinating shift in how e-commerce is going to play out. And then on the Google partnership, that seems like a pretty big deal to me, getting integrated into Google Search. You talked about brand dollars kind of being part of that and opening up incremental budgets. Just expand on that relationship a little bit more about I wanted to [indiscernible] just like how that rolls in terms of contribution and all that into next year. Michael Komasinski: Sure. Yes, happy to expand on that. Yes. Look, the Google partnership is exciting. We announced that back in August. And it really is another example of Criteo unlocking more demand for the Retail Media category. And obviously, it allows retailers to capture brand search budgets that have traditionally been outside of Retail Media, and it's going to give advertisers true cross-channel visibility into search performance. And so the incrementality comes from net new brands and new search budgets from existing mutual brands. And back to the sizing we talked about, obviously, it's a huge addressable spend at $172 billion. A portion of that will move in. And importantly, the API connection with Google is up and running now. So we will start to see campaign volume flow into the business across Q4, and then we'll open that up to the other regions in the first half of next year. So it's a strong multiyear growth lever, really probably starting more in 2026. And if you just sort of go off a few other things, from a take rate perspective, it's directionally neutral, the same demand side fee, whether a brand goes through SA360 or through CMax. In terms of measurement, retailers can choose whether they want to share click data with Google to enable that cross-channel measurement. And so Google has an incentive to prove incrementality. And importantly, we only share click data tied to Google campaigns, not all click data or broader user behavior on retail sites. So I think a real great win-win here for retailers, for Google to get access to the fastest-growing part of the ecosystem and for Criteo to continue to benefit from unlocking demand for our retailers, which is core to our mission. Operator: And your next question comes from the line of Mark Kelley from Stifel. Mark Kelley: I'll stick with the agentic theme. I wanted to get your thoughts on -- I think there's a debate across the investor base, not for just Criteo, but just the Retail Media category overall, where as people start to transact more inside agents, maybe that would be a headwind to Retail Media as we know it today, people not going to that e-commerce site. So fewer eyeballs to see Retail Media ads. But conversely, I think as people transact more inside these agents, it seems like you'll be able to tap more and more into the search budget. I know we just talked about the Google partnership. But I guess, how do we balance those 2 dynamics in terms of what you gain that you didn't have access to before versus what might be a headwind for retail media, if that makes sense? Michael Komasinski: It does. It does, Mark. And look, again, like a hotly debated topic, I think, week-to-week. I mean, at Criteo, we see agentic as an additional channel. We just don't subscribe to the notion that agentic platforms will essentially swallow or cannibalize the entirety of the commerce ecosystem. So this pattern that you see today of people doing discovery, getting shopping assistance agentically and then jumping into commerce sites to complete transactions, we see that pattern continuing. Now agentic may become a bigger channel in that mix at some point, but we just don't see it consuming it in entirety. I mean that would be a bear case for like all of retail and all marketplaces. So it's just not the future that we believe in. If you did see some of that channel shift, which I don't think has to be zero sum, by the way, retail could compensate by raising CPMs because you could argue that those placements are going to be even more valuable than they would be today. I think what also gets lost is that retailers won't stand still. They'll continue to add additional formats, improve their shopping and site experience, and they're competing for really the right to conduct business on their own channel versus an agentic channel. So I mean those are some of our thoughts. I guess we'll see how it plays out. But I think Criteo has got to play in that either way, right? We'll either play directly into that channel in some of the ways that we talked about earlier on the call or through some of our current means powering retailers as they serve up world-class experiences that give them the right to continue to command traffic and serve customers. Mark Kelley: That all makes sense. And then maybe a second question, just on Retail Media. Nice to see Activated Media accelerate in Q3. Possible to parse out, I guess, some of the new wins that you've announced, whether it's DoorDash or other ones, how that's layered in already? Or is that mostly kind of like a same-store sales number with your existing retailer footprint? Michael Komasinski: Yes. I mean I'll let Sarah comment a little bit about it because we were super excited about the 26% Activated Media Spend growth. And so you have the 2 factors that we've talked about in the past, scope reductions and then lapping the tiered fees. And then really the new things. We had a couple of new wins that just did not scale as quickly as we had hoped for in this quarter. And so that created a little bit of softness. But we think that we'll make that up as those programs get up and running for next year, Sarah? Sarah Glickman: Yes, most of Q3's activity related to our existing base. And within that, we had some more mature, I would say, customers, right, scaled base. But ultimately, some -- there's a little bit of softness in some of the beauty area. But the new wins that we have are starting to ramp up now. So we only announced, as you know, DoorDash a couple of -- really a couple of weeks ago. So that's starting to ramp up now. Operator: And your next question comes from the line of [ Tim Nolan from SSR ]. Unknown Analyst: Two numbersy questions, I guess. If you could help us understand a bit better as to how you beat so substantially on the earnings line in Q3. It looks like your CXT number was roughly in line with guidance, but you beat pretty substantially on the adjusted EBITDA line. And then as you move your domicile to Luxembourg and into the U.S., are there any financial implications we should be aware of the cost to do this, the tax implications, reporting, anything like that? Sarah Glickman: Yes. I mean just in terms of the beat for EBITDA, I mean some of that relates to the top line beat on CXT. We also benefited and continue to benefit from the operational leverage of just continuing to make smart investments. And there are a couple of, I would say, more onetime items. So our bad debt reserve are reduced. Our receivables are in really good shape, which also translates to great cash flow in Q3. And we have some shift of marketing spend from Q3 into Q4. So I would say a pretty solid list of kind of why we be, but most of it relates to, I would say, strong operational leverage. [indiscernible] redom? Sorry, I thought you said Q3. So yes, in terms of the redom, we don't see any material costs related to that, and we will isolate those within our filings so you can see what those costs are. Operator: And your next question comes from the line of Doug Anmuth from JPMorgan. Douglas Anmuth: I appreciate you highlighting the 3 major areas of the agentic opportunity. Are there any particular investments that we should be thinking about as you're heading into '26 required to build out those AI products? And then, Sarah, just on the few guidance, I know you shift with the 2 Retail Media clients. Is there anything to call out on the slower ramp in certain new clients that you mentioned? And then as we think of '26, any change to the headwind that you had called out earlier in the year kind of over the first 10 months of the year? Michael Komasinski: Thanks, Doug. Yes, I can take the AI investment one and then Sarah can follow up on the second half. I wouldn't say that there's any investments that are sort of out of the norm to continue to scale the 3 different categories that we've talked about or at least that we can see right now. Yes, I mean you can see a little bit of it in the quarter. There's some extra marketing costs that's going into launching Commerce Go, but that's probably just like kind of more of an increase on a run rate as we scale that self-service tool in the market. The things like the campaign agent and the audience agent have been developed very much inside the teams as they are today. And then we'll see how the pilot test goes with the agentic platform. I suppose that's a bit of a wildcard. We'll have to see how the test goes and then what would be required to scale that if that's a partnership that's going to take off. But obviously, it would be self-funded with some kind of a revenue model attached to it. Sarah? Sarah Glickman: Yes. I mean -- and I think just on the Retail Media, we have a strong base of clients, 235, 4,100 brands. We're continuing to see a very strong baseline of our revenue. And there's just a slower ramp-up of some of those new clients in the latter part of '25, which is not unusual. We've seen that in past years. Douglas Anmuth: And same -- Sarah, just to clarify the same kind of cadence that you had talked about through '26 in terms of headwind. Just want to make sure that we're on the same page there. Sarah Glickman: Yes. Yes, we still anticipate the $75 million. And I pointed out in the prepared comments that Q1 will be the low watermark. So then we had the tiered fees for December '25 and January '26 for our largest retailer. So our expectation is that will kind of -- it will be the same impact of about $75 million that we already discussed. Operator: And your next question comes from the line of Matthew Cost from Morgan Stanley. Matthew Cost: Commerce Go is coming up a lot. It seems like the launch is pretty exciting, talking about kind of doubling the number of campaigns from 10% by the end of the year for small customers. I guess how should we think about the contribution to growth for this product, especially as we look into '26 and beyond? Is this something that is sort of offsetting change in behavior for customers in other parts of the product portfolio? Or is it like really incremental in the way that we think it could kind of shift the growth trajectory for Performance Media? And then I have one follow-up. Michael Komasinski: Yes. Thanks, Matthew. It's a great question. It's a product we're really excited about. You can think about it in a couple of ways. One, there is a conversion of existing clients to the GO tool or to the GO campaign workflow. And in that case, what we're seeing is higher spend, lower churn, better results. And so those flow through in a couple of different ways for us that are great for the business. And then there is an incremental client gain angle as well as we roll out full self-registration, self-service early next year, we're looking to drive client count with that and bring on real net new customers. The other thing that's exciting about GO in that context is how it really makes our cross-channel proposition come to life. I think we mentioned in the remarks, right, we've got 35% of the campaign revenue flowing through social channel. It really is like an expression of that cross-channel, full funnel self-service proposition with a lower cost to serve model. And again, the results we're seeing from clients so far are they spend more, they churn less and they get better performance. So it's really a win-win all around. Do you have anything to add? Todd Parsons: Nothing to add to that at all. We're thrilled about it. We're excited. And it is already showing up in several ways as being significant with a lot of headroom. Michael Komasinski: And I guess, Doug, just to -- or Matt, just to put a punctuation on that, we do see this being a contributor to '26 growth. We'll do guidance on '26, obviously, at year-end results in February. But we do see this being a meaningful contributor to our top line next year. Matthew Cost: Great. And then just on the proof of concept with the major AI assistant that you talked about in the prepared remarks. Presumably, proof of concept is sort of an internal test that's not consumer-facing. If it's deemed to be successful by both yourselves and your partner, what are the next steps that come after that? Todd Parsons: The next steps will be entirely determined on the quality of the test. Like you said, it's a fairly limited test at this point to determine how the data that we have, the feeds that we have that Michael talked about earlier are contributing to better answers and product recommendations. So it's relatively contained. What we will see once we have that baseline is how we take that to scale to improve the way questions are answered across the larger base of that particular partner. And we don't know that yet. So we're very much in the evidence-producing phase of the trialing, and we'll have more on it, obviously. We're going to go step by step like we do with everything, produce a good result and build. Operator: And your next question comes from the line of Mark Zgutowicz from Benchmark. Mark Zgutowicz: Sarah, your net dollar retention was 107% for Retail Media in the quarter. And I'm just curious what was the incremental from offsite versus display? And then just hoping you could provide a little more clarity on your comment about the Retail Media trends being softer but improving in the U.S. and sort of what that means in terms of how we should be thinking about variables over the next 12 months in terms of gross spend versus take rate? Anything outside of the large client transition that we should be thinking about there? Sarah Glickman: Yes, absolutely. I mean in terms of most of the revenue came from sponsored, and we have seen that, I would say, consistently that sponsored and then our auction-based display ramp-up are where we see most of the uptick. And that's obviously off a scaled base. So there clearly are very fast growth within that, but there's also some more stable growth. Off-site, we now have 42 retailers, and I would say it's just over 10% of our revenue. In terms of what we're seeing for next year -- or sorry, rather of our Media Spend, in terms of what we're seeing next year, we are seeing the continued trend with auction display kind of continue to ramp up really sponsored being, I would say, the kind of lifeblood, if you will, of Retail Media, that's where we're seeing most of the expectation of our growth. And with adding more and more capabilities to that offering, that's where we'll see most of the growth. Off-site will continue to ramp up, but I would say that is absolutely secondary to the incredible traction of our sponsored advertising and on-site offerings. And what we're seeing for next year is that we continue to see our media spend growth across our client base, and we continue to add new clients to that. So we're continuing to see that we're in the right place with our retailers, and there's some new opportunities as we discussed with some of the agentic AI that we're partnering with our retailers on as well. So many factors for growth and obviously, the near-term impact in '26 have very much been offset by good traction across Retail Media. Operator: And your next question comes from the line of Richard Kramer from Arete. Richard Kramer: A couple of things maybe you haven't touched on so much yet. One is, Michael, can you speak a little bit to Custom Audiences share and the extent to which you're getting greater social media inventory from outside of Meta properties? It would seem pretty important for the potential resumption of growth or continued resumption of growth in Performance Media. And then maybe, Sarah, you mentioned all these new initiatives, specifically self-serve, and Michael made a few comments about the API relationship with Google, but mindful of the bid switch margin experiences. Can you talk about the relative economics of self-serve versus direct sales and the trade-offs that investors might expect to see in Activated Media growth, but also take rates? Michael Komasinski: Thanks, Richard. Yes, I'm going to have Todd take the Custom Audiences one as he is the architect of that in full. Todd Parsons: Yes, I can -- Richard, I would say this, the way we think about social right now is ensuring constant performance across Meta and open auction and going to CTV, as we talked about earlier in the Q&A. So in terms of other social, we look at global scale partnerships. I think we've talked about the fact that we're testing in TikTok as one of those. And there are a couple of other explorations that we've done. But really, we have plenty of headroom with Meta currently to optimize our setups for constant performance between social and the open auction. So that's why you're seeing the numbers show up the way that they are. So as much as we're excited about expanding the social footprint, we're doing it pretty thoughtfully with a global scale partnership set in mind and then making sure that we don't get lost in single channel setups that other competitors are emphasizing. We're all about holistic performance across social and open and Retail Media as it comes online, and we're very focused there. Sarah Glickman: Yes. And in terms of the margin, we certainly do see with self-serve, and I think it was answered well in terms of the traction we're seeing on scaling the media spend. So that's obviously beneficial. It just gives us top line leverage and it's optimized automated flows. We're using the same -- I would say, the same capability internally as well. So even if it is more a managed campaign, especially for our enterprise clients, we are starting and continuing to use more capability to optimize all of those campaign setup. So that's all good for margin. In terms of -- you referenced BidSwitch, I mean that is margin generating. So just to be clear on that. And while it's not as high margin as other parts of commerce growth, it does continue to contribute to our margin overall. But yes, we're seeing really strong traction of self-service. We continue to see optimization and what we need is that unlock of media spend, and we have many avenues that we're highly focused on to make sure we can scale that. Melanie Dambre: Thank you, Michael, Sarah and Todd. That concludes our call for today. Thanks again to everyone for joining. If you have any follow-ups, the Investor Relations team is available to assist. Have a great day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, everyone. My name is Bo, and I will be your conference operator this morning. At this time, I would like to welcome everyone to Veralto Corporation's Third Quarter 2025 Conference Call. [Operator Instructions]. I will now turn the call over to Mr. Ryan Taylor, Vice President of Investor Relations. Please go ahead, sir. Ryan Taylor: Good morning, everyone, and thanks for joining us on the call. With me today are Jennifer Honeycutt, our President and Chief Executive Officer; and Sameer Ralhan, our Senior Vice President and Chief Financial Officer. Today's call is simultaneously being webcast. A replay of the webcast will be available on the Investors section of our website later today under the heading Events and Presentations. A replay of this call will also be available until November 7. Yesterday, we issued our third quarter 2025 news release, earnings presentation and supplemental materials, including information required by the SEC relating to adjusted or non-GAAP financial measures. These materials are available in the Investors section of our website, www.veralto.com under the heading Quarterly Earnings. Reconciliations of all non-GAAP measures are also provided in the appendix of the webcast slides. Unless otherwise noted, all references to variances are on a year-over-year basis. During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings. Actual results may differ materially from our forward-looking statements. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements, except as required by law. And with that, I'll turn the call over to Jennifer. Jennifer Honeycutt: Thank you, Ryan, and thank you all for joining our third quarter earnings call today. During the third quarter, we continued to drive consistent growth through strong top line performance, disciplined operational execution and rigorous deployment of the Veralto Enterprise System. For both the third quarter and year-to-date, our team delivered mid-single-digit core sales growth, double-digit adjusted earnings per share growth and over 100% free cash flow conversion. These results underscore our ability to successfully navigate a dynamic macro environment, particularly with respect to changes in global trade policies. Our steady growth and improvement this year is a testament to our durable business model and the critical role our technologies and services play in supporting the daily operations of our customers. Given the strength of our third quarter results, we raised our full year adjusted earnings per share guidance to a range of $3.82 to $3.85 per share, and we raised our full year free cash flow conversion guidance to approximately 100%. Our financial position continues to strengthen, giving us ample flexibility to evaluate opportunities to deploy capital within our proven framework. Our capital allocation bias is towards acquisitions, and our pipeline of opportunities is comprised of a mosaic of attractive targets across both Water Quality and PQI. We continue to take a prudent approach to evaluating opportunities consistent with our disciplined market company valuation framework. I also want to highlight that during the quarter, we published our annual sustainability report. We have approached our commitment to sustainability with the same rigor and discipline that we apply to operating our businesses by leveraging our VES tools for continuous improvement to drive results. We have achieved significant milestones in developing innovative and sustainable products that not only meet the needs of our customers but also support the health of our environment. Our commitment to excellence in product design and functionality ensures that we contribute positively to the world we share. In 2024, our products and services helped provide daily access to clean water for 3.4 billion people, treat and recycle 14 trillion gallons of water, save 85 billion gallons of water and ensure product authenticity and safety by helping customers mark and code over 10 billion products each and every day. Additionally, we are making progress on reducing our own carbon footprint, an important commitment for many of our stakeholders. We are proud of the steps we are taking to support our environment and help our customers progress their sustainable journeys. The work we do helps customers deliver higher-quality products, accelerate time to market, minimize resource consumption and ensure compliance with relevant standards to improve overall operating efficiency. The essential need for our technology solutions, our durable business model and the secular growth drivers across our end markets fortified by the Veralto Enterprise System enable us to deliver long-term sustainable growth. The third quarter 2025 marked our fifth consecutive quarter of mid-single-digit core sales growth, consistent with our long-term value creation algorithm. I am proud of our global team for the steady growth and improvement we have achieved while embracing our purpose, a reflection of our high-performance culture. Looking at our third quarter results in detail. We delivered 5.1% core sales growth and 11% adjusted EPS growth. Our commercial teams continue to drive outstanding execution, leveraging their applications expertise to deliver growth through new customer wins and increased market penetration, while also capitalizing on steady demand across our key markets. Our core sales growth came in at the high end of our expectations and was broad-based across geographies in both segments. Water Quality delivered 5.3% core sales growth and PQI, 4.6% core sales growth. In PQI, our marking and coding business continued to see strong year-over-year core sales growth in both consumables and equipment. And in packaging and color, our Esko team continued to drive core sales growth by expanding software solutions in the mid-market CPG segment. In Water Quality, we delivered mid-single-digit growth across both water treatment and water analytics with particularly strong growth in North America. Moving on to margin performance. Adjusted operating profit margin came in at 23.9%, in line with our underlying guidance assumption. Adjusted earnings per share grew 11% year-over-year to $0.99, $0.04 above the high end of our guidance range. Looking at sales by geography and end market, growth was broad-based across key verticals and regions. In North America, which accounts for 50% of our business, core sales grew 6.9%, led by high single-digit growth in PQI and strong mid-single-digit growth in Water Quality. Core sales in high-growth markets were up 4.3%, and core sales into Western Europe grew 2.5%. Taking a closer look at North America, core sales in PQI grew 9.2% over the prior year period. This growth reflects strategic pricing adjustments related to tariffs that were implemented in the second quarter, along with higher volumes of marking and coding equipment-related consumables and Esko software solutions. From an end market perspective, demand trends in PQI were in line with our expectations during the third quarter. PQI's volume growth through the first 9 months this year has been strong relative to the market. This reflects the disciplined cross-functional execution and rigorous application of VES tools to deliver on our strategic initiatives. And overall, CPG demand was also in line with our expectations. At Water Quality, core sales in North America grew 6% year-over-year with broad-based growth across water treatment and water analytics. In our water treatment business, we continue to capitalize on strong demand for our chemical treatment solutions where core sales grew mid-single digits year-over-year. This growth was broad-based across most of the industrial markets we serve and was most pronounced in chemical processing and technology-related industries supporting artificial intelligence, including data centers. We are well positioned to capitalize on the rapid growth of infrastructure required to support AI growth. Our application expertise in water treatment is essential to helping deliver efficient water utilization and reduced energy consumption for hyperscalers and data center operators. We are also well positioned to capitalize on adjacent industries supporting AI growth such as semiconductors and power generation. In our water analytics business, core sales into North America grew mid-single digits with growth across both municipal and industrial verticals. Our water analytics growth was primarily driven by demand for our laboratory instrumentation and related chemistries. In Western Europe, core sales grew 2.5% with both segments up year-over-year. PQI grew 3.7%, driven by marking and coding and Water Quality grew 1.3%, driven by water analytics. In high-growth markets, core sales grew 4.3%, highlighted by strong growth in the Middle East, Latin America and India. Core sales into China grew low single digits in both segments. Overall, we continue to deliver consistent top and bottom line growth in the third quarter. At this time, I'll turn the call over to Sameer for a detailed review of our financial results and an update on our guidance. Sameer Ralhan: Thanks, Jennifer, and good morning, everyone. I'll begin with our consolidated results for the third quarter. Total sales grew 6.9% on a year-over-year basis to $1.4 billion. Currency was 150 basis points or about a $20 million tailwind year-over-year. Acquisitions net of divestitures contributed 30 basis points of growth, primarily from TraceGains and AQUAFIDES. Core sales grew 5.1%, with both volume and price up year-over-year in both segments. Volume grew 2.7% year-over-year and price contributed 2.4% to core sales growth in the quarter. Recurring revenue grew high single digits year-over-year and comprised 62% of our total sales. Gross profit increased 8% year-over-year to $844 million. Gross profit margin expanded 50 basis points to 60.1%, reflecting the benefit of our strategic pricing actions and strong procurement and supply chain efforts related to the tariff environment. Adjusted operating profit increased 6% year-over-year and adjusted operating profit margin was 23.9%, in line with our expectations. Strong year-over-year margin expansion in our Water Quality segment in the quarter was offset by acquisition dilution, strategic growth investments and tariff mitigation costs at PQI. Additionally, corporate expenses were up year-over-year, reflecting our full run rate costs. Looking at EPS for Q3, adjusted earnings per share grew 11% year-over-year to $0.99 per share. As compared to our guidance, adjusted EPS came in $0.04 above the high end of our range. This was primarily driven by stronger volume growth in both segments, higher operating margin in our Water Quality segment and lower net interest expense. Our free cash flow generation was strong in the third quarter. We generated $258 million of free cash flow at 20% or $43 million increase year-over-year. I'll cover the segment results, starting with Water Quality on the next page. Sales in our Water Quality segment were $856 million, up 7% on a year-over-year basis. Currency was a 140 basis points tailwind, and acquisitions contributed 30 basis points of growth, driven by AQUAFIDES. Core sales grew 5.3% year-over-year. Higher volume drove 360 basis points of core sales growth and price contributed 170 basis points. Water Quality's volume growth was driven by strong demand for water analytics at municipalities and water treatment solutions in our industrial end markets. And to a lesser extent, we also saw growth in UV treatment installations. Water Quality's recurring sales grew high single digits year-over-year, and equipment sales were up more than 3% year-over-year. Adjusted operating profit increased 13% over the prior year period to $225 million, and adjusted operating profit margin was 26.3%, up 150 basis points versus the prior year. Overall, it was a very strong quarter for Water Quality, reflecting the attractive secular growth drivers in our end markets and the ability of our Water Quality team to create value through VES-driven execution. Moving to our PQI segment on the next page. Sales in our PQI segment grew 6.9% year-over-year to $548 million in the third quarter. Currency was a 200 basis points tailwind. Contribution from acquisitions was 30 basis points year-over-year, primarily driven by TraceGains. This was net of the AVT divestiture, which was completed in Q1 2025. Core sales grew 4.6%, with price contributing 3.3% growth, helping offset tariff-related cost increases. Volume contributed 1.3% to core sales growth. PQI's core sales growth was broad-based across most of our key end market verticals and geographies. Recurring revenue grew high single digits year-over-year, led by consumables and software. And equipment sales were up just over 3%, driven by sales of marking and coding equipment. We continue to see strong demand for Videojet's refreshed technology portfolio. Equipment sales were strong across continuous inkjet and laser technologies with particularly high customer demand for the UV laser marking system that we introduced at the end of last year. Our UV laser is an attractive alternative to thermal transfer overlay technology. Additionally, it is helping our customers transition to more sustainable, flexible film packaging solutions. From an acquisition perspective, core sales growth for TraceGains continued to exceed 20% year-over-year. We continue to invest in TraceGains to scale the business and further penetrate the CPG market to create long-term value. We believe the transition to digital connected workflows in the food and beverage industry is poised for strong growth over the next decade. The combination of Esko and TraceGains provides us a unique opportunity to deliver value to our consumer brands as they digitize workflows with connected data across product development, compliance and packaging. Looking at PQI's profitability for the third quarter, we reported $139 million of adjusted operating profit, resulting in adjusted operating profit margin of 25.4%. The year-over-year change in PQI's profitability reflects the impact from acquisitions, strategic growth investments and to a lesser extent, tariff mitigation costs. Specifically, we continue to enhance our manufacturing utility with new production lines in strategic locations to improve our ability to serve customers in every region. We are in the final stages of completing these product line shifts. Overall, we are pleased with the growth at PQI and progress on our strategic investments during the quarter. Turning now to our balance sheet and cash flow. In the third quarter, we generated $270 million of cash from operations. We invested $12 million in capital expenditures. As a result, free cash flow was $258 million for the quarter or 108% conversion of net income. At the end of the third quarter, gross debt was about $2.7 billion, and cash on hand was nearly $1.8 billion. Net debt was just under $900 million, resulting in net leverage of 0.7x. Our financial position is strong and provides us the flexibility in how we deploy capital to create long-term shareholder value. We will remain prudent and disciplined in our approach to capital allocation. Over the long term, our goal is to continue to create shareholder value with a bias towards M&A. As Jennifer mentioned, we have an attractive pipeline of opportunities in both Water Quality and PQI. Looking now at our guidance for the fourth quarter and full year. Our underlying assumptions have been updated to reflect our current view of demand in our end markets, our most recent assessment of trade policies and currency rates as of October 3. Beginning with sales. For the fourth quarter, we are targeting total sales growth in the mid-single digits year-over-year. On a sequential basis, we expect total sales to be roughly in line with the third quarter, even with fewer shipping days. This assumes a year-over-year currency benefit of approximately 3% and core sales growth in the low single digits. Core sales growth is expected to be negatively impacted by 3 fewer shipping days versus the prior year period. 3 fewer shipping days represent a little more than 2.5% impact on Q4 core sales versus the prior year period. For the full year 2025, our assumption for core sales growth remains mid-single digits for the total company. This assumes approximately 5% core sales growth in each segment for the full year. Favorable currency rates are expected to benefit full year sales growth by a little more than 1% and the impact from acquisitions and divestitures is expected to be neutral on the top line for the full year. Looking at adjusted operating profit margin. In the fourth quarter, we expect to deliver approximately 30 basis points of margin expansion versus the prior year period. And for the full year, we expect adjusted operating profit margin in the range of flat to up 25 basis points year-over-year. For adjusted earnings per share, our fourth quarter guidance is $0.95 to $0.98 per share. And we raised our full year adjusted EPS guidance to $3.82 per share to $3.85 per share. We are now expecting adjusted EPS to grow high single digits for the full year. Finishing up our guidance update with free cash flow conversion. Based on our strong conversion through the first 9 months, we raised our guidance for free cash flow conversion to approximately 100% of GAAP net income. That concludes my prepared remarks. At this point, I will turn the call over to Jennifer for closing remarks. Jennifer Honeycutt: Thanks, Sameer. In summary, we continue to demonstrate Veralto's ability to successfully navigate dynamic macroeconomic environments with confidence. Our high-performance culture grounded in VES has helped to deliver mid-single-digit core sales growth and double-digit growth in adjusted earnings per share through the first 9 months of 2025. We expect to deliver another quarter of year-over-year growth in the fourth quarter given the essential need for our technology solutions, our durable business model and the secular growth drivers across our end markets. Our financial position continued to strengthen in the third quarter, and we are prudently evaluating opportunities to create shareholder value within our disciplined capital allocation framework. We are excited about the bright future ahead for Veralto, its associates and the opportunities in front of us to help customers solve some of the world's biggest challenges in delivering clean water, safe food and trusted essential goods. That concludes our prepared remarks. And at this time, we are happy to take your questions. Operator: [Operator Instructions] We'll go first this morning to Deane Dray of RBC Capital Markets. Deane Dray: Nice job on margins and free cash flow. Really good to see that quality coming through. Just start off with a couple of kind of nuanced questions regarding the macro. Can you clarify about tariffs? You were -- there was a bit of a mismatch on the last quarter on the timing of pricing. So do you feel like you've caught up there and then anything about the government shutdown that you may be seeing on the Water Quality side, any ripple effects? Sameer Ralhan: Yes, Deane, as you go to look at it on the pricing side, at this point, the teams have taken really good actions from a strategic perspective, really working with the customers on the pricing front, and you started seeing that flowing through the numbers, PQI a little bit more than Water Quality. So at this point, I think on the pricing front, we feel like we're in a good place to help offset the tariff -- any kind of a headwind. But again, pricing is one of the elements. As you know, we've been working on the supply chain, production changes as well to help offset any of the impact on tariffs at this point in a pretty good place, but the environment is volatile, and we're staying on top. Jennifer Honeycutt: Yes. And I would say relative to your second question, Deane, we watch the government environment closely. At this point, we've really not seen any material impact. So it's steady as she goes. We're running the business, continue to have critical needs for clean water, safe food and trusted essential goods. Deane Dray: Good to hear. And then just a follow-up on the regions. Any specific comments about China, the pace of demand? There's been -- some of your peers have had some softness there. Jennifer Honeycutt: Yes. I mean, China is effectively performing as we expected it to. We had an easier comp here relative in Q3. But sequentially, if you look Q2, Q3, we're not really seeing any meaningful changes to our total sales in China. And I would say our team continues to do a great job of executing well in what has really become a more mature market. Operator: We'll go next now to Andy Kaplowitz at Citi. Andrew Kaplowitz: So Jennifer, you've had many quarters in a row of strength in your industrial-focused Water Quality business. So could you talk about the durability of that strength into '26, especially given your comments regarding data center-related growth? Can you size that particular business at this point and its impacts that you expect moving forward? Jennifer Honeycutt: Yes. Data centers for us continues to remain a strategic priority. We're seeing strong double-digit growth here from sales to both existing customers and new builds, mostly driven by the big 5 tech companies. As you know, data centers tend to consume large amounts of water and operators are looking to us to maintain uptime while reducing both water and power consumption. And so our involvement really starts as early as preconstruction with consulting services that we provide to maximize energy efficiency and water conservation, including the design of the water treatment train. So a great opportunity here in data centers themselves. But I would also say, if you zoom out, data centers are just part of the AI value chain. Water treatment that we provide to the market, these technologies play a critical role in chip manufacturing, power generation, mining and other critical raw materials needed to build and operate these data centers. So we play in a broad space here in terms of the entire value chain leading up to data centers. I would say, relative to the opportunity, very big opportunity for us. We'll remain strategically focused on it. It is a smaller portion of our business, but it's got substantial runway for growth going forward. Andrew Kaplowitz: That's helpful. And then, Sameer, you lowered the '25 margin guidance slightly. Was that all PQI tariff-related pass-through? Or was it the incremental investments you're making? When you look out a bit into '26, would you expect to resume more normal incrementals at least well into the 30s as per your algorithm? Sameer Ralhan: Yes, Andy. As you kind of look at the full year margin guide, it does reflect the first 9 months of the performance and what we expect for Q4. You're absolutely right. As we kind of look at Q4 at this point, the tariff stuff should be lapping, but there's a little bit of a math impact just from the price and cost side, given we are offsetting the dollar impact. And as you know, in Q4, we typically tend to make some investments as we kind of drive the efficiency set up for the next year. So some of that timing will hit us in Q4 as well. So that's really kind of driving -- but most of that, Andy, as you're absolutely right, will flow from the PQI side than on the Water side. Water has had a great year with a great fall-through, and we expect that to continue. But as you're going to look at the margin side, right, for the full year from an EPS perspective, Andy, as you're going to look down the P&L, we feel really good. There's a little higher assumption on the sales volume, interest expense and some of the below-the-line tax rate should be a benefit to us as well. So that's why we felt confident despite the margin raising the EPS guide. Operator: We'll go next now to Andrew Buscaglia at BNP Paribas. Andrew Buscaglia: I just wanted to check on some of your trends were really strong in the quarter, especially in North America, especially PQI within North America. I was surprised to see that. How much of this would you attribute to pull forward? And clearly, I mean, there's a lot of noise into Q4, but what's your sense on sequential trends in PQI, if you're seeing any impact one way or the other from CPG markets? Jennifer Honeycutt: Yes. We really don't see any meaningful pull forward. We've had exceptionally strong commercial execution in our PQI businesses in North America, particularly from Videojet. And Videojet's performance has not only been on the back of strong commercial execution, but also on the back of the products launched in the last year. So we're seeing strong CIJ and laser sales as well as sales in the secondary packaging. So customers are needing increased case level traceability tied to the Food Safety Act. That's driving some of that strength. And we're just seeing higher share of wallet with existing customer base really driven by new technologies and go-to-market strategies on their part. So it's a great job by our commercial teams executing on our strategic price initiatives as well. Andrew Buscaglia: Yes. Okay. Okay, great. And in Water Quality, margins there have exceeded my expectations at least this year, and it seems like past investments are paying off. I'm wondering, this kind of was the case last year in PQI, but I'm wondering, going forward, do we need to see more increased investments in either segment? Or is this sort of a sustainable run rate for both segments in terms of margins into 2026? Sameer Ralhan: Yes, Andrew, let's start with Water Quality comment first. On the Water Quality side, you're absolutely right, great execution by the team as we kind of think on the [ margin ] side, really very disciplined VES-driven execution, and you're seeing the benefit of that on the fall-through side. PQI this year had a little bit of a heavy lift as you kind of think about some of the tariff-related moves we had to make. So you're seeing that. But as you kind of move forward, the way to think about the PQI margin is, the incremental margins as we move forward should be driving that 30% to 35% kind of a fall-through as we laid out in the long-term value creation algorithm. And that kind of translates into 25 to 50 bps of [ OMX ], right? So we expect that. Now there may be some one-off items that we had this year that should be offset next year. So that should benefit. But we'll take all the puts and takes and in February, talk about the '26 guidance. Operator: We'll go next now to John McNulty with BMO Capital Markets. John McNulty: Maybe the first one, just in Water. So it seems like on the pricing side, you've kind of been gradually creeping higher. I guess should we continue to see that pricing accelerate as we go into the back of like into 4Q and into the early part of 2026? And then also, can you give us a little bit of color as to if there's much variation between the subdivisions in Water. Jennifer Honeycutt: John, just to clarify, you're inquiring about the pricing differences in the subdivisions in Water? John McNulty: That's right. That's right. Jennifer Honeycutt: Okay. Yes. We don't really delineate there at that level. But what we will say is we've had strong price execution on the back of covering for some anticipated tariff activity. But both price and volume on Water has been equally balanced, which is pretty fantastic in the environment that we're in. Pricing going forward is going to look a lot like our frame that we have talked about in prior calls relative to 100 to 200 basis points of contribution in the growth number coming from price. But having said that, we believe we're going to be in a strong position here to deliver price in the fourth quarter. John McNulty: Okay. Fair enough. And then maybe just with regard to your cash flow. So you did incredibly well in 3Q. It looks like a solid outlook for 4Q. Your cash is definitely starting to build on the balance sheet. Your leverage is pretty anemic at this point. I guess, do you see opportunities that you think in the next 6 to 9 months, you may be able to actually get across the finish line when it comes to M&A? I know these are hard to time, but your capital efficiency seems like it's starting to maybe drift a little bit lower just given how successful you've been with the cash you've been building up. So maybe a little bit of color on that. Sameer Ralhan: Yes. Thanks, John, for that. First, on the cash side and the free cash flow side, really proud of all the execution of the teams across our businesses as you kind of think about the quality of the earnings, working capital management and that kind of flowing into the free cash flow. So really great execution is really driving the cash generation. And ultimately, as you said, cash is accumulating nicely on the balance sheet. Now our intention is to deploy that capital to create long-term value. As you've heard from us in the past, look, the pipelines are pretty active. We are very actively looking at the number of opportunities, but we're going to stay disciplined. You know us. We're going to stay true to our framework of market company valuation. So more to come. But as we kind of think about our cash, we'll look at all the opportunities to deploy it to create value for the shareholders. Operator: We'll go next now to Will Grippin at Barclays. William Grippin: Just one quick one for me, another one on M&A. I know it's still early, but I would be curious if you have any updates on your recent investment in Emerald Ventures and maybe how some of those early discussions or opportunities being presented to you are looking? Jennifer Honeycutt: Yes. We remain excited about our partnership with Emerald, and they are vetting a number of technologies in partnership with us that address treatment, monitoring and emerging contaminants. It's steady as she goes here. We continue to work with them on vetting and looking at opportunities there. And we'll let you know when we have something to report. Operator: We'll go next now to Nathan Jones with Stifel. Nathan Jones: I guess first question, Jennifer, 6 months ago when tariffs had just been announced, you were pretty excited about the potential for Veralto to use the disruption from tariffs to gain market share. I'm wondering if 6 months later, you can maybe talk about any opportunities that the teams have taken advantage of and how that's played out relative to expectations over the last 6 months? Jennifer Honeycutt: Yes. I think we're fortunate enough to really get ahead of this relative to our 3-pronged strategy of strategic pricing, supply chain and procurement changes and product line shifts. The product line shifts that we've made are really no regret moves, right? So moving product lines closer to where customers are offsetting tariff impact is something that we have been nimble in executing and VES has helped support do that. Certainly, if you look at price-volume balance here, it would suggest on the volume side that we're holding up well with regard to being able to continue to penetrate markets regionally where localization provides good strategic competitive advantage for us. So as you well know, we've got a warehouse now here in North America for our Trojan business that's headquartered out of Canada. They continue to have great opportunities here in the U.S. And so all of these sort of initiatives that we've taken here have gone the way we thought them to, and we're seeing good opportunity to be closer to our customers and serve them locally. Nathan Jones: I guess my follow-up is going to be PQI in North America. I mean it's 3.3% of price in PQI. I assume that's obviously skewed to North America given the tariff environment. So there's a pretty heavy pricing in PQI there. Maybe you could just talk a little bit more about any opportunities there are for non-price mitigation actions in PQI. I guess the tariff impact was a little bit higher than I expected. And then does that present an opportunity to maybe mitigate some of the tariff impacts, keep some of the price and have that drop through to margins as we move into 2026? Jennifer Honeycutt: Yes. I would say relative to PQI in North America, we are seeing great balance between price and volume within our marking and coding segment. And that is largely on the back of Videojet products launched last year in terms of new CIJ and laser products, including secondary packaging products that actually tie to the Food Safety Act that I spoke about earlier. So we're confident in terms of the ongoing sort of demand and stability of these products. And I think what we're seeing here in North America is those products that were newly launched last year are really starting to gain traction. So great execution by our commercial teams. And we will continue to monitor the environment as we go forward. Operator: We'll go next now to Jacob Levinson at Melius Research. Jacob Levinson: Just tacking on Andy's question earlier on the data center side of things. Is there any way you could frame for us the content intensity or the opportunity that you would have at ChemTreat or Trojan relative to some of those other types of non-res facilities that they operate in? I'm just trying to get a sense of how a data center would compare to, say, a power plant or a chemical plant. I'm sure they all use a lot of water, but it's not entirely clear which ones would be more intensive for what you sell? Jennifer Honeycutt: Yes. Thanks for the question, Jake. I think the way to think about this is our commercial teams are really skilled at pivoting where the opportunities are in any given quarter or year. We are seeing double-digit growth in data centers and in applications closely tied to data centers. We don't publicly disclose sales by vertical market, but we can say that we feel very good about our current position and our opportunity to continue to grow double digits in these areas going forward. Sameer Ralhan: Yes. And Jake, the other way to think about also is as you kind of think about the applications within the data center, there are multiple touch points where our services kind of get into. Think about the data center, some of the key issues are around reducing the water and power consumption, both. So we play a part on both sides of the equation. And also the other part of the data centers is to really think about the uptime, right? Maintaining uptime is critical in the data center infrastructure. We're all kind of learn based on some of the news that you've seen in the last couple of weeks. So as you kind of think about minimizing corrosion, scaling biological growth, there are tons of applications you're going to think about and expertise that is needed in making sure the data centers maintain their uptime and our country team plays a phenomenal role in helping our customers achieve that. Jacob Levinson: Okay. That's helpful. And just one quick one on TraceGains. It sounds like that deal has been working out nicely for you. Maybe you can just help us understand the puts and takes on the deal as we come out. I think you've had it now for almost a year now. And I think part of the thesis at least was that there was an opportunity maybe to pull in some of your traditional products into that smaller mid-sized CPG segment. So any color there would be helpful. Jennifer Honeycutt: Yes. We are incredibly happy with TraceGains' performance and the integration here has gone well. They are now at their first year anniversary. And so their growth rate greater than 20%, which has been in line with expectations, will go into the core growth calculus going forward. In terms of opportunity there, both TraceGains and Esko have been working together to integrate the digital backbone here that will create a single source of truth for all stakeholders in both the packaging and the product development workflow. So all of that is on track. We do believe that the CPG market is early in its digitization journey, but there continue to be strong regulatory and consumer safety drivers there, making an attractive place for us. So TraceGains is doing great, strong grower for us on track. We continue to invest in building out that business, but they are growth accretive to the profile. Operator: We'll go next now to Brian Lee with Goldman Sachs. Brian Lee: Just a couple more follow-ups. I know we've talked a lot about margins in PQI. But if we think about the cadence, it seems like we're 2 quarters into tariffs hitting margins in this segment. So do we maybe not really fully lap the tariff impact until 2Q of '26? And is that kind of the way to think about when from a modeling perspective, we start to see PQI margins start to expand again year-on-year? And maybe just to add on to that, when you think about pricing in PQI, is that -- I mean, I would assume it's the biggest lever, but are the increases enough to get back to kind of recapture the 100 to 200 basis points of margin decline you've been seeing here at the end of the year? Or do you need productivity gains, mix, other factors to help there as well? Just any sense on the puts and takes there. Sameer Ralhan: Yes. Brian, a lot of questions to unpack there. So let's go one by one, right? First, I think your instinct is right as we're going to think about when we start lapping up the impact from the tariff side from the -- all the actions perspective, you're going to start seeing in the second quarter. I think that's a good way to think about that impact. But overall, as you kind of think about the margin expansion, look, price is one of the impacts. We look at price versus the raw material costs and that we call it the [ PPE kind ] of that expansion all the time. That is one of the -- definitely one of the factors that we're going to move into next year. But productivity is part of it, right? As we're going to think about the volumes that are coming through, they should be falling through at 30% to 35% kind of a range. That itself should give us 25 to 50 bps kind of a margin expansion as you're going to start looking at things moving forward. But there are some one-off things as we kind of talked about the tariffs and the actions and the costs that come with mitigating those. Some of those -- one of those -- one-off things like that should be offsetting next year as well. So lots of moving parts, but we feel really good about where the business is, the new products that come in, the acceptance we're seeing from the customers and the volume gains that you've seen. So really positive as we kind of think about our opportunity to expand the margins -- to continue to expand the margins, I should say. So you're going to see us in February kind of talking about that in more detail. Operator: We'll go next now to Saree Boroditsky at Jefferies. Jae Hyun Ko: This is James on for Saree. I wanted to look at some reason for Water Quality. I think high-growth markets kind of underperformed other regions over the past few quarters, but it outperformed this quarter. So what are kind of key factors kind of driving growth in these regions? And how do you see this trajectory like going forward for the next several quarters? Jennifer Honeycutt: Yes. I mean I think we've had good strong growth really contributing from our high-growth markets. Certainly, China is no longer a drag here for us. First time in several quarters that we've seen growth from both of our segments there in China, and the team is doing a great job to execute commercially. We see continued strong growth here in Latin America. And I would say there's real upside and double-digit growth that we're seeing also from India and the Middle East. India on the back of a rapidly growing middle class, lots of infrastructure development there and so on. India still is a relatively small part of our overall enterprise as a percent of sales but rapidly growing. And we've got a team on the ground there who's driving some great execution, both for our Water Quality and for PQI. In the Middle East, it's -- everyone knows that they have considerable challenges with water and energy utilization and so on and so forth. So there's great opportunities there as they look to drive recycle, reclaim water as they focus on how to make the water that they do have last longer, recycle more of it and so on. So we think the secular drivers here for our high-growth markets are going to continue to remain strong. And certainly, the focus that we've had on executing commercially in those target regions has gone well. Jae Hyun Ko: Got it. Great color and great to hear that. And kind of moving on to recurring revenue, it kind of grew strongly like high single digit in the quarter. Can you kind of discuss the drivers behind this growth? And do you expect recurring revenue to continue to outpace equipment sales growth going forward? Jennifer Honeycutt: Yes. I mean I think you've got to look at the relationship between equipment and consumables or recurring revenue over the cycle. They're going to be modest changes in which is the faster grower. But I would say in the main, we've got strong growth from both right now as in the case of PQI on our coding and marking business, strong printer placements and the inks and solvents and consumables to go with them. Same thing that we see on the Water side, great instrument placement as well as the consumables that go with them. So we've got a very sticky business, as you probably know, with regard to consumables and their relationship to the hardware that they support. I would also say we're starting to see some higher contributions from our software-based businesses. So if you look at our packaging color side, where you're starting to see our [ SaaS ] and annual revenue start clocking in here with both TraceGains and Esko, those are starting to be meaningful contributors as well. Sameer Ralhan: The only one more point I would add is as you're going to think about our instrument business as well, right, I mean there's a finite life, and that is a reoccuring business as well. So as you're going to think about that growth from the growth perspective, so that's nice add on as we're going to continue to move forward. Operator: We'll go next now to Bobby Zolper of Raymond James. Robert Zolper: Were there any variances relative to your expectations in Water Quality pricing? Sameer Ralhan: No. I think, look, pricing in general has been along the expectations, Bobby. As you recall, when we -- the tariff environment started earlier this year, we said we're going to be very strategic with respect to our pricing versus one-off items being added tied to tariffs. So we work very closely with our customers to make sure -- ultimately, the goal here is to create value through a combination of price and volume, and that's kind of reflected as you kind of think about the overall core growth, both in the Water Quality and PQI side as well. So we saw a little bit higher pricing in PQI versus Water, but ultimately, it's a combination of both that creates long-term value, price and volume. Robert Zolper: Okay. Understood. And what are your thoughts on the attractiveness of water metering as a platform? Jennifer Honeycutt: Yes. I mean I would say we look at the entire value stream of where water is used, analyzed and consumed. Metering is part of that value chain. We actually are in the metering business today with magmeters in our McCrometer business, smaller overall portion of our revenue profile, but we're actively in metering today. Operator: We'll go next now to Andrew Krill of Deutsche Bank. Andrew Krill: I don't think this was explicitly touched on. But for 4Q, I just was hoping you could give some segment level color on margin expectations, maybe sequentially is the best way to do that? And also anything on core growth for the fourth quarter by segment? I know you said, I think both around 5% for the full year, but just wondering if any big differences for 4Q. Sameer Ralhan: Thanks, Andrew. There are 2 distinct questions over there. So let me start with the margins first. For the fourth quarter, we expect the margins in aggregate to be around 30 basis points. Both segments should be driving the year-over-year expansion in the margin side. You're going to see that. Water Quality, just driven by continued disciplined execution. Frankly, they've done a phenomenal job in the first 9 months, and we expect that to continue in Q4. PQI should start benefiting from the reduced tariff-related costs and some of the operating efficiencies that we've been driving. So you're going to see that, but PQI should be on a year-over-year basis up as well. But in aggregate, we should be in the 30 basis points kind of a [ ZIP code ] on the margin side. As far as the core growth, again, as you know, we don't give guidance by segment, but both segments are lined up pretty nicely and should be contributing to the growth that we've laid out. And Andrew, as you know, we said core growth around low single digits. But just to highlight and reiterate what we said in the prepared remarks, we do have 3 less shipping days. So if you pro forma for that, the core growth across the portfolio is in the solid mid-single digits range. Andrew Krill: Great. Very helpful. And then going back to cash conversion, again, very impressive in the quarter. Could you expand a little on like what went well? And as we look forward, I think in the past, you said 1Q and 3Q often go below 100% conversion as you do your cash interest payments. Just -- is there a chance maybe like you can hold the line more consistently going forward? Or should we still be expecting a more normal outcome of below 100% in 1Q and 3Q? Sameer Ralhan: Yes, Andrew. As you kind of look at the free cash flow, I think it makes sense to look at it on an annual basis because interest payments are always going to be heavy in Q1. There's always a meaningful comp in Q1 payout as well. And then in Q3, we're going to have a heavy interest payment as well. That's just the architecture of how the -- our capital structure is. It's less about the business. Underlying businesses when you look at, Andrew, the cash flow generation is very consistent, very strong, high-quality earnings. So I think that's the way to look at it. Ryan Taylor: Thanks, Andrew, and thanks for everyone that joined us on the call today. This is Ryan Taylor. This concludes the Q&A portion of our call. We appreciate everybody's engagement and joining on the call today, and we look forward to talking to you next time. Thank you. Operator: Thank you, Mr. Taylor. Again, ladies and gentlemen, that will conclude Veralto Corporation's Third Quarter 2025 Earnings Conference Call. Again, thanks so much for joining us, everyone, and we wish you all a great day. Goodbye.
Operator: Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to Garmin Ltd. Third Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Teri Seck, Director of Investor Relations. You may begin. Teri Seck: Good morning. We would like to welcome you to Garmin Limited's Third Quarter 2025 Earnings Call. Please note that the earnings press release and related slides are available at Garmin's Investor Relations site on the Internet at www.garmin.com/stock. An archive of the webcast and related transcript will also be available on our website. This earnings call includes projections and other forward-looking statements regarding Garmin Ltd. and its business. Any statements regarding our future financial position, revenues, segment growth rates, earnings, gross margins, operating margins, future dividends or share repurchases, market shares, product introductions, foreign currency, tariff impacts, future demand for our products and plans and objectives are forward-looking statements. The forward-looking events and circumstances discussed in this earnings call may not occur, and actual results could differ materially as a result of risk factors affecting Garmin. Information concerning these risk factors is contained in our Form 10-K and Form 10-Q filed with the Securities and Exchange Commission. Presenting on behalf of Garmin Limited this morning are Cliff Pemble, President and Chief Executive Officer; and Doug Boessen, Chief Financial Officer and Treasurer. At this time, I would like to turn the call over to Cliff Pemble. Clifton Pemble: Thank you, Teri, and good morning, everyone. As announced earlier today, Garmin achieved another quarter of outstanding financial results, reflecting the strength of our unique, highly diversified business model. Consolidated revenue increased 12% to nearly $1.8 billion, which is a new third quarter record, and we experienced strong double-digit revenue growth in three of our business segments. These results are even more remarkable, considering the strong comparison from last year when consolidated revenue increased over 24%. Gross and operating margins were 59.1% and 25.8%, respectively, resulting in record third quarter operating income of $457 million, up 4% year-over-year and pro forma EPS of $1.99. We are pleased with our results so far in 2025, and we are on track to achieve full year revenue of $7.1 billion as communicated in July. Given our strong year-to-date performance and outlook for the remainder of the year, we are raising our full year EPS guidance. We now anticipate pro forma EPS of $8.15 a share, reflecting in an increase of $0.15 over the prior guidance. In a moment, I will cover changes to the segment revenue model that is the foundation for our consolidated guidance. But it's important to remember that the segment model is simply a point-in-time guideline that evolves based on trends throughout the year. With the majority of 2025 behind us, and the momentum we are experiencing entering the important Q4 holiday season, we anticipate delivering another record year of double-digit growth in revenue, operating income and EPS. Doug will discuss our financial results and outlook in greater detail in a few minutes, but first, I'll provide a few remarks on the performance and outlook for each business segment. Starting with Fitness. Revenue increased 30% to $601 million, with growth led by strong demand for advanced wearables. Our performance can be attributed to the breadth and depth of our wearable product lines, which offer highly differentiated features across many different price points. Gross and operating margins were 60% and 32%, respectively, resulting in operating income of $194 million. During the quarter, we launched several new products, including the Edge 550 and 850 cycling computers that bring new coaching plans and cycling metrics to the Edge lineup, the Bounce 2 smartwatch for kids offering voice calling, messaging and geo-fencing alerts and the Venu 4 smartwatch with a premium all metal design, a built-in flashlight and many new health and wellness features. We also announced our collaboration with King's College London to study the health of women and their partners during and after pregnancy with an emphasis on detecting and managing potentially dangerous conditions such as gestational diabetes and hypertension. Garmin is the exclusive partner of King's College London for this study, which is one of the largest of its kind to incorporate wearables into study protocols and results. Given the strong performance of the Fitness segment and the demand we are expecting during the holiday season, we are raising our revenue growth estimate to 29% for the year. Moving to Outdoor. Revenue decreased 5% to $498 million, driven primarily by consumer auto and adventure watches following the 1 year anniversary of the dezl series launch as well as the highly successful fenix 8 launch. Gross and operating margins were 66% and 34%, respectively, resulting in operating income of $170 million. During the quarter, we launched the fenix 8 Pro, which adds satellite and cellular connections and offers a range of communications options, including voice, text, live tracking and SOS using the Garmin Response Center, making this smartwatch the ideal companion for adventures on and off the grid. In addition, the fenix 8 Pro lineup now includes a version with a microLED display. MicroLED has been highly sought after for its superior brightness and the ability and the fenix 8 Pro is the first device of its kind to offer this exciting new display technology. I'm proud of our global team who worked very hard to bring microLED technology to the wearable market. Also during the quarter, we entered a new market with the launch of our Blaze equine wellness system designed to help horse riders, owners and trainers monitor their horses' health and fitness levels. We are pleased with the performance of the Outdoor segment, but delivering back-to-back years of double-digit revenue growth has been more challenging than originally anticipated, following the 1-year anniversary of the highly successful product launches in this segment, most notably the fenix 8. The recent launch of the fenix 8 Pro partially offset pipeline fills from the previous year, but did not fully close the gap when compared to the fenix 8 launch. As it has in the past, product release cycles can create short-term noise, but in the long-term view, the Outdoor segment has been a remarkable performer and has a remarkable track record of growth. Considering our year-to-date performance and outlook for the fourth quarter, we now expect Outdoor revenue to increase 3% for the year. Looking next at Aviation, revenue increased 18% in the third quarter to $240 million, with growth contributions from both OEM and aftermarket product categories. Gross and operating margins were 75% and 25%, respectively, resulting in operating income of $61 million. During the quarter, we certified a retrofit integrated cockpit system for the Cessna Citation CJ1, which brings new capabilities and safety-enhancing technologies to this popular light jet. We also added Autoland and Autothrottle capability to the King Air 350, which is the largest and most complex aircraft to receive Autoland capability to date. And we announced additional certifications for our GFC 600 autopilot bringing the performance and safety enhancing benefits of our flight control technology to more aircraft models. Given the strong third quarter performance of the Aviation segment and recent trends, we are raising our revenue growth estimate to 10% for the year. Turning to the Marine segment. Revenue increased 20% to $267 million, with growth across multiple categories, including chartplotters, audio and cartography. Gross and operating margins expanded to 56% and 19%, respectively, resulting in operating income of $49 million. During the quarter, we expanded our trolling motor product lines with the Force Current, which is the industry's first hands-free Kayak propulsion system, and we expanded the Force Kraken lineup, which now includes a model with a 110-inch drive shaft for large fishing boats. We also launched the ECHOMAP Ultra 2 chartplotter offering a large 16-inch display, premium mapping and exceptional sonar capabilities. We were recently recognized by the National Marine Electronics Association as Manufacturer of the Year for the 11th consecutive year, and we received 8 Product of Excellence awards ranging from chartplotters to marine smartwatches, reflecting the strength and diversity of our product lineup. Given the strong third quarter performance of the Marine segment and recent trends, we are raising our revenue growth estimate to 10% for the year. And moving finally to the Auto OEM segment, revenue decreased 2% to $165 million as certain legacy programs approach end of life and were partially offset by growth in our most recent BMW domain controller program. Gross margin was 15% and was negatively impacted by an increase in accrued warranty costs associated with prior period sales, which contributed to the operating loss of $17 million. During the quarter, we shipped the 3 millionth BMW domain controller, demonstrating our capability as a respected Tier 1 supplier to the automotive market. We continue to achieve important milestones leading up to the launch of our next large auto OEM program, which is anticipated to add significant production volumes and expand the scale of our business. Given the year-to-date performance and recent trends, we now expect Auto OEM revenue to increase approximately 8% for the year. That concludes my remarks. Next, Doug will walk you through additional details on our financial results. Doug? Douglas Boessen: Thanks, Cliff. Good morning, everyone. I'll begin by reviewing our third quarter financial results and provide comments on the balance sheet, cash flow statement, taxes, updated guidance. Posted revenue of $1.77 billion for the third quarter, representing a 12% increase year-over-year. Gross margin was 59.1%, a 90 basis point decrease from the prior quarter. The decrease was primarily due to higher product costs. Operating expense as a percentage of sales was 33.3%, a 90 basis point increase. Operating income was $457 million, a 4% increase. Operating margin was 25.8% 180 basis point decrease compared to prior year quarter. Our GAAP EPS was $2.08, and pro forma EPS was $1.99. Next, we look at our third quarter revenue by segment and geography. In the third quarter, we achieved double-digit growth in 3 of our 5 segments, led by the Fitness segment with outstanding growth of 30%, followed by Marine segment growth of 20%, Aviation segment growth of 18%. By geography, we achieved double growth in all 3 of our regions, led by 14% growth in APAC, followed by 13% growth in EMEA and 10% growth in Americas. Looking at operating expenses. Third quarter operating expense increased by $76 million or 15%. Research and development increased by $37 million, SG&A increased by $38 million. Both increases were primarily due to personnel-related expenses. A few highlights on the balance sheet, cash flow statement, taxes. We ended the quarter with cash and marketable securities of approximately $3.9 billion. Accounts receivables increased year-over-year to approximately $956 million following the strong sales in the third quarter. Inventory increased year-over-year sequentially to approximately $1.9 billion. We're executing our strategy to increase inventory of certain product lines to support strong customer demand as well as mitigate the effects of potential increases in tariffs. For the third quarter of 2025, we generated free cash flow of $425 million, a $206 million increase on prior year quarter. Capital expenditures for the third quarter of 2025 were $60 million, which is $22 million higher than the prior quarter. We expect full year 2025 free cash flow to be approximately $1.3 billion with capital expenditures of approximately $275 million. During the third quarter of 2025, we paid dividends of $173 million, purchased $36 million of company stock. At quarter end, we had approximately $107 million remaining in the share repurchase program, which is authorized through December 2026. We had an effective tax rate of 21.2% compared to 17.9% in the prior year quarter. Increase in effective tax rate was primarily due to the new U.S. tax legislation enacted during the quarter, which changed capitalization requirements of certain R&D costs resulting in a year-to-date adjustment due to a decrease in certain U.S. tax deductions and credits. Turning next to our full year guidance. We estimate revenue of approximately $7.1 billion and gross margin of approximately 58.5%, both of which are consistent with our previous guidance. We now expect our operating margin to be approximately 25.2%, which is higher than our previous guidance of 24.8% due to lower operating expenses. Also, we expect a pro forma effective tax rate to approximately 17.5%, consistent with our previous guidance. Expected pro forma earnings per share is approximately $8.15 compared to our previous guidance of $8. This concludes our formal remarks. Bella, can you please open the line for Q&A? Operator: [Operator Instructions] Your first question comes from the line of Joseph Cardoso with JPMorgan. Joseph Cardoso: Maybe, Cliff, I just wanted to start off with, if we could dig into the downward revision to the Outdoor guidance. It looks like the revenue outlook is coming down roughly 10% here in the back half. I was just curious if you could share any additional color on the main drivers behind the deviation from your outlook 90 days ago. I know you touched on the fenix 8 versus Pro dynamic, but any other areas of the portfolio you're seeing sluggishness relative to your earlier expectations? And then I have a follow-up. Clifton Pemble: Yes. I think our remarks pretty much cover our thinking there. The fenix 8 Pro did launch fairly late in Q3, so it didn't have a lot of time to make an impact. And the results from the fenix 8 release last year were incredibly strong. And so I think that those are all factors as we look at the back half of the year that we're thinking that maybe our expectations were a little bit too high to begin with. But if you look at the long term over several of these major launches like the fenix 7 to fenix 8 and now to fenix 8 Pro, the overall growth of our watch category has been strong double digits and also ahead of the market. And so we feel like in the long-term view that these devices in the Outdoor segment in general has been a remarkable performer. Joseph Cardoso: Got it. And then maybe just switching gears a little bit here. When I look at the implied gross margin guide for 4Q, it appears you're embedding a seasonal step down. However, when we look at the historicals, it's not at the same magnitude that we've seen Garmin produce over a multiyear period, maybe more in line with recent trends. Can we just touch on the drivers behind that? Like what we're seeing in terms of driving a less seasonal decline related to mix? Less aggressive promotions? Is it more on the production side around utilization? Just curious any color you can share there? And then maybe just a quick clarification. Are you -- what are you guys assuming in the guide relative to FX headwinds and then potentially tariffs, if any, that are included in the guide? Douglas Boessen: Yes. This is Doug. Let me kind of give -- start out with the gross margin maybe first of all, the year-over-year on Q3. That is lower due to higher product costs. Part of that is relating to tariffs. Another thing relates to a strengthening of the Taiwan dollar, which does impact our cost of goods sold, as well as Cliff mentioned, there's warranty accruals like the prior year period sales. And that's partially offset by some favorable FX on sales due to the weakening U.S. dollar. And as it relates to Q4, if I look at the change basically from last year, this year in Q3, it's about the same change in Q4 there because we do have some of those higher product costs in there that we had to take into consideration. Now we also do have to remember that Q4 versus Q3, Q4 is a more promotional period of time for us, so we did factor that in. As it relates to some of our assumptions that are in there, as it relates to tariffs, we're factoring what the current tariff rates are out there. We are mitigating that due to certain things such as our higher levels of inventory to offset any potential increases in that. And also as it relates to FX, we did have -- as it relates to the top line, there are some tailwinds there from that standpoint. So we're factoring in similar type of trends in Q4 as we saw in Q3 from that standpoint. So in Q4, we think it's pretty well consistent with some of the trends that we're currently seeing there with tariffs, with FX, and then Taiwan dollar after consideration as well as the euro and those type of things in there. But as you mentioned, there are a lot of moving parts in gross margin, but we've factored most of those -- all those in that we did know about. Operator: Your next question comes from the line of Erik Woodring with Morgan Stanley. Erik Woodring: Cliff, maybe just to start, I'd love if we could maybe take a step back and for you to help us understand where exactly you think we are in the kind of cycle for Fitness and Outdoor? Obviously, a little bit different dynamics for each business, but obviously, really strong performance for multiple years on the back of new product launches and pricing increases. So where do we stand kind of in the cycle for each business? And then I have a follow-up, please. Clifton Pemble: I think we look at it as an ongoing opportunity and not necessarily as a cycle as in ups and downs, but we are a small but growing market share player in the overall wearables market. We have a very broad and strong product line about -- across both fitness as well as adventure watches. We see the opportunity to continue to grow with market share gains and innovation in our product lines. Erik Woodring: Okay. I appreciate that color. And then, Doug, if I could just turn over to you, maybe not necessarily core to any debates, but over the last 3 years, you've kind of guided CapEx up in the $300 million-plus range. And each year, it's kind of ended up lower than that. Just curious, again, kind of where you -- are you not able to find the dollars to spend? Or are there limitations to what you're just able to manufacture and that continues to get pushed out? Would just love a little color about kind of why spending plans are just a little bit lower than you had expected, just a bit of a continuation of '23 and '24. Douglas Boessen: Yes. Regarding cap expenditure, it's not an item where we don't have the money to spend. We do have $3.9 billion of cash from a standpoint. So it relates to CapEx, those estimates are done at the early part of the year, and we progress those throughout the year. And we have plans for those and sometimes some of those is pushed out. So it's simply a situation that we have expectations for those, just for one reason or the other, things just get pushed out. A lot of -- I should say a lot of those CapEx we have are really infrastructure to grow our business, for manufacturing, those type of things. And so it's just a situation where we come with that estimate and things just change during the year along the way and just kind of push those out. But but we're not taking anything off the table from a standpoint of CapEx. We still think we need to have that infrastructure for growth in the future. Operator: Your next question comes from the line of Tim Long with Barclays. Timothy Long: Two, if I could as well. First one, could you just touch on kind of channel inventory, what you're seeing there? I think you alluded to inventory related to tariffs a little bit earlier, but particularly in the Fitness and Outdoor segments, how you think the health of the channel inventory looks? And then second, just looking at the number, it looks like there was a little bit of a downtick in the Americas business in the quarter. Could you just touch on what drove that? And do you think there's -- that's a short-term blip or what could get that moving back growing sequentially? Clifton Pemble: Yes, Tim, I think that we view channel inventory as being healthy at this stage. The registrations and sell-out of our products has been stronger than the sell-in in recent, near-term weeks and months, and I think that's retailers positioning, getting ready to take things in for Q4. But the channel inventory looks very healthy and lean and ready for a good Q4 fill. There's really not a relationship between what we said about inventory and tariffs and channel inventory. When we talk about our inventory and bringing that in ahead of tariff impacts, that's inventory that we hold on our books, whereas the channel is a different consideration. We view the channel as being very lean. As far as Americas, I think the difference there is that some of the other regions did benefit from FX. So if you adjust for that, they tend to be very comparable. Timothy Long: Okay. So I was just asking about the sequential downtick in Americas. Is that mostly FX? Or was there something else going on there? Clifton Pemble: Yes. Again, I wouldn't read a lot into that. I think some of that, again, is associated with our product cycles as well as currency movements and all kinds of things. So it's -- there's a lot that goes into that. But I think in general, we're pleased with the performance of all of our geographies. Operator: Your next question comes from the line of Jordan Lyonnais with Bank of America. Jordan Lyonnais: I wanted to ask on autos. How should we think about the growth going into next year and until the BMW -- or sorry, the two 2027 contracts start up with new lines that are retiring? Clifton Pemble: Yes. So going into next year, as we've communicated, we've been in the peak adoption of the BMW program for a while now, actually have anniversaried that. And as some of these end-of-life programs wind down, 2026 could experience some revenue pressure because of those natural dynamics. We expect the new program to come online towards the back half of 2026. And so we're on track for that, and we continue to make progress in delivering that. Jordan Lyonnais: Got it. And on Aviation too, was there any greater driver of the growth that you saw between OEM and aftermarket that you could give more detail on? Clifton Pemble: Yes. I think they're both very comparable, both very strong for different reasons. The backlog in OEM, as you know, is very long. And so aircraft makers are building to that backlog, and we're benefiting from that. And in the aftermarket, the consumer behavior was resilient and people buying and equipping their aircraft. And so the trends are very positive there. Operator: Your next question comes from the line of David McGregor with Longbow Research. Joseph Nolan: This is Joe Nolan on for David. The fitness business saw another great quarter. Just if you could talk about what's driving the growth there? I know advanced wearables have been strong in recent quarters. And if you could just give any update on new user growth? Clifton Pemble: Yes. I think we saw growth across both kinds of products that we have in Fitness in terms of wearables that would be the running products as well as the advanced wellness products. And I would say that the registration behavior, the consumer behavior that we see on the registrations is very strong across the whole business, including all of our wearables in Outdoor and Fitness. The convincing majority of people coming to our platform are new users, and we're seeing strong double-digit growth in those registrations in new products year-over-year. Joseph Nolan: Okay. Great. And then fourth quarter promotions typically step up a little bit for the holiday season. Is it fair to expect a pretty comparable promotional environment compared to last year? Is there any puts and takes to think about within that? Clifton Pemble: I would say that -- I would call it comparable. We have a lot of products to offer, which is great for retailers because there's something for everyone. And so we have strong promotions planned. I'd say they're in line with what we've seen in previous years, and I think we're really excited about what we have to offer. Operator: Your next question comes from the line of Ivan Feinseth with Tigress Financial Partners. Ivan Feinseth: Congratulations on another record quarter and the great new cadence of -- a new product introduction cadence. On the launch of the Blaze, what kind of uptake have you been seeing so far? And what is your production run projection? Clifton Pemble: Yes. I think Ivan, Blaze has been great. It's gotten a lot of attention. I think this is a market that is underserved in terms of technology. And at the same time, I think it's a market that's very traditional. So while it's gotten a lot of attention, it will take some time, I think, to build the channel and the momentum there. But we're excited about the early start. And I think we also have plans to enhance the roadmap and offer more products as well. Ivan Feinseth: And what is kind of your target marketing strategy? And I mean, right now, one of the fastest-growing spectator sports is actually rodeos. So there's a lot of interest in horses and of course, traditional horse racing and horse training. So what's kind of your ideas for targeting -- penetrating the market? Clifton Pemble: Well, I think there's certainly different disciplines around horses. I think if you look at the common threads of each discipline, it's that the horse owners and the caregivers really love the animal, and they want to do the right thing by the animal. And so again, there's been hardly any tools available for people to assess horses, whether it's on the purchasing side, on the selling side of that as well as the training and the ongoing performance improvement of the animal. So I think that lends itself to a lot of opportunities of tools that have been available to people that can be applied to horses going forward. Ivan Feinseth: Then with the launch of the 8 Pro with the satellite inReach connectivity and also on the Bounce, are -- what is the percentage of people buying those that are signing up for the connectivity plans? Clifton Pemble: Well, I think those two products are specifically designed with connectivity features, so anyone that buys those products is probably going to sign up for the additional services that go along with that, and that's exactly what we're seeing. It does target a unique user case. So if you look at Bounce for example, it's not just a watch for kids, it's a way for parents to monitor their kids and to communicate with them, especially for those that don't want to yet provide a smartphone to their kids. And so it just means that when you buy that product, you will absolutely sign up for the service that goes along with it. Ivan Feinseth: And then with more and more products that you're launching, including inReach connectivity and also more people are signing up for the Messenger. What is kind of your vision for how inReach and the Messenger kind of grows the Garmin ecosystem? Clifton Pemble: Well, inReach and Messenger and our connected products have all been part of our strategy to offer off the grid communication and especially rescue services for people who are enjoying the outdoors. Things happen out there and consequently having the right equipment and having equipment that works, that connects to real people that can help you has been a unique differentiator for us. So we'll continue to work on products that fulfill that vision and continue to expand our product line. Ivan Feinseth: Good luck for a strong year-end finish. Operator: Your next question comes from the line of Ben Bollin with Cleveland Research. Benjamin Bollin: Cliff, could you talk a little bit about what you're seeing with respect to Auto on the accrued incremental warranty costs that you're seeing? And then any thoughts on where that Auto OEM margin structure looks over time? And then I have a follow-up. Clifton Pemble: Yes. I think the accrued warranty was an isolated situation where an issue arose in our product that we had to manage, and it did affect prior period sales. So there was a catch-up that went on with that, but that's been addressed and corrected. And I think the longer-term view on the margin structure is the same as what we've communicated before, where we're targeting mid- to upper teens gross margin and mid-single-digit operating margin in the segment when we're at scale. Benjamin Bollin: Okay. And then the other question, with respect to the broader component supply environment, I'm interested if you're seeing any scenarios or situations arise. Notably, advanced process nodes where any availability issues, you feel good on your ability to source memory, components into the out year given kind of the radical demand you're seeing from hyperscale and what they're buying? Any thoughts there. Clifton Pemble: I think there's definitely some impact you're seeing in the overall semiconductor market associated with these large-scale new initiatives that are going on with AI and data centers and that kind of thing. I think it overall will benefit customers and us in the longer term because semiconductor providers are focusing on more higher performance processors on more dense memory configurations which overall are a benefit to the products going forward with better features, more storage, more capability. Operator: Your last question comes from the line of Noah Zatzkin with KeyBanc Capital Markets. Noah Zatzkin: I guess maybe just on the Marine segment and the raised guidance there, is that purely idiosyncratic? Or is there something in the end market that you see kind of improving underneath that? Clifton Pemble: Yes, I think the end market is definitely stabilized, if not really even back on an uptick, especially when you look at aftermarket. And so the market dynamic is good at this moment. Consumers seem resilient and interested in the products that we're offering. And there's also an element of market share gains in that, particularly in chartplotters, trolling motors, audio and cartography. Noah Zatzkin: Great. And apologies if you touched on this, but just any thoughts around -- updated thoughts around tariffs would be great. Clifton Pemble: I think as we mentioned in our remarks, the tariff situation has been mostly stable for today's definition of stable. There can always be changes. But I think in general, we're managing through that. I think we've made all of the short-term adjustments that we had intended to make to our business model. And then going forward, we're focused on longer-term optimizations in our business, which is what we do as the normal course with tariffs or any other matter, we simply are always working to achieve the most efficient supply chain structure. Operator: That concludes our Q&A session. I will now turn the call back over to Teri Seck, Director of Investor Relations, for closing remarks. Teri Seck: Thank you all for joining us today. We are available for callbacks, and we hope you have a great day. Bye. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect. Everyone, have a great day.
Operator: Good morning. Joining me on today's call is Michael Dale, AxoGen's Chief Executive Officer and Director; and Lindsey Hartley, Chief Financial Officer. Michael will discuss third quarter 2025 financial results and corporate highlights. Lindsey will then provide details on financial performance, guidance and overall outlook for the year. This will be followed by a question-and-answer session. Today's call and presentation is being broadcast live via webcast, which is available on the Investors section of AxoGen's website. Following the end of the live call, a replay will be available in the Investors section of the company's website at www.AxoGeninc.com. Before we get started, I'd like to remind you that during the conference call, the company will make projections and forward-looking statements. Forward-looking statements include, but are not limited to, statements relating to financial guidance, market development priorities, estimated market opportunities, timing for future product and application launches and the company's expectations for approval of the biologics license application for Avance Nerve Graft in December 2025, including the anticipated timing of approval and the assumption that Avance Nerve Graft will be designated as a reference product for any future biosimilar nerve graft and that such designation will provide marketplace exclusivity. Forward-looking statements are based on current beliefs and assumptions and are not guarantees of future performance and are subject to risks and uncertainties, including, without limitation, the risks and uncertainties reflected in the company's SEC filings, including its most recent Form 10-K and 10-Q. The forward-looking statements are representative only as of the date they are made, and except as required by applicable law, the company assumes no responsibility to publicly update or revise any forward-looking statements. In addition, for a reconciliation of non-GAAP measures, please refer to today's press release, short presentation with highlights from today's call and the corporate presentation on the Investors section of the company's website. I'll now turn the call over to Michael. Michael Dale: Thank you, operator, and welcome to everyone joining us this morning as we discuss our 2025 third quarter financial results. I'll begin today's call with a financial and corporate overview, highlighting our progress through the third quarter and year-to-date, implementing our strategic plan, followed by an update on the Biologics License Application, or BLA, for our Avance Nerve Graft. I will then pass the call to Lindsey to review the quarter's financials and outlook for the remainder of 2025, and then we will open the lines for a question-and-answer session. As remarked in this morning's earnings release, we are delighted with our third quarter performance and progress year-to-date for the business. Our strong revenue growth and notable milestone achievements during the quarter further validate our strategic plan objectives and market development strategies and importantly, AxoGen's ability to operationally execute our plans. Indeed, I am proud of our executive team in each of the respective operating functions at AxoGen for the performance year-to-date that is at or above plan. Looking ahead, we will continue to optimize our business models based on experience and have confidence in our ability to continue delivering growth consistent with the guidance we have provided for our strategic plan in both the near and longer term. Regarding the quarter, Q3 sales increased to $60.1 million, growing 23.5% compared to the same period last year. This performance reflects double-digit growth across all of our nerve repair target markets, including extremities, oral maxillofacial and head and neck and breast. Consistent with prior quarters, our growth is driven by expanding adoption of nerve care using AxoGen's nerve algorithm for the treatment of all types of peripheral nerve injuries, including traumatic, hyrogenic and chronic nerve injuries. The Avance Nerve Graft is the primary growth driver, often complemented based on the clinical situation by one or more of our nerve repair connection, protection or termination products. In extremities, we continue to execute our high potential account strategy with solid growth in both traumatic and chronic nerve injury procedures in the quarter. In OMF and head and neck, surgeon adoption of the AxoGen algorithm during the quarter was strong across all products -- all procedures, but particularly in mandible reconstruction procedures. And likewise, in breast, we continue to see strong adoption of our breast resensation techniques, supported by new surgeon activation, increased procedure volume in implant-based reconstruction cases and the expansion of our commercial infrastructure. In summary, we are encouraged by the broad-based adoption of our nerve care portfolio and momentum across each of our 3 target markets. To assess our progress, we continue to monitor key metrics tied to our plan in 2025 strategic priorities, including high potential accounts, commercial expansion, professional education, new product development, clinical research and prostate market development. I'll begin with an update on our performance and growth in high potential accounts. We continue to focus on expanding our presence in these accounts to drive more consistent customer creation, algorithm adoption and improvements in sales force productivity. Our goal for 2025 is to generate at least 66% of total revenue growth from high potential accounts and average account productivity of 21% -- through the first 3 quarters, approximately 64% of revenue growth was driven by high potential accounts based on an average account productivity of 19%. These results are slightly below our planned target, but notably the result of the fact that we are also seeing double-digit revenue growth and account productivity growth year-to-date in our non-high potential designated accounts as well. Growth in all account types was amplified in the quarter by the discontinuation of our case stock sales program for Avance Nerve Graft in preparation for the anticipated BLA approval. This sales program previously allowed for Avance Nerve Grafts to be shipped for a case for an unused product to return to AxoGen. With the discontinuation of the case stock program, previous case stock customers are transitioning to either order by direct sale or consignment. This shift in purchasing behavior contributed to our top line performance and reduced revenue growth from high potential accounts by an estimated 4%. To be clear, high potential account growth was actually quite strong on an absolute basis, while it appears lower than last quarter, it's really just a function of the denominator getting larger because of the benign high potential base is performing better as well. The underlying fundamentals in all account types remains very positive. And after accounting for the case stock impact in the third quarter, we continue to realize that our focus on high potential accounts is enabling broader and more enduring adoption of nerve care and as such, more predictable growth. During the first 3 quarters of 2025, there were 668 active high potential accounts. of the approximately 780 accounts that meet our high potential criteria, which represents an increase of 8 accounts or 1.2% as compared to the first 3 quarters of 2024. Regarding our 2025 commercial infrastructure expansion goals, as of the end of third quarter, we are now at or ahead of our hiring plan for each target market. In breast, we ended the quarter with 22 breast resensation sales specialists and 2 regional sales directors. We have met our goal to double the breast sales force in 2025 by the end of the year. To support broader adoption in non-breast markets, we ended the quarter with 125 sales professionals, including 15 regional sales directors. In OMF and head and neck, we ended the quarter with 4 field-based market development managers. Surgeon training remains a core component of our customer creation and nerve repair algorithm adoption. Execution of our 2025 professional education programs are on track, and we fully expect to meet our 2025 surgeon training targets. In breast, we have trained 62 surgeon pairs year-to-date with one program planned in the fourth quarter. We are confident we will meet our 2025 target of 75 surgeon pairs trained. Active breast resensation programs increased 7% from the third quarter of 2024 from 113 to 121. We estimate 281 surgeons performed a breast resensation procedure in the third quarter, which represents a 20% increase versus third quarter of 2024. In Extremities, we have trained 97 surgeons year-to-date, of which 30 were trained in the third quarter with 3 additional programs planned in the fourth quarter. We expect to meet our 2025 target of 105 surgeons trained. In OMF and head and neck, we have trained 57 surgeons year-to-date, up 16 from second quarter 2025, exceeding our 2025 target of 45 surgeons trained. Next, I will provide an update on our clinical research priorities. We continue to advance our 2025 initiatives and are on track to complete a Level 1 study protocol for implant-based neurotization, a clinical evidence plan for Avance versus autograft and Vic and motor nerves and a clinical evidence plan for oral maxillofacial and head and neck. Regarding research and development, as we have outlined in our strategic plan, innovation remains critical to our long-term growth -- through the 3 quarters of the -- through the first 3 quarters of the year, we continue to progress and advance our innovation platform across 3 pillars. Those include therapeutic reconstruction, ease of coaptation and protection expansion. Consistent with our clinical research objectives to build evidence in support of nerve care, in the third quarter, we received meaningful external validation of AxoGen's differentiated technologies and leadership in peripheral nerve repair. 10 new peer-reviewed publications cited clinical use for discussion of our products, bringing our total nerve repair related literature body to 339 publications. This growing body of evidence underscores the clinical relevance and impact of our solutions. Notably, there has been a 70% increase in the number of nerve repair publications in the last 5 years, reflecting in part the growing experience and interest in nerve repair. For those interested, all peer-reviewed studies are available on our website. During the third quarter, we also saw significant validation from medical societies. Both the American Association of Hand Surgery and the American Society for Reconstructive Microsurgery released official position statements recognizing nerve allograft as a nonexperimental and medically necessary standard medical practice option for the treatment of peripheral nerve defects. These position statements add to the previously released clinical practice guidelines from the American Association of Oral and Maxillofacial Surgeons. Together, these endorsements mark a critical step towards establishing peripheral nerve repair with allograft as a recognized standard of care, and we believe this support will be helpful in our efforts to expand coverage. On the coverage and reimbursement front, we continue to see noncoverage policies removed within the Blue Cross Blue Shield network and within Medicare Advantage for Nerve Care, resulting in an estimated 1.1 million newly covered lives in the third quarter. Year-to-date, we estimate 18.1 million additional lives are now covered for nerve repair for peripheral nerve injuries using synthetic conduits or allografts. This expansion brings coverage amongst commercial payers to more than 64%, reflecting continued momentum and expanding access. And finally, I will provide an update on our prostate clinical and market development plan. We remain enthusiastic about the opportunity to improve nerve function outcomes in robotic-assisted radical prostatectomy and are actively collaborating with key opinion leaders to advance surgical technique development. During the third quarter, our clinical development team provided field-based support to surgeons and clinical sites incorporating nerve repair into the robotic-assisted prostatectomy cases. We added 4 new clinical sites during the third quarter, bringing our total to 10 active sites meeting our year-end goal. Procedures are ongoing, and we remain on track to complete 100 cases by year-end. Before I hand it over to Lindsey, I would like to address the status of our biologics license application for Avance Nerve Graft. In August, the FDA extended the PDUFA goal date from September to December 5, 2025. In the communication from the FDA, it stated that a recent submission by AxoGen, a facility and manufacturing information provided in the response to an FDA information request constituted a major amendment to our BLA for the Avance Nerve Graft submission, which resulted in the 3-month extension. Since our last public update, interactions with FDA have expanded to all elements of the BLA application. Based on these interactions, we remain confident we will successfully complete the application process, consistent with the new December 5 PDUFA date. The BLA approval will secure 12 years of market exclusivity from biosimilar nerve allografts and establish Advance Nerve Graft as the only implantable biologic indicated for the repair of functional deficits in peripheral nerves. With this, I will now turn it over to Lindsey. Lindsey Hartley: Thanks, Mike. I'm pleased to report our third quarter results. We reported strong growth with revenue of $60.1 million, reflecting a 23.5% growth compared to the third quarter of 2024 and a 6% sequential increase over the second quarter of 2025. Revenue growth continues to be fueled by strong sales of Avance Nerve Graft and the adoption of our comprehensive product algorithm across our target markets, with unit volume and mix serving as the primary driver of our performance -- revenue performance. As Mike noted, during our third quarter, we successfully ended our case stock sales program for Avance Nerve Graft in preparation of the anticipated BLA approval. We estimate our revenue for the third quarter was positively impacted by $1.6 million or 3% as the result of customers transitioning away from purchasing Advance through the case stock program and ordering through direct sales. Our gross profit for the quarter came in at $46 million, up from $36.4 million in the third quarter of 2024 and $42 million in the second quarter of 2025. This represents a gross margin of 76.6%, up from 74.9% in the same period last year and up from 74.2% in the second quarter of 2025. The year-over-year increase and sequential increase from second quarter were primarily driven by lower inventory write-offs and reduced shipping costs on products sold. These gains were partially offset by modestly higher product costs, which had a minimal impact of less than 0.5 percentage point on gross margin compared to both periods. Gross margin for the first 3 quarters of 2025 was 74.4%, 1.3% less than the first 3 quarters of 2024. The decrease of gross margin for the first 3 quarters of 2025 was driven by a 1.9% increase in year-over-year product costs. Product cost increased as a result of the transition of processing Avance Nerve Graft to our AxoGen processing center and costs related to additional steps and tests required as we approach the transition to processing as a biologic anticipated in December. We expect the cost of our advanced product to decrease over time as we gain economies of scale at the AxoGen processing center. And once the BLA is approved, we can begin implementing more significant continuous improvement programs. Our operating expenses increased to $44.1 million, up from $36.8 million in the third quarter of 2024. And as a percentage of revenue decreased 2.2%, highlighting our ability to increase our operating leverage. Sales and marketing expenses as a percentage of total revenue were up nearly 4% to 42.7% from 38.9% in the third quarter of 2024. Research and development expenses increased 8.1% to $7.6 million from $7 million in the third quarter of 2024. As a percentage of total revenue, research and development expenses were down 1.8% to 12.6% from 14.4% in the third quarter of 2024. General and administrative expenses remained flat quarter-over-quarter at $10.8 million. As a percentage of total revenues, general and administrative expenses were down 4.2% to 18.1% from 22.3% in the third quarter of 2024. Net income for the quarter was $0.7 million or $0.01 per share compared to a net loss of $1.9 million or $0.04 per share in the third quarter of 2024. Adjusted net income for the quarter was $6.1 million or $0.12 per share compared to an adjusted net income of $3.1 million or $0.07 per share in the third quarter of 2024. Adjusted EBITDA for the quarter was $9.2 million compared to an adjusted EBITDA of $6.5 million in the same period last year. Adjusted EBITDA margin improved 210 basis points to 15.4% from 13.3% in the same period last year, driven by revenue growth and increased operating leverage. As of September 30, our balance of cash, cash equivalents, restricted cash and investments increased $3.9 million to $39.8 million from $35.9 million at the end of the second quarter of 2025. I am pleased to report that for the first 3 quarters of 2025, our balance of cash, cash equivalents, restricted cash and investments increased $0.3 million from a balance of $39.5 million at December 31, 2024, demonstrating our ability to be free cash flow positive for the year. Now turning to our full year financial guidance for 2025. We are raising our revenue growth guidance to at least 19% or revenue of at least $222.8 million. We reiterate our gross margin in the range of 73% to 75%, inclusive of onetime costs related to the BLA approval for Avance Nerve Graft, which we are expecting to impact gross margin by approximately 1% or $2 million. As a reminder, these costs will be incurred around the anticipated BLA approval date currently expected in December. Also, we estimate that 2/3 of these costs relate to the vesting of our BLA milestone related stock compensation awards and are noncash. We continue to expect to be net cash flow positive for the year. In summary, we are very pleased with our third quarter performance and the progress we have made. We remain focused on executing our strategy, investing in innovation, optimizing our resource allocation and driving towards profitability. With that, we will now open the line for questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Chris Pasquale with Nephron Research. Christopher Pasquale: Congrats on the nice quarter. If I look back at the last few years, your fourth quarter revenue tends to be up slightly compared to 3Q. I know guidance is for at least 19% growth. So you're leaving the door open for something better than that. But at 19, it would imply a 4% sequential decline. So I want to make sure we understand how to think about this case stock program transition and whether that $1.6 million was in effect kind of pulled forward from 4Q into 3Q? And then there's anything else about the dynamics this year that we should be keeping in mind as we're updating our models, especially related to the BLA decision date. I would love to sort of flesh that out. Lindsey Hartley: Thanks, Chris. For our fourth quarter, we are expecting our typical seasonality. But in giving our guidance, we have been prudent as because of the case stock program. During the third quarter, we saw an increase of $1.6 million related to these customers transitioning mostly to direct sales. We discontinue that program September 1, so we're just 1 month in. So we're still trying to get a grasp on what that full potential impact could be and if that was a onetime pickup as a result of a shift to direct sales. So in modeling, I would exclude the $1.6 million that we saw from the case stock program in Q3. Christopher Pasquale: Okay. That's helpful. And then looking ahead to consensus is right now embedding about 16% revenue growth. You've actually done better than that now 3 quarters in a row, but that's obviously going to create some tougher comps as well. I know you guys will give formal guidance in February, but just curious if there's any directional comments you'd like to make now about how you're thinking about next year and maybe some of the key puts and takes across the business. Michael Dale: Chris, we're not prepared at this point to give any color on 2026 beyond the general statement that we remain very positive about the business and have full confidence in the strategic plan. I realize you guys are looking for more granularity than that, but not ready to provide that. Operator: Our next question comes from the line of Michael Sarcone with Jefferies. Michael Sarcone: I guess just to start on the BLA, thanks for all the color, Mike. In the press release you had put out in late August, you mentioned the FDA was targeting November to maybe start talks around the label. Is this still the expectation? And then I guess just a follow-up, I'll throw out there. Just on the labeling front, can you comment on how you're thinking about the label in terms of being broad versus narrow? And you've made some good progress with the medical societies. Does the FDA take that into account when kind of thinking about the label? Michael Dale: Sure. With regards to the last part of your question, we do not know explicitly whether or not the FDA takes that information into account. So I can't comment definitively. With regards to label, as I mentioned in my comments a moment ago, we have expanded already into all parts of the BLA application to include scope of label and hence, why I was able to provide some color that based upon those interactions, we believe that we will continue to serve the full scope of patient indications that we have been serving historically. So no dimidiation of our ability to provide support and service for mixed and motor nerve patients as we have historically. Operator: Our next question comes from the line of Caitlin Cronin with Canaccord. Caitlin Cronin: On an awesome quarter. I guess just to start off in terms of the commercial coverage, I mean, pretty impressive move up from last quarter. I mean, do you see this plateauing at a certain point prior to the BLA? Or can you give any more color in terms of the trajectory going forward? Michael Dale: Well, I think it's -- I'll tell you, I'll let Rick answer that question. Rick Ditto: All right. Caitlin, great question. So the increase in our percentage of commercially covered lives primarily reflects the refinement in our data. So we acquired a data set that tracks health plan enrollment by state and metro area. And so that is the main driver of the uplift from 55% coverage to 64% coverage. We're really excited with the progress we've made, and we're a few weeks away from engaging the national payers. There are 3 big national payers that currently list us investigational experimental. And so that work is ongoing. I've been here 7 months, and I would say we're probably 5 or 6 months ahead of the initial plans on when we would engage them. So the society support is helpful. We're not going to speculate on when those payers will flip medical policy to cover us. But we're marching forward in our pursuit of making nerve repair an expected standard of care, and we're happy with the progress. Michael Dale: The way we look at it in our strategic plan over time, Caitlin, is use that phrase I often use, like little engine it could. It's going to become fits and starts, but it's going to keep going up and to the right. simply because factually and objectively, we have the information to justify these asks. What what's happening over the last 12 months and going forward is that we are methodically engaging with the payers with regards to the information they need and the processes they utilize so that we can make these asks. And when you do, when you have a high ground objectively to make the ask, most of the time, you're going to win. And so that's really what's underway and the effort that Rick and his team is leading. And all we can say is so far, so good. Caitlin Cronin: That's awesome. And then just as a follow-up, Lindsey, I don't think I heard the breakdown in revenue growth this quarter between price and volume and mix. Do you have that available? Lindsey Hartley: Yes. We're seeing about the typical increase from price. Our mix is the same as what we see historically. Operator: Our next question comes from the line of Jayson Bedford with Raymond James. Jayson Bedford: Congrats on the progress. Maybe just a quick financial -- Mike, the case stock program, was there -- I realize it's relatively small, but was there any impact on gross margin either in 3Q or an expected impact in 4Q? Michael Dale: From case stock specifically? Jayson Bedford: Yes, on the gross margin line. Lindsey Hartley: We're not seeing it yet. In the future, we do anticipate some savings just from the nature of that program. It required a lot of additional resources shipping back and forth. With 1 month in right now, it's hard to say what that total impact is going to be, but we hope to see in the next quarter or 2. Michael Dale: But there will be no negative impact. The only question is to what degree positive. The case stop program was not a very efficient program. Jayson Bedford: Okay. Okay. Internationally, I think historically, you've talked about addressing the international market. I'm just wondering what the timing is? And is it somewhat dependent on the BLA at all? Michael Dale: Completely connected to the BLA in terms of any formative efforts going forward. So until we actually have that and then can then reengage with competent authorities overseas, we're not going to make any significant investment changes. So bottom line, at some point during the first half of 2026, we'll come to a conclusion as to what we will do and where we will do it, and then we'll be providing updates at that point. Operator: Our next question comes from the line of Mike Kratky with Leerink Partners. Michael Kratky: Congrats on the strong quarter. You provided some really helpful color on the dynamics between high productivity accounts and other accounts. So what seems to be driving some of the adoption in the non-high productivity accounts? And then have you seen any signs of utilization growth in those or how you could convert some of those to high productivity accounts over time? Michael Dale: Sure. Jens, are you on the call still? Jens Schroeder Kemp: I am. Michael Dale: Go ahead. Jens Schroeder Kemp: So yes, so our strategy continues to be really focusing the majority of our efforts in the high potential cohort, which is about 800 accounts. The reason for focusing in that segment is because that's where the majority of the nerve repair takes place in the hospital segment. Now we do have, of course, a lot of other accounts. And the progress that we've been making and the support that we're getting from societies and the increased awareness of the AxoGen nerve repair algorithm also basically means that you have more procedures adopting the AxoGen algorithm outside of our high potential focus. So in some ways, the progress that we're making within these academic institutions also has a spillover effect in the other non-high potential accounts. Operator: Our next question comes from the line of Ross Osborn with Cantor Fitzgerald. Ross Osborn: So what are the next steps for targeting the prostate market following the completion of your targeted 100 procedures by year-end? Michael Dale: At the conclusion of the initial clinical trials that we're running and development of the procedure guides, we will follow those patients, and we will evaluate those outcomes. And based upon those outcomes, that will determine the velocity that we invest thereafter. So we're assuming it will be positive, but we are watching. And realistically, we won't see the clinical feedback on that initial 100 patients that we are enrolling in this trial until sometime towards the middle part of 2026 at the earliest. In the meantime, what we are doing in terms of work product is we are further characterizing the market, refining the support plans and beginning the process to think through what would be required in terms of a controlled study, Level 1 type studies. So that's what's underway with prostate. Ross Osborn: Perfect. And then outside of prostate, would you provide some more color on where you stand on generating Level 1 evidence across your portfolio? Michael Dale: So we have protocols in development with respect to breast. And then we will have the same -- really for each of the segments that we prioritized, we will have one or more studies that we will be looking to kick off formally during 2026. Actual dates and timing of that have not been confirmed. But as soon as we do, we will update everyone publicly. Operator: Our next question comes from the line of Dave Turkaly with Citizens JMP. David Turkaly: Mike, I know the society updates are positive, and I know you've been working on them for a while, but I was curious if you could just comment on sort of the process there and maybe why you think this happened kind of right in front of the BLA? Is there anything to read into that? Michael Dale: Well, fortunately, it's serendipitously coincidental, but this is really a process of socialization of clinical evidence and the society's understanding that for nerve care to go forward, they, as the leaders of their membership need to take an effort formally to provide the guidelines and the expectations because that's part of their duties and roles as a society. And for any novel therapies until societies do that, it's very difficult for these types of new therapies to be adopted to go forward. And furthermore, it directly impacts coverage and payment as coverage and payment is really driven by medical care and clinical guidelines. David Turkaly: And then just as a quick follow-up. Is there any thoughts on sort of your other products, maybe the AxoGuard lines and such in terms of the societies maybe looking at them and maybe having a policy at some point down the line that may include them or incorporate them as well? Michael Dale: There is nothing imminent in that regard. And frankly, it will be really dependent upon evidence in the future for them to take up the mantle or something like that, and that's work that still has to be done. So some of these algorithms that are being adopted are things that people believe in based on their clinical practice and experience. But objectively, we also need to develop the evidence to support them the way you would to create -- to put them into the guidelines. So that's underway, but that won't happen this year and unlikely to actually complete next year either, more like a 2027 event. Operator: Our next question comes from the line of Anthony Petrone with Mizuho Group. Sorry. disconnected. Our next question comes from the line of Frank Takkinen with Lake Street Capital Markets. Frank Takkinen: Congrats on a nice quarter. I was hoping to start with some more guideline commentary as well. How should we think about impacts commercially? Can you do anything differently? Would you maybe pull hiring forward even more? It sounds like you've already been hiring a little faster than anticipated. But with some of these positive guideline wins, do you change strategy and get a little bit more aggressive in any of those areas? Michael Dale: No, we won't change strategy. Although I think maybe to provide open clarity on this, what we have decided is with respect to the strategic plan is we will incrementally hire on a quarterly basis across all target markets. So we believe that we do not touch every customer and every opportunity and that the most important thing we can do for our therapies to ensure that we have coverage in order to develop use of nerve care in all locations of service. So to that end, and we'll continue to update everybody, but Act will be incrementally expanding the sales footprint for several years going forward on an incremental basis. But we will also do that within the constraints we previously described in terms of financials. So we'll do this with our operating cash flow, and we'll do this only as we can maintain positive leverage. Frank Takkinen: Got it. That's helpful. I know there was previously some street perception that the government shutdown could impact the BLA process. Based on your commentary today, that feels like those conversations are going well and potentially ahead of expectations in some areas. I assume it's fair to think that the government shutdown is not having an impact on any of your FDA interactions at this point? Michael Dale: That is fair. So to date, we've maintained productive discussions. And as I've just described, we've already extended our discussions to future labeling and scope and expectations. So these things are not finalized yet. But directionally, we are already receiving... Operator: Our next question comes from the line of Anthony Petrone with Mizuho Group. Anthony Petrone: Congrats on the quarter. I apologize to just hopping between earnings calls, so I had some phone difficulties. It's actually a follow-up question to the one that was just asked just on timing, just to get that down a little bit more closely. So the label will -- I think the original communication was that label could come before BLA announcement, targeted PDUFA date, December 5. Is that still the thinking? Or will those sort of coincide more in a December time frame? And then I'll have a quick follow-up. Michael Dale: Well, we will I think the way everyone should plan for this is explicit to the guidance previously provided in which the FDA said November would then be labeling and then the final date would be December 5. So could it come earlier? Yes, but there's no discussions to that effect, and we have no insight that, that will occur. All we know is that the work product that supports labeling and all the rest of the BLA application is continuing to pace and some of it a little bit ahead of the official schedule. So I think for the sake of planning and assumptions, everyone should still assume because we are that this will go through December 5. Anthony Petrone: And then just a higher level one. It was kind of asked a couple of times here, but you did get some medical society positive announcements and also Blue Cross Blue Shield as well as Medicare Advantage extended number of covered lives. And so when you think about what a BLA can do to maybe incremental society announcements and/or coverage expansion, is that just something that we should be expecting in 2026 under a scenario where you do get a positive outcome on the BLA? Michael Dale: Thank you, Andy. So the BLA will no doubt be a positive support for all of our market development efforts and guidelines development. There are still institutions. There are still certain quarters of medical community who based upon the current regulatory status, consider Avance Nerve Graft as experimental. So with the conclusion of the BLA, that question will be resolved. And we will have, as part of our regulatory status a now codified official benefit risk profile that we can all refer to and reference and all of our future data will build off of that. So strategically and tactically, it will have an impact. What I want to caution everybody about, though, is it will not be a light switch effect. So there's -- for many customers, they are barely aware that this process is underway, but there are exceptions. So it will be positive, but I don't want anyone to think that this is going to be like a traditional market approval where you're not on the market and then all of a sudden, the floodgates open. That's not what will transpire. Operator: Our final question this morning comes from the line of Yi Chen with H.C. Wainwright. Yi Chen: This is Eduardo on for Yi. I guess to follow up a little bit on the segment growth. I'm curious about if you're seeing particular profitability. I know you have different fragmentations of each of these markets in breast and extremity and OMF. I'm curious if you see anyone to be more specifically profitable and if that's guiding any of your strategic decisions and investing. Michael Dale: Good question. The simple answer is all the segments are from a profitability standpoint, very positive. The markets that we have established were part of a process to determine what would be the most efficient as well as effective ways to further our business purpose. And so in that sense, we love all of our children to use that expression. So they were selected explicitly because we thought they were addressable in different ways. So I know it's a little bit of a nonanswer, but it's because they're all positive in that we make progress in is accretive to the business. Yi Chen: Got it. And then just following up, if you could -- you mentioned how the BLA would obviously unlock better coverage potentially. I'm curious if you could quantify that. You obviously, again, have pretty good support within the medical groups and societies. And like you mentioned, reimbursement is largely driven by these medical guidelines. I'm curious if you could quantify the impact of the BLA. You mentioned international markets. I'm just kind of focusing -- obviously, that would be a gate to open up international market discussions, but I guess, focusing on more local in the U.S. Rick Ditto: This is Rick. I'm happy to chime in and answer that. Sorry. In terms of the BLA unlocking incremental coverage and quantifying the impact, I think the way to think about it is that it helps unlock portions of the TAM that may have not been accessible prior rather than thinking about it in terms of a direct impact to revenue in '26 in the way Mike said it, this isn't a light switch, and so that's how I would think about it. Operator: Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Dale for any final comments. Michael Dale: Thank you, operator. On behalf of the AxoGen team, I want to thank everyone for their time and interest in our work to fulfill the promise and potential for all stakeholders in our business purpose to restore health and improve quality of life by making restoration of peripheral nerve function and expected standard of care. We look forward to updating you on our continued progress and plans on our earnings call next quarter. Thank you. Operator: Thank you. This concludes……
Operator: Ladies and gentlemen, good day, and welcome to the Leonardo DRS Third Quarter Fiscal Year 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this event is being recorded. I would now like to turn the conference over to Steve Vather, Senior Vice President of Investor Relations and Corporate Finance. Please go ahead. Stephen Vather: Good morning, and thanks for participating on today's quarterly earnings conference call. Joining me today are Bill Lynn, our Chairman and CEO; John Baylouny, our COO and incoming CEO; and Mike Dippold, our CFO. They will discuss our strategy, operational highlights, financial results and forward outlook. Today's call is being webcast on the Investor Relations portion of the website, where you will also find the earnings release and supplemental presentation. Management may make forward-looking statements during the call regarding future events, anticipated future trends and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. For a full discussion of these risk factors, please refer to our latest Form 10-K and our other SEC filings. We undertake no obligation to update any of the forward-looking statements made on this call. During this call, management will also discuss non-GAAP financial measures, which we believe provide useful information for investors. These non-GAAP measures should not be evaluated in isolation or as a substitute for GAAP performance measures. You can find a reconciliation of the non-GAAP measures discussed on this call in our earnings release. At this time, I'll turn the call over to Bill. Bill? William Lynn: Thanks, Steve. Good morning, and welcome, everyone, to the DRS Q3 earnings call. We continue to perform well. Our third quarter results demonstrate DRS' close alignment with customer priorities, which was clearly reflected in our strong bookings, revenue and profit growth as well as solid cash flow generation. As I told you last call, we expected second half bookings strength, and that materialized in spades in the third quarter. We secured $1.3 billion of bookings in the quarter, resulting in a 1.4x book-to-bill ratio. Our year-to-date book-to-bill ratio sits at 1.2x, and we continue to see a solid path to remain above 1x for the full year. This quarter, demand was most evident for our counter UAS, advanced infrared sensing, naval network computing and electric power and propulsion technologies. Our exceptional bookings propelled us to another record total backlog, which now sits at $8.9 billion, up 8% year-over-year and also up sequentially. Funded backlog also saw remarkable year-over-year growth of 20% in the quarter. Diving deeper into our quarterly financial performance. Across metrics, we sustained double-digit growth in the year-to-date, including in Q3. This provides greater visibility to close out the year on a strong footing. Furthermore, the foundation built in the year-to-date leads us to increase our full year revenue growth expectations to 10% to 11%. Our profit metrics also showed strong performance. Adjusted EBITDA was up 17%, although margin slightly lagged behind prior year levels as we continue to ramp our investment in internal research and development. Adjusted diluted EPS increased by 21%. Lastly, free cash flow significantly surpassed prior year levels, reflecting improved collection linearity and working capital efficiency. In aggregate, our strong Q3 results place us in a solid position to meet our full year outlook. However, we continue to operate in a dynamic market environment and are focused on smoothly navigating its complexities. The team and I remain focused on execution discipline and maintaining investment to sustain strong organic growth. While DRS continues to perform well, the operating environment offers both opportunities and challenges. Global threats persist, leading to continued growth in U.S. and allied defense investments to expand and enhance capabilities to deter and contest these adversaries. We are thankful that earlier this month, the remaining Israeli hostages were returned and that initial steps toward peace are being made in the Middle East. We are hopeful that the cease fire sustains and brings lasting stability, not only for our employees in the region, but for all situated there. Domestically, the federal government remains shut down, marking the longest full shutdown on record. Unlike the last lengthy government shutdown in late 2018, all agencies, including the Department of Defense are impacted. Thankfully, to date, we have not seen a meaningful impact on our ability to execute our programs or deliver for our customers. However, as the shutdown extends, we are keeping a watchful eye on any impacts. We are hopeful that Congress and the administration negotiate and enact funding to provide clarity and visibility to our national security customers. Zooming out and taking a look at the bigger picture, DRS remains well positioned in areas of customer priority with strong alignment to enduring themes of counter UAS, improving shipbuilding throughput via industrial base expansion, enhancing missile production, and sensing and electronics modernization. There are clear funding tailwinds in the $150 billion for defense embedded in the tax reconciliation passed earlier this year. We are eager to see the enacted funding start to flow to our customers. Shifting to the supply chain. We are executing the strategy laid out last quarter to strengthen our germanium supply chain. We have begun recycling initiatives and are seeing early success in extracting adequate levels of germanium. We are also actively working on strategic agreements with several partners to ensure consistent supply in 2026. Overall, I am pleased with the progress made to date. There's still work to be done before resolving this constraint fully, but I am confident that the initiatives that we have put in place will successfully resolve this challenge in 2026. Let me wrap up my remarks with a few closing thoughts. Our year-to-date results reflect the resilience of our business and the strength of our differentiated technology portfolio. Customer demand is clear for our capabilities, and we remain focused on executing with excellence to support them in their most critical missions. The team has performed remarkably. Their commitment is unwavering and their incredible contributions are foundational to our financial success. Earlier today, I announced that I will be retiring as Chairman and CEO on January 1, and our COO, John Baylouny, has been named the company's new CEO. I've had the distinct privilege of leading DRS as CEO since 2012. The DRS we have today is unmistakably better and stronger than the one I joined 14 years ago. I could not be prouder of what the team and I have accomplished together. We have strategically transformed DRS through a steadfast focus on reshaping the portfolio into enduring areas of demand, driving consistent innovation and executing to provide exceptional capability into the hands of our war fighters. All of these strategic actions have resulted in a consistently growing business with expanding profitability and strong cash generation. I am pleased with where the company is positioned today and the incredible potential ahead of it. This inflection point offers an opportunity for me to hand the reins over to someone who has been my right hand for a near decade. While I'm delighted with what we have achieved, I have high expectations for what this company will achieve under John's leadership as our next CEO. Many of you already know John. He's an outstanding leader and is absolutely the right person to take this on. He has a wealth of knowledge, deep technological expertise and vast experience at DRS spanning over 35 years with significant operational impacts. Equally important, he possesses a profound understanding of our customers and their needs, coupled with an unwavering commitment to driving innovation and delivering solutions that ensure their mission success. Separately, the Board has unanimously elected Fran Townsend, our current Lead Independent Director, to become Chair. She has been a steady hand on our Board dating back to our acquisition by Leonardo. As part of this transition process, John, Mike, Steve and I will have several opportunities to meet with many of you over the coming months. John and I will be sharply focused on ensuring a seamless transition through the end of the year. Congratulations, John. Now let me turn the call over to him so he can review our operational highlights. John Baylouny: Thank you, Bill. First, on behalf of all of our employees, I want to thank you for your extraordinary leadership and the incredible impact you've had on the company. I am honored to be the next CEO of DRS, and I appreciate the trust you and the Board have in me to lead this exceptional organization. I'm very excited about where DRS is today, more importantly, where we can take this company moving forward. The opportunities to create value for both our customers and shareholders are abundant as ever. Let me now turn to discuss key business highlights from the quarter. As Bill mentioned earlier, we continue to see vigorous appetite for our counter UAS solutions. Due to the evolving threats, we are constantly iterating our offerings to stay ahead of the threat. Earlier this month, at the AUSA Annual Meeting, we showcased our leading expertise in counter UAS. We demonstrated our ability to develop and integrate a palletized mission equipment package that is vehicle and platform agnostic and applicable to both manned and unmanned systems. Furthermore, we successfully combined both short-range air defense and counter UAS missions into a significantly smaller and lighter platform to JLTV. In a growing field of counter UAS solutions, DRS stands out due to its reputation for bringing best-of-breed technologies well ahead of others and with proven field-tested results and mission effectiveness. To that end, I would like to commend the team for taking first place at our recent Army counter UAS competition, showcasing our cutting-edge electronic warfare capabilities to disrupt drone threats. Additionally, in Q3, we demonstrated cross-modality success in solving some of the hardest problems facing our armed forces, integrating our sensors to enable threat neutralization through a platform to platform kinetic kill handoff. Our leadership position in counter UAS has translated into demand across our portfolio, including our integrated systems and sensing solutions in tactical radar, electronic warfare and infrared. I want to highlight that in the quarter, we were awarded over $250 million of contracts for our premier ground-based counter UAS and short-range air defense programs. Moving to sensing. We continue to see strong demand building in the missile domain. We are actively engaged in initiatives to expand sensing capacity and bring generational upgrades to sensing content on new platforms. Additionally, unmanned systems present a growing area of opportunity for our multimodal sensing business as we integrate our technologies into both unmanned aerial and surface vessel platforms. Lastly, in our core infrared business, we continue to capture an outsized share of the market to supply our customers with infrared capabilities for dismounted and ground combat vehicle applications. Next, I want to highlight our new software offering, SAGEcore. SAGEcore is an integrated operating system that brings AI, advanced sensor and edge computing together in a single deployable solution for use on tactical platforms across multi-domain environments. SAGEcore is one piece of the innovation we are bringing to the next generation computing and sensor fusion. In the quarter, we also released THOR, a 4 plus 1 multifunction network computing product with the ability to host electronic warfare, onboard crypto and tactical WiFi capabilities. THOR complements the AI processor we developed earlier this year and supports the Army's next-generation C2 initiative with a Zero Trust cost-effective solution for tactical and ruggedized computing at the edge. Additionally, we continue to see steady demand for our next-generation enabled network computing solutions in support of the Navy's network sensor and integrated fire control initiative, Cooperative Engagement Capability, or CEC. Last but certainly not least, I want to commend our electric power and propulsion business for the consistent and remarkable performance. The impact of their strong execution is evident not only at the segment level, but also at the company level. We continue to see this part of our business driving significant growth and margin expansion. We are well positioned to capture incremental scope and remain in active conversations with our customers on industrial base expansion, particularly steam turbine generators. The growth opportunity of proliferating our electric power and propulsion technology into future platforms remains an exciting growth vector. Let me now turn the call over to Mike, who will review our third quarter and our revised 2025 guidance in greater detail. Michael Dippold: Thanks, John, and congratulations. I look forward to working closely with you in your new role to create value for our customers and shareholders. Bill, it's been a heck of a ride, and I'd like to thank you for your outstanding leadership. Overall, I'm pleased with our solid year-to-date performance, particularly amidst a complex and dynamic operating environment. Our third quarter reflects the results of our sustained focus on driving innovation, processing customer demand into revenue growth and maintaining disciplined execution. Let me start by discussing our Q3 performance. Quarterly revenue grew by 18% over the prior year, totaling $960 million. The team did an impressive job converting strong customer demand. We also benefited from favorable timing of material receipts, resulting in revenue above the framework laid out on the Q2 call. From a segment perspective, IMS was our growth engine. IMS quarterly revenue was up 34%, driven by strong contributions from counter UAS and electric power propulsion programs. ASC demonstrated a healthy upper single-digit increase of 9%, thanks to growth from naval network computing, advanced infrared sensing and tactical radar programs. Shifting to adjusted EBITDA. Q3 adjusted EBITDA was $117 million, up 17% from last year. Quarterly adjusted EBITDA margin was 12.2%, reflecting a 10 basis point margin contraction from the prior year. Higher volume and improved electric power and propulsion program profitability were offset by increased research and development investments, less favorable program mix and less efficient program execution, leading to the slight margin decrease in the quarter. Shifting to the segment view. ASC adjusted EBITDA was flat on a dollar basis, but saw a 100 basis point contraction due to greater internal research and development investment, along with less favorable program mix. IMS adjusted EBITDA was up 47%, with margin expanding by 120 basis points, thanks to higher volume and improved profitability on our Columbia Class program. On to the bottom line metrics. Third quarter net earnings were $72 million and diluted EPS was $0.26 a share, up 26% and 24%, respectively. Our adjusted net earnings of $78 million and adjusted diluted EPS of $0.29 a share were up 22% and 21%, respectively. The favorable year-over-year compares were driven primarily by operationally led profit growth, coupled with slightly lower interest expense. Now on to free cash flow. Free cash flow was $77 million for the quarter, up significantly over the prior year despite increased capital expenditure investment, driven by increased net profitability and better working capital efficiency. With 1 quarter remaining, we are revising our full year 2025 guidance to incorporate our strong year-to-date performance, along with factors we expect to influence the business as we close out the year. We now expect revenue in the range of $3.55 billion to $3.6 billion, implying 10% to 11% year-over-year growth. Our backlog position provides clarity into the execution range. The single most important factor driving the output is the variability in the timing and level of material receipts received by year-end. I would resist the urge to fixate on the implied fourth quarter trends. Over the past few years, we have steadily worked to improve quarterly linearity and our year-to-date performance this year is certainly reflective of that initiative. We expect Q4 to reflect comparable patterns as last year, where there is a step down in growth from the first 9 months of the year. Lastly, the nature of our business makes it challenging to run rate quarterly performance into any useful trend. Bottom line, the step-down in implied growth to close the year should not be used as a read-through for next year just as Q4 2024 was not indicative of the growth. We are currently on track to deliver for 2025. Next, we are maintaining the range of adjusted EBITDA. As a reminder, the range is between $437 million and $453 million. As evidenced by our year-to-date results, we continue to expect IMS to be the source of the vast majority of profit and margin expansion for the year. Adjusted EBITDA margin at the company level continues to be constrained by increased R&D investment, less favorable program mix and less efficient program execution, including the impact of germanium. The increased adjusted diluted EPS range incorporates a slightly lower effective tax rate. We now expect adjusted diluted EPS between $1.07 and $1.12 a share. Our revised tax rate assumption for the year is 18%, and our other nonoperational assumptions remain static from our prior guidance. Lastly, with respect to free cash flow conversion, we are still targeting an approximately 80% conversion of adjusted net earnings for the full year. Shifting to 2026. We are in the middle of our normal course budgeting process. It's premature to provide specific guidance for next year, but as a team, we are focused on driving continued organic growth and expanding adjusted EBITDA margin. Consistent with past practice, we plan to provide formal guidance in conjunction with our fourth quarter and fiscal year 2025 call in late February. In conclusion, I want to thank the team for their incredible contributions in bringing innovation to solve complex national security challenges, delivering exceptional technologies to our customers and delivering solid financial results for our investors. We will continue to remain focused on rigorously executing our strategy to create value through durable long-term growth. With that, we are ready to take your questions. Operator: The first question today will be coming from the line of Peter Arment of Baird. Peter Arment: Congrats, Bill and John. Bill, thanks for all the support over the years. Really appreciate it. A question on just IRAD spending. Obviously, you're seeing a lot of opportunities up pretty significantly, 35%, I think, in 2025. How do we expect that trending just because of kind of some of the margin performance we've seen at ASC just because some of that is impacting that? How does that trend as we go forward? Michael Dippold: I would expect to see this internal research and development investment kind of stay at this percentage of revenues. I think we're in a more dynamic operating environment where the procurement processes has changed from the department. And I think that we're going to continue these investment levels to provide that agility in order to maintain this growth. Peter Arment: Okay. So that was roughly like mid-3% or so roughly or right around there? Michael Dippold: Yes. I think around there. Yes. Peter Arment: Okay. Helpful. And then just, I guess, any updates on just kind of foreign military sales activity. Obviously, there's a lot of demand signals from Europe. You guys are well positioned. What are you seeing there, Bill? And any opportunities for DRS? William Lynn: Yes. Thanks, Peter. We do think we're going to see a ramp-up in foreign military sales opportunity. We're just at the -- I think, at the start for the force protection, the counter UAS. I think that has a real opportunity. We continue to see demand for our sensors, the EO/IR sensors and for our network computing. And I think given the threat environment, we expect those to continue. And then we are working to develop markets for our naval power and propulsion system, particularly in Asia. Peter Arment: Just last one for me, just on Mike, on the germanium pricing, has things stabilized there? Have you gotten more suppliers or supply lined up for next year? Michael Dippold: Yes, I'll take that out to start and then maybe hand it over to Bill. But first, on the pricing side, as we talked about in our last call, I think we've got 2025 kind of lined out, and there were no real surprises or anything from our last call on the germanium front. We are making some progress in terms of solidifying supply into '26. And I'll hand it over to you, Bill, there. William Lynn: Yes. As Mike said, we're trying to build a structure that supports our revenue flow for optics going forward. And so that involves in the near term, recycling existing germanium from older optics. Over the midterm, we've moved to diversify our supply base with agreements with different suppliers and processors. And basically, we need to move it away from reliance on China. We're seeing success in both those near-term and midterm initiatives, and we think that will put us in a strong position in 2026. Operator: And our next question will be coming from the line of Robert Stallard of Vertical Research. Robert Stallard: Best of luck, Bill, and congratulations, John. First to kick things off, very good quarter for bookings. And I was wondering if there was any unusually large orders that were placed this quarter. And in relation to that, how do you expect these bookings to flow through to revenues? Michael Dippold: Yes. I would say there was an increase in demand that we saw on the counter UAS and short-range air defense programs. So those came in heavy for the quarter, which accelerated some of the bookings results, primarily in the IMS segment. So that was a little bit of a pop there. And then we did see some acceleration just across the board as just the typical flow you see at the government fiscal year-end as September wrapped out. So a little bit plused up. That said, as I look out for the year, I expect to be comfortably ahead of that 1:1 target that we've put out there. We've got a good foundation for that. So we expect the demand to continue and feel good about our bookings number for the year. In terms of the revenue turn, obviously, for us, it's about our funded backlog and how that pulls over into revenue. Bill mentioned in the prepared remarks here that the funded backlog was up 20% year-over-year. And if you look at it sequentially, it's up 7%. So we're feeling good about the foundation we have for 2026, Rob. Robert Stallard: Okay. And then as a follow-up for Bill, you highlighted the extended U.S. government shutdown. If this carries on, what sort of potential risk do you see for DRS from this situation? William Lynn: Yes, Rob, it depends for how long, of course. We're anticipating at least going well into November. And as I said in the prepared remarks, the impact of that length is moderate. As it starts to go longer than that, it's -- the people who pay us and give us the awards aren't there. And so you'll start to see delays in awards and delay in pay. But it would really have to keep going for a longer period, where we're already basically longer than we've ever seen, but it would have to be a historic length before we'd see an impact. Robert Stallard: Okay. And then just one final one for Mike. You said there were some, I think, operating efficiency issues on programs in the quarter. You highlighted germanium. But is there anything else we should be aware of? Michael Dippold: It's primarily germanium. Obviously, with our development programs, we always have a little lower margin when we have that mix. But in terms of the context of the comment, it centers around germanium. Operator: And our next question will be coming from the line of Michael Ciarmoli of Truist Securities. Michael Ciarmoli: Bill, John, congrats. And Bill, thanks for everything over the years. Maybe just back to Peter's question on the margins. I mean you guys had '26 targets out there. You've obviously got this elevated R&D. How do we think about the payback and measuring the return on this R&D? Do we -- should we expect? Do we see new programs, maybe an acceleration of revenue growth off of what you've done this year? Just trying to get a sense of really measuring the payback on the R&D investments. Michael Dippold: Yes. I think the payback on the R&D investments are going to put us in position to attack a lot of those adjacent markets and growth opportunities that we've had. So I think as you think about the kind of new way of procurement and coming to the table with solutions that are already at a higher kind of technical maturity, that's what we're really doing here. And I think it is giving us some good opportunities in the counter UAS domain. I think it's giving us some opportunities here as we look to kind of unmanned surface vessels. So all of these are giving us some additional opportunities to continue the growth that we've seen, and that's really what we're expecting from the IRAD investments at these levels, Mike. Michael Ciarmoli: Okay. Okay. Is that -- you just mentioned counter UAS, and we've heard it a couple of times. Is there any way to sort of quantify or size your exposure at this point to counter UAS programs and maybe size the pipeline of opportunities? You mentioned AUSA. There's certainly a lot of competing companies from new entrants to large-scale primes guys like yourselves, everybody is thrown around new offerings. I mean, can you give us any sense of where your revenues are today or what you think your growth rate is or sort of adoption penetration there? Michael Dippold: Yes. And I think this is one of DRS' nice differentiators is when we talk about counter UAS, that is largely all of our force protection type of revenue that we have there. So we talk about and disclose force protection being about 20% of our revenues. That's largely dominated by the short-range air defense and counter UAS programs. So we have real penetration, which we believe gives us an advantage as we look to the future here. So that's -- think about that kind of in that 18% to 20% range of revenue is all tied to those efforts. John Baylouny: Let me add to that quickly and just say that we're the current provider, the approved provider for counter UAS for the U.S. Army. Our solutions are battlefield tested. We know that our solutions work, and we're always adapting our solutions to the evolving threat. We did see a lot of counter UAS solutions on the AUSA floor, but we distinguish ourselves by having a battle-proven capability. And we're very close to our customer. We understand what they need. We understand where they're thinking. We do expect that counter UAS to kind of expand and proliferate to all echelons of the forces and really all domains. And so we see a real opportunity in the future here is driving innovation and pushing this out new technology. Michael Ciarmoli: Okay. Would you say you're kind of equally exposed to both kinetic and kind of non-kinetic solutions for counter UAS? John Baylouny: Yes. I would say this, Michael. I think that you're going to see both capabilities on the battlefield. It's going to depend on where you are in the Echelon. If you're up in the front -- next to the front, you're going to see some capabilities back in the back at higher echelons, you're going to see other capabilities. DE is going to end up probably at both echelons, but those capabilities are going to be different. So you're going to start seeing the counter UAS market kind of proliferate across all echelons, all different capabilities, and we provide all of that. Michael Ciarmoli: Okay. Okay. Last quick one for me, Mike. Just should we expect the same margin profile in '26 with kind of IMS being the lead engine and some more of that IRAD dampening down the ASC margins? Michael Dippold: Yes, I wouldn't expect the trends to continue. We're not going to go deep into '26 here. But in terms of just the allocation of profit, the investment is going to stay heavy at ASC, and we still feel pretty good about the tailwind that is Colombia as we look into the future. Operator: And our next question will be coming from the line of Kristine Liwag of Morgan Stanley. Kristine Liwag: Bill, congratulations on your retirement. It's been a pleasure to see how you've transformed DRS over the years. And John, congrats on your new role. I guess following up on the supply chain, you guys have called out germanium a few times. So I just wanted to dive a little bit deeper into this. Can you talk a little bit more about your sourcing strategy for this? Like how much inventory do you have? It sounds like you got a little bit better access, but it would be really helpful to understand regarding some sort of time line or some sort of quantity. William Lynn: Yes. Thanks, Kristine. I don't think I can give you precise numbers, but let me give you kind of the approach. We had before anticipating these kinds of issues, bought a buffer stock, which is we are using to transition '25 and support our '25 flow-through. At the same time, we're now actively involved in recycling from older optics and pulling the extracting the germanium and constructing new optics from that. And that's -- now we've seen success in that process, and that will bridge us into '26 and get us partway through '26. And then at the same time, we're involved in developing partnerships with companies in both the mining and the processing area outside of China, so that we have a long-term supply, and that's what gives us confidence that we're going to have a robust '26, and we're going to be able to support our germanium needs with these both midterm and short-term initiatives. Kristine Liwag: Great. And maybe pivoting to a different topic. I mean, in the quarter, you guys made a $15 million investment in Hoverfly. I wanted -- I think you're now at 25% of your equity stake here. I wanted to better understand what's your strategy regarding these unmanned capabilities? Where does this fit into your broader portfolio and strategic vision? Michael Dippold: Yes. I would say the investment with Hoverfly is really kind of key to some of the strategy that we have in terms of making sure we're bringing the best-in-breed technologies to different solutions. We think this tethered capability is going to allow for -- obviously, for elevated sensing, for targeting, potentially for counter UAS. So there's some good applications here for this capability, and that's what fostered the investment. Kristine Liwag: Got you. Great. If I could do a follow-up question. IMS growth was up 34% year-over-year, 32% up sequentially. Can you provide any color on how much of this was driven by the Columbia Class? And were there any other transitions in shipsets that drove this step up? Michael Dippold: I didn't catch what -- the first part of that question, Kristine, I'm sorry. Kristine Liwag: Sorry, on IMS growth, IMS was up 34% year-over-year, up 32% sequentially. Just trying to understand how much of this step-up was driven by Columbia Class or if there were other transitions in shipsets that drove this increase? Michael Dippold: Yes. So a good question. The increase in the revenue -- actually, Columbia has been pretty stable from its revenue output in a quarterly cadence throughout the course of the year. The increase in revenue is really coming from a lot of the short-range air defense and counter UAS programs for the quarter. So that's where the big pop was this quarter. Operator: [Operator Instructions] The next question will be coming from the line of Anthony Valentini of Goldman Sachs. Anthony Valentini: Bill, congrats on a great run. I'm just trying to get a sense for the longer-term growth prospects here. Are there opportunities to take what you guys are doing in propulsion on Columbia to other types of ships and programs? And the primes are talking about significant growth in missiles, which I think are highly dependent on the sensors. You guys have expertise there. So I'm wondering how large the missile business is today for DRS and where that can go over time? Any color really on the large growth vectors would be great. William Lynn: Thanks, Anthony. This is John. Let me start with the ship and the propulsion systems. And absolutely, we are looking and bidding other ship classes, and we have some real progress in that regard, shaping. We believe that we have an advantage in providing energy flexibility on board a ship. It's not obvious, but the more energy, more power a ship has, the further away can fight longer range of radars, longer-range electronic warfare, a longer-range directed energy. And our solutions allow for that capability to be able to direct that energy to different places on the ship. So yes, for sure, we believe that there's opportunity long-term growth for us there. Turning to missiles. DRS has always been a supplier of the best infrared sensing in the industry and other sensors as well. We're really at the top of the food chain. When it comes to missiles, those missiles have to be smarter. They have to have longer range. They have to have greater capability. So we're seeing an increased pull for those higher-performing sensors into that space. And so we're playing at all different levels from the very low-cost, high-volume missiles and effectors all the way to the very high-end missiles and effectors. Operator: And the next question will be coming from the line of Seth Seifman of JPMorgan. Seth Seifman: Congratulations to Bill and to John as well. I wanted to ask, John, you mentioned at the outset the SAGEcore. I wonder if you could talk a little bit about how that fits into the Army's NGC2 plans and the extent to which that can be a growth driver. It seems there's a good amount of funding headed in that direction. William Lynn: Thanks, Seth. Let me step back and talk about the fact that when we see platforms, all platforms are going to end up having to think for themselves. They're going to have to sense for themselves and think for themselves. At the end of the day, those platforms that are at the edge of the battle space, whether it's land, sea or air, are going to have disrupted communications in battle. So those -- the computing resources for those platforms to think about what's happening on the battle space has to be on the platform, has to be at the edge. And so this is where we're putting our energy. This is where we're putting a lot of our money is to build out that capability. The connectivity from the platform up to the enterprise we'll be there at certain times and some of the enterprise capabilities will play there. But those platforms have to think. So this is part of NGC2, next-generation C2 program with the Army is being able to build out a capability on the platform, not just to communicate but also to think. And so we're adding the AI capability. And now with the SAGEcore, it's really the DRS' operating system, which we're going to place on to those computing resources at the edge that allow those platforms to think for themselves, to fuse the sensing information to have AI to understand what's going on in the edge and to be able to make sense and act on the information. So that's where SAGEcore fits into the program, not just for the Army's platforms, but we're also using it in the sea for USVs. We're also putting in other air platforms and in space as well. Seth Seifman: Excellent. Excellent. And as a follow-up, if we could just talk about IMS and on the Colombia, kind of what shipset you're up to? Or maybe a different way of saying it is, how far up the curve are we in terms of when you've got kind of to a place where pricing has kind of stabilized? Michael Dippold: Yes. And we've talked about Colombia in the past that we're always kind of working on 3 different shipsets simultaneously in terms of our revenue base. What happened in 2025 is we will start to pretty much retire the second chipset, which was bid at a lower price point. So subsequent to 2025, we'll be at a cadence where all of the new ship and revenue base associated with the different ship classes will be negotiated after the design was materially complete after the inflation impacts to labor and materials. So we should see more consistent margin output from Colombia starting in 2026 with one more year of margin expansion. And then the little asterisk I'd put on that is before we see the margin benefit from the South Carolina facility and think about that impact starting in 2027. Operator: Our next question will be coming from the line of Andre Madrid of BTIG. Andre Madrid: Congrats to Bill and John. I wanted to talk again about Hoverfly. Great to see the up investment there. Is this something that fits into your previously outlined M&A criteria? Michael Dippold: Yes. I would say that when we're talking about M&A, we're looking at different aspects of that, whether they're joint ventures, partnerships, minority investments. And certainly, with this capability having the ability to assist us in elevated sensing to bring our sensors through from a network perspective, I think that this kind of checks the boxes that we were looking at from an M&A perspective, and it's certainly strategic to where DRS is headed. Andre Madrid: Got it. Got it. That's helpful. And then I wanted to follow up on the C-UAS work that you guys are doing. Could you maybe talk a bit more about the margin profile of that work and if it's generally accretive or dilutive to IMS? Michael Dippold: Yes. We don't get into the marginality of this particular programs, but it's the same customer set. It's in line with the rest of our portfolio. There's no anomalies here from a drag or from a tailwind perspective. Operator: And our next question will be coming from the line of Ronald Epstein of Bank of America. Alexander Christian Preston: This is Alex Preston on for Ron today. First of all, I just wanted to echo the congratulations to both Bill and John. I wanted to circle back on the government shutdown. Obviously, 3Q bookings are really strong. You guys mentioned there's not a ton of material impact at this point. But I'm wondering if you're seeing any slowness in the contracting environment? And if so, where? I think, for instance, we might have expected Golden Dome awards to be maybe a little more firmed up by now given reconciliation funding is to be spent. There's contract vehicles in place. Curious if you have any commentary on that. William Lynn: Yes. As I said, it would take a while before this would catch up to influencing things like that. It would through -- think of things like testing to prove systems out, but those schedules are generally pretty far out. And so we haven't really seen much more than modest impact yet. And it would have to go much closer to the end of the year before we'd see that. Alexander Christian Preston: Okay. And then just as a quick follow-up, we've noted -- a bunch of us have noted the strength in counter UAS bookings and revenue this quarter. Just curious if you could characterize more on where the demand is coming from. I know you mentioned there's particular strength in the U.S. Army, there's foreign military sales involvement. Just curious if you could provide any color on the split there. John Baylouny: Yes. I think that's where the demand is coming from for sure. We are seeing demand coming from really all over. We're seeing demand coming from the Army for sure, and that's evident in the bookings. We're seeing demand coming from Navy, Marines as well in the U.S. Air Force has also plagued with this problem. We're seeing progress there in demand building and some bookings there as well. And of course, direct commercial and international FMS sales as well. There's demand coming from all avenues, as you might imagine, due to the changing nature of warfare. Operator: And our next question will be coming from the line of Jon Tanwanteng of CJS. Jonathan Tanwanteng: Bill, congratulations on your retirement, and John and Fran on their appointments. My first question is, if you could drill just a little bit more into the germanium supply, that would be helpful. You mentioned bridging into the future with the recycling and then the alternative supply. But do you expect to be constrained in the coming quarters as your stockpile falls off and then maybe catch up later in the year? Or how do you expect that to shape up? Does -- do the programs that you have in line fill 100% of the supply right out of the gate or does it take time to get there? William Lynn: We think we have a plan, Jon, that does bridge from the '25, where I think we've taken account of the supply restrictions and price increases. And we have it planned into '26 with the different initiatives that I mentioned. So we're feeling comfortable as to where we are. Jonathan Tanwanteng: Okay. Great. That's helpful. And then second, is the price on these alternative supplies significantly higher than what you're seeing in the market? And does that further impact the ASC margin as we go forward? How should we think about the profitability there as you ramp these alternative sources? Michael Dippold: Yes. I would say that, as you know, we're largely a fixed price shop. So the higher pricing is certainly going to be inherent in those programs as we look into 2026. Jonathan Tanwanteng: Okay. Got it. One last one, if I could. Just any changes to thoughts on capital allocation? You obviously did the Hoverfly investment, you did some share repurchases, but any thoughts on capital allocation and use of cash going forward? William Lynn: Yes. I mean, as we've said that we want to have a balanced capital allocation strategy. So we've instituted a dividend this year. We have a moderate buyback, but our priority continues to be seeking out M&A opportunities that meet both our strategic and financial criteria. In that, we've exercised patience. We've looked at a lot of things. We are doing the Hoverfly this quarter, as we mentioned. We're looking at larger investments as well. But you should expect going forward to see more M&A, but a balanced strategy as well. Operator: And our next question will be coming from the line of Austin Moeller of Canaccord. Austin Moeller: Just my first question here. You've talked about recycling germanium from older optics. It sounds like you're going to get additional legs on your supply beyond Q1 '26, which is I think what you discussed last time for your visibility. Have you looked into alternative like glass-based solutions like BlackDiamond glass potentially to replace the germanium just given it has less temperature sensitivity and better supply? William Lynn: We -- you're correct. We are looking at alternative materials. It's particularly relevant for smaller optics where you can replace germanium with other. And that is part of the portfolio of solutions we're pursuing. And that one is in the early stages, but we are seeing success there as well. Austin Moeller: Okay. And just a follow-up. If we -- I know we're in a shutdown here, but if we think about the opportunity for Golden Dome and when do we start to get RFPs and contracts for that, do you have any sense of the timing next year? And there's also like your partner, AeroVironment has been testing per UAS solutions at Grand Forks in North Dakota. John Baylouny: Let me take the Golden Dome part of that. For sure, we're seeing a lot of activity on Golden Dome. While the architecture is not yet public, we certainly see movement. You're probably aware of the SHIELD RFI -- RFP that I think 1,500 companies bid, including DRS. We do expect that to move forward very quickly. I think that we see opportunity here, not just in the space sensing, but also in the underlayer and also in the over-the-horizon radar area. So we believe that, that's going to move forward and general [ recruit ] lines moving forward very quickly. On the counter UAS front, we see a lot of activity in counter UAS, including Leonardo's activity. And I think that just to go back to the points about the fact that we are the ones that are solving this problem for the Army. We have battle-proven technology. We've proven our capability, and we're following the threat, making sure that we're ahead of the threat and very close to our customer. Operator: Thank you. I would now like to turn the call over to management for closing remarks. Please go ahead. Stephen Vather: Thank you, Lisa, and thank you all for your time this morning and your interest in DRS. As usual, if you have any follow-up questions, please call or e-mail me. We look forward to speaking with all of you again soon. Enjoy the rest of your day. Operator: This does conclude today's program. Thank you all for participating. You may now disconnect.
Operator: Good morning. My name is Michelle, and I'll be your conference operator. At this time, I would like to welcome everyone to ADP's First Quarter 2026 Earnings Call. I would like to inform you that this conference is being recorded. [Operator Instructions] I will now turn the conference over to Matt Keating, Vice President, Investor Relations. Please go ahead. Matthew Keating: Thank you, Michelle, and welcome, everyone, to ADP's First Quarter Fiscal 2026 Earnings Call. Participating today are Maria Black, our President and CEO; and Peter Hadley, our CFO. Earlier this morning, we released our financial results for the quarter. Our earnings materials are available on the SEC's website and our Investor Relations website at investors.adp.com, where you also find the investor presentation that accompanies today's call. During our call, we will reference non-GAAP financial measures, which we believe to be useful to investors and that exclude the impact of certain items. A description of these items, along with a reconciliation of non-GAAP measures to their most comparable GAAP measures can be found in our earnings release. Today's call will also contain forward-looking statements that refer to future events and involve some risk. We encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ materially from our current expectations. I'll now turn it over to Maria. Maria Black: Thank you, Matt, and thank you, everyone, for joining us. This morning, we reported solid first quarter results that included 7% revenue growth and 7% adjusted EPS growth. We achieved these financial results while also making meaningful progress across our strategic priorities. I will briefly review some additional highlights from our results before discussing our strategic progress. We delivered solid Employer Services new business bookings with growth accelerating from our fourth quarter last year, resulting in a record sales volume for our first quarter. Growth was healthy in our small business portfolio, which includes our retirement and insurance services businesses. We were also happy to see growth reaccelerate in our Employer Services HR Outsourcing business after a softer finish to last year. Overall, HCM demand remained relatively stable, and we experienced specific strength in ADP Lyric HCM. Our Employer Services retention rate continued to exceed our expectations and only declined slightly. Our overall client satisfaction score reached a new all-time high for our first quarter, reflecting improvements in each of our business units. Employer Services pays per control growth continued to moderate and rounded down to 0% for the first quarter with clients remaining cautious around adding headcount in the current environment. And last, our PEO revenue growth of 7% exceeded our expectations, helped by growth in 0 margin pass-throughs and higher wages. We are proud of our first quarter financial results and excited by the progress made across our 3 strategic business priorities. I will start with what we are doing to lead with best-in-class HCM technology. In the small business space, we continue to scale our embedded payroll solution. Embedded payroll saves small business owners' time by bringing payroll directly into the software platforms they are already using to run their businesses. We are pleased with our early embedded payroll sales collaboration and look forward to adding more partners over time to further extend the reach of our small business distribution network. We also continue to add functionality to our existing small business offerings. For example, earlier this month, we launched a benefits recommendation tool designed to help guide small business clients on the most suitable benefits options. Today, these recommendations cover group health and individual coverage health reimbursement arrangement or ICRA, and they will expand in the future to include our PEO. Our Insurance Services business also recently launched a digital option that enables small businesses to purchase ICRA plans directly on our RUN platform through our partner, Thatch. This opens up more choice for employees by allowing every team member to pick the plan that is right for them, health, dental, vision, all in one place. In the mid-market, we accelerated the deployment of Workforce Now Next-Gen. We reached an important milestone in the first quarter with more than 80% of our new mid-market clients in the 50 to 150 employee space were sold on this Next-Gen version of Workforce Now. Moving forward, we will continue to extend this solution to larger mid-market prospects to enable them to also benefit from its modern tech stack and enhanced functionality. In the enterprise space, ADP Lyric HCM continues to experience strong momentum. Lyric's new business bookings exceeded our expectations for the first quarter and its new business pipeline continues to grow. Among the many enterprise clients that started on Lyric during the first quarter was a large travel management company. This client selected Lyric for its AI-driven automation and flexible architecture. They are using ADP for payroll, HR time, benefits and talent in both the U.S. and Canada. Highlighting its positive reception in the market, Lyric was recently recognized by HR Executive as a top HR product of 2025 and honored at the HR Tech Conference in September. With respect to our WorkForce Software acquisition, we continue to make meaningful progress. By unifying workforce management, HR and payroll, we help our clients to gain better visibility, simplify their operations and lower overall costs. Our differentiated approach helped us win the time and attendance business of an existing payroll client in the student transportation business with thousands of employees. And just this morning, we announced the acquisition of Pequity, an innovative compensation management software provider. This acquisition will broaden ADP's capabilities to support the complex compensation planning needs of our clients who are looking for insight-driven compensation solutions that help them make informed pay decisions. Underscoring our commitment to leading with best-in-class HCM technology, we also continue to advance our AI initiatives. We deliver purpose-built AI to solve real-world problems for HR teams. Our latest enhancements to ADP Assist use the power of generative AI to analyze and resolve things like payroll anomalies by automatically identifying inconsistencies or deviations in the data, analytics requests that can take days to fulfill and routine compliance tasks, which pull teams away from strategic work. Utilization of ADP Assist is also increasing with more than 5.5 million client conversations over the last year. This helps reduce the need for clients to contact us as their questions are answered proactively within our products. As we look ahead, our vision for ADP Assist includes simple agents to handle everyday tasks, advanced agents to execute multistep processes, autonomous agents to go further, managing workflows from start to finish, being sure to keep humans in the loop where it matters. What makes our approach different from others is the scale of the data we use to power our agents and how we train them to work together. A single action sets off the right follow-ups for employees, managers and HR practitioners. It is in these connections where the real value is produced. We have an opportunity to use AI not just to speed up the client workflows, but rather fundamentally shift how work gets done. It's the difference between using AI to do things better and faster than before and using AI to do things better and faster than anyone else. Our new AI capabilities empower our associates to deliver on our second strategic priority, providing clients with unmatched expertise and outsourcing solutions. These internal AI tools provide our sales, implementation and service teams with client-specific insights to address market shifts, resolve unique challenges and ultimately deepen client engagement. Additionally, all of our developers are now equipped with coding copilot tools that are leading to measurable productivity gains. We also continue to expand our use of digital implementation for both small business and PEO clients. These AI initiatives create additional time for our associates to engage in higher value-added activities that support our clients' growth. Finally, we continue to execute on our third strategic priority benefiting our clients with our global scale. We bring value to our clients through our unmatched footprint in over 140 countries and continue to add to our global capabilities. During the first quarter, we also went live with our first GlobalView client in Costa Rica, where we now serve one of the world's largest employers. Further underscoring the quality of our global products, ADP was recently positioned as a leader in multi-country payroll by NelsonHall in its Payroll Reimagined 2025 meet and as an overall leader in multi-country payroll solutions by Everest in its 2025 PEAK Matrix. We remain confident in our ability to advance our strategic goals, drive our competitive differentiation and deliver strong financial results. And with that, I would like to take a moment to recognize our associates whose efforts and outstanding performance help us consistently deliver for our clients and maintain our record high client satisfaction levels. Thank you all. And now I'll turn the call over to Peter. Peter Hadley: Thank you, Maria, and good morning, everyone. I will start by providing some more color on our first quarter results and then update our fiscal 2026 outlook. Let me begin with our Employer Services results and outlook. ES segment revenue increased 7% on a reported basis and 5% on an organic constant currency basis in the first quarter. As Maria shared, ES new business bookings were solid to start the year. With a relatively stable demand backdrop and continued healthy pipelines, we are maintaining our 4% to 7% full year growth guidance. ES retention declined slightly in Q1 versus the prior year, but still came in better than we anticipated. We are continuing to forecast a 10 to 30 basis point decline in full year retention. ES pays per control growth rounded down to 0% for the first quarter, coming in slightly below our expectations. We are now forecasting pays per control to remain about flat for the full year. Client funds interest revenue increased more than we anticipated in Q1, helped by stronger average client funds balance growth. While the yield curve has declined marginally since our last update, this impact is more than offset by our stronger client funds balance growth. We are now forecasting average client funds balances to grow 3% to 4% in fiscal '26, and we are continuing to expect an average yield of approximately 3.4%. Accordingly, we are increasing our full year forecast for client funds interest revenue by $10 million to a range of $1.30 billion to $1.32 billion. We are also increasing our expected net impact from our extended investment strategy by $10 million to a range of $1.26 billion to $1.28 billion. Overall, we are maintaining our full year ES revenue growth forecast of 5% to 6%. Our ES margin decreased 50 basis points in Q1, reflecting integration and acquisition-related costs associated with the WorkForce Software acquisition, which closed last October. Moving on to the PEO. Revenue growth of 7% represented a solid start to the year with average worksite employee growth of 2% in the quarter. We saw continued growth in PEO new business bookings. However, PEO pays per control growth moderated in the quarter. As a result, we are continuing to expect fiscal 2026 PEO revenue growth of 5% to 7% and average worksite employee growth of 2% to 3%. PEO margin decreased 140 basis points in Q1, mainly driven by higher selling expenses, the timing of state unemployment insurance costs, 0 margin pass-through revenue growth and some onetime costs connected with the retroactive change in the deadline for filing certain employee retention tax credit claims. Putting it all together, we are maintaining our fiscal 2026 consolidated revenue outlook for 5% to 6% growth and our forecast for adjusted EBIT margin expansion of 50 to 70 basis points. We continue to expect our effective tax rate to be around 23% for the year. We also continue to forecast fiscal 2026 adjusted EPS growth of 8% to 10%, supported by share repurchases. I would also like to add a quick reminder of how we reflect the impact of our client funds investment strategy in our segment reporting. The results of our client funds interest revenue are reflected in our Employer Services segment, while corporate extended interest income, which represents the interest generated from the portfolio on the days that we borrow as well as the related short-term financing costs are both recorded in our other segment. Accordingly, from a segment geography perspective, some of the benefit we expect to receive from our overall client funds investment strategy in fiscal 2026 is recorded in our Employer Services segment, while the balance of this overall benefit is recorded in our other segment. This dynamic played out in our first quarter, and we expect it to continue throughout the rest of our fiscal year. Thank you, and I'll now turn it back to the operator for Q&A. Operator: [Operator Instructions] Our first question comes from Samad Samana with Jefferies. Samad Samana: Maria, I'll start with you. It sounds like the booking side is going well, both in Employer Services and PEO. And I thought it would be helpful if maybe you can update us on what the backdrop looks like in terms of deal cycles just looks like? And then how are you thinking about just time to close? And if there's been any change in what you're seeing in deal time lines, particularly with larger customers? And then I have one follow-up for Peter. Maria Black: Sure. Samad, thank you for the question. So overall, we feel okay about the HCM demand backdrop. I think we referred to it as relatively stable, and that's exactly what I would suggest that it is. It really doesn't feel like a lot has changed as it relates to the dynamic of the demand backdrop. We called out a bit of pipeline aging throughout fiscal '25. We saw that kind of continue into Q1. So we're really back to kind of those pre-pandemic. I used to call it, I suppose, the new normal or the old normal. I think it's just kind of normal. So I think it felt largely the same as it did as we finished up the year in terms of really across the board, whether it's in the down market, where we're measuring things like new appointments or it's in the upmarket that you asked about, Samad. With respect to deal cycles, I would say we haven't observed any meaningful changes in Q1. Samad Samana: Great. And then, Peter, as I think about the guidance, and I appreciate the color on the individual pieces and how you tend to maintaining it, and I know it's still early in the fiscal year. But particularly on Employer Services, if I think about some of the underlying pieces, it feels like there is a little bit of a downtick, whether that's pays per control, whether that's retention. So how do you get confidence in the range? And maybe just as we think about shorter term into the next fiscal quarter, how should we think about maybe where that should track and if there's any onetime things. I think maybe there was one less processing day last fiscal -- last year -- this time last year. So just maybe help us think of the guidance. Peter Hadley: Yes, sure, Samad. So I think there are a number of things. None of them are individually particularly significant, they're going in different directions. So as you pointed out, we have lowered our pays per control guidance to the lower end of that range. So again, when we're talking about tens of basis points of movement there, there's obviously some revenue and margin attached to that. Conversely, we have a relatively small uplift in our client fund interest revenue driven by the balances. Again, that's sort of a counteract. We also have a little bit of favorability on FX and sort of 1 or 2 other things. So I definitely feel very confident, I think, with respect to the guidance we have shared there. In terms of the quarterly cadence, so we actually had 1 extra processing day in Q2 last year. We also had some SUI revenue in the PEO pulled into Q2 last year. So we have to grow over that in the second quarter. There may be not a material difference, I would say, absent the anniversary of the WorkForce Software acquisition at the end of this quarter. So when you take that out and go back to sort of an organic constant currency type level, not a material difference, maybe a slight downtick in the revenue growth rate for the quarter, just growing over that extra processing day in the ES and a little bit of that SUI revenue pull forward that we're -- at this point, we're not anticipating in Q2. But in terms of the full year and in terms of Employer Services, I think the movements are relatively small and somewhat offsetting each other. So again, we feel just as comfortable with the range as what we were 3 months ago when we issued our initial guidance. Operator: Our next question comes from Mark Marcon with Baird. Mark Marcon: Congratulations on the -- on what sounds like a pretty good start from a sales perspective. Maria, you went through a number of different areas on -- in terms of new bookings. What area was the most surprising from your perspective? And in addition to that, can you just describe a little bit more about what you're doing on the embedded side? Like how widespread is that on the lower end of the market in terms of percentage of sales? And does that have any impact with regards to the economics of the business? Maria Black: Yes. Thank you. And thank you, Mark, as always, for the congrats on the good start. And we feel exactly that way. So I wouldn't say it surprised us, but it certainly pleased us to see that growth did accelerate in the first quarter. And I called out some of the highlights within our small business space. We saw specific highlights within retirement services, insurance. We were really pleased to see that the Employer Services, HR Outsourcing business, that we talked a lot about last quarter, a lot of those big complex deals that have big transformations, we are excited to see those cross the finish line and certainly continue to build the pipeline there. And then we were pleased also to see the continued interest and demand for Lyric HCM. So I wouldn't say that it surprised us. I think it pleased us to see the quarter kind of evolve that way. That said, though, as everybody knows, we still have the bulk of the year ahead of us as it relates to execution kind of broadly across each one of those areas. To speak to Embedded Payroll specifically, it is still very much early days. I think you know we're very committed to our partnership that we have specifically with Fiserv. We're also really excited about continuing to make progress on the embedded offering in general and other partnerships. So it is a big piece of our growth agenda and growth strategy within the down market. That said, though, we just rolled out the opportunity across the back book, if you will, of our partner just in October. So the bulk of, call it, the bookings contribution from Embedded is really ahead of us. It really doesn't contribute thus far in the numbers through the first quarter. And so we're excited about the sales collaboration and the progress we've made to integrate and scale the offering. We're also really excited to put CashFlow Central inside of the RUN offer toward the tail end of this year, if you will. So again, definitely a part of the strategic agenda, hasn't really contributed much to the sales results thus far. The bulk of that contribution is ahead of us. Mark Marcon: Great. And then for a follow-up, just you mentioned in terms of majors, Next Gen basically comprising 80% of the new sales in the core area within majors. Can you talk a little bit about what you're seeing in terms of the utilization of Next Gen with the clients? To what extent is the client satisfaction rate going up? What does it make you feel from a retention perspective as that continues? And any sort of impacts from a profitability perspective? Maria Black: Yes, great question, and it is exciting. It's incredibly exciting to finally see the Next Gen making progress at the levels that we reflected. So 80% across that core space of the mid-market. Obviously, our goal is to extend the reach throughout this fiscal year to broadly cover the mid-market. And part of that excitement is anchored entirely in what you just suggested, which is that we are seeing faster time to implementation. We are seeing better implementation satisfaction. We are seeing upticks in overall satisfaction. So as the mid-market has been making these investments into the products and the platforms, and we've been able to simplify really the experience for the clients, but also that experience for our associates to service our clients, whether that's while they're onboarding them or while they are servicing them, it's definitely making an impact, and that's exactly the journey we've been on, and it's greatly contributed over time as Next Gen has been scaling in the mid-market to those record level NPS results that we've been talking about in the mid-market. And certainly, we've talked a lot about the mid-market retention over the last few years. And we're confident that the product investments we're making, specifically Next Gen are driving a sustainable improvement in client satisfaction broadly across the mid-market. Peter Hadley: And I think just on the profitability piece, Mark, at the end there, we're also anticipating that this will lift our productivity. Certainly, we observe, as Maria said, not just more smooth implementations, but easier implementations, the ability for more digital onboarding as well as the number of client contacts for Next Gen clients is meaningfully lower than on the current gen solutions. So certainly, a profitability opportunity there as we roll it out further across the mid-market base. Operator: Our next question comes from Jason Kupferberg with Wells Fargo Securities. Jinli Chan: This is Cassie Chan on for Jason. Just a quick question from me and maybe a follow-up. So I mean, obviously, you guys talked about U.S. PPC coming in flat for the quarter, maybe a little bit below expectations. And now you guys are expecting the full year guide to be flat. I guess just diving a little bit deeper, what drove that weakness? And what gives you guys confidence that it won't maybe even decelerate or be down through F '26? Peter Hadley: Yes, I'll take that one. So I think we're talking about relatively small movements here, tens of basis points of movement. We were at a 0 to 1 range. We're just really guiding now to the lower end of that range. So it's not a -- I would say it's not a huge shift. Where we draw our guide from, our projection from and our confidence, I guess, is just with our own data. I mean, we -- obviously, we look at a lot of external reports. We have our own national employment report on this sort of stuff. But really, we're looking at the hiring in our own base the patterns that we see. And I think we feel confident that just given the magnitudes involved that, that is the right guide for now. And in terms of revenues and margins, again, not a meaningfully different sort of point from our initial guide, albeit the rounding, obviously has moved to the low end of the range from, call it, the midpoint, which I think in the previous earnings call, I think we did suggest that at that point, the midpoint felt more likely. Now we have moved a number of, call it, tens of basis points more towards the lower end of that range. We also said in the prepared remarks that we're rounding down to 0% at this point, and we expect that likely will continue through the balance of the fiscal year unless things change meaningfully in the macro environment. Jinli Chan: Okay. That's helpful. And then just on margins, I think you guys did around flat margins for the quarter and then you're maintaining the 50 to 70 basis points expansion for the full year. I guess, how are you expecting the rest of the year to shape up in terms of expenses and the margin dynamic there just so we have that model correctly? Peter Hadley: Yes, sure. So we're actually quite happy, not that we're shooting for flat, but we were quite happy with sort of beat our expectations. We alluded to the fact we're expecting some margin decline, mostly due to the fourth quarter of the WorkForce Software acquisition, so the acquisition-related expenses, some integration costs there. So we actually felt -- we actually ended up a little better than what we expected in the first quarter. That certainly helps. That anniversaries -- actually anniversaried about 2 weeks ago. So that -- call it, that drag element is behind us. The rest of the year, we feel pretty good about where the range is. We have a little bit of ramp in the second part of the year, which we are contemplating. And again, some of that is due to some efficiencies that we're driving in the business, some of the effects of some of our GenAI investments. But you should expect us to -- again, when you adjust for the WorkForce Software acquisition in the first quarter to see something similar in terms of the net result in the second quarter and then a little bit of a ramp in the back half of the year. Operator: Our next question comes from Kartik Mehta with Northcoast Research. Kartik Mehta: Yes. Peter, I wanted to start off with you. I think when you originally gave guidance for yet, at least for FY '26, you anticipated that pricing would be about 100 basis point benefit, a little bit lower than what it had been a little bit after COVID, but a little bit higher than pre-COVID. And I'm wondering if your expectations are still the same considering the environment has changed a little bit, at least economic environment. Peter Hadley: Yes, absolutely. No change at all actually in our price expectations. We've not seen anything in the first quarter that makes us feel like that needs to change. We do expect, as you said, Kartik, we're going to come in a little lower than where we were last year on price. Again, our philosophy has not changed in terms of sort of the long-term value proposition prices, a piece of that -- an important piece of that, but not the only piece of it. So -- and in terms of, call it, receptivity in the market and the client base, we feel like our price assumptions are appropriate and not expecting any -- necessarily anything meaningfully more or less than what we communicated last quarter. Kartik Mehta: Perfect. And just a follow-up, Maria. You talked about at Analyst Day, AI rollout, especially for the sales force and how that was helping them become a little bit more productive. And I'm wondering where you are in that rollout, maybe I'm not sure if you can give a percentage of the salespeople that are able to use the AI or what the plans are for kind of full rollout of that program. Maria Black: Yes. Great question. And I love this topic and love speaking about our sales force and our distribution and the investments that we make in them, in their ecosystem and specifically their technology. We talked a lot about at Investor Day, what we call the Zone, which is ADP's tool that we are rolling out across the sellers, leveraging generative AI to make them more productive. And so that's everything we've talked about in terms of sales modernization over the last year or so with respect to call summarization, pre-call planning, coaching, things of that nature. I believe at Investor Day, we cited that it was deployed across, I think, roughly 40% of our sellers. That has increased, Kartik. I don't know that I want to be in a position where every quarter, we're giving you the update, but it's definitely north of that at this time. We actually just had all of our sales leadership together across ADP at a meeting. And I have to tell you, I had a chance to see the preview of what's coming with respect to kind of the next iteration of generative AI inside of these tools, and it is it is unbelievable. Somebody used to do this job or the sales job for a living, although I still do. I have to tell you that this stuff is way ahead of its time. It's ahead of a lot of the tools and technology vendors that we even leverage. We're helping guide their road map, and it is going to be a game changer. And I think the most meaningful thing that I would say is sitting in that room with all of those sales leaders is their willingness to engage in these tools to help change the workflow of how our sellers actually go to market and engage and prospects and close and sell and even pass to implementation. And I think that's exactly the types of responsible leaders that we have that are willing to train these tools and make them useful and have those tools impact their sellers' productivity because that's really the end goal. So I don't want to unveil all those things to you right here on the earnings call. I really look forward to the data we get to show these things to you live, but they're pretty incredible. And as you can tell, I'm always bullish on the investments we're making into our distribution. As you know, it's a big competitive differentiation for us here at ADP. Operator: Our next question comes from Bryan Bergin with Cowen. Jared Levine: This is actually Jared Levine on for Bryan today. To start here on the PEO WSEs, I just want to confirm that actually came in line with your expectations for 1Q. And I guess what drives the confidence that you can accelerate that growth to hit the midpoint of the guide? Peter Hadley: Yes. Jared, it's Peter. I came in, yes, broadly in line with our expectations, maybe 10 basis points or so above actually. So we were happy with where the first quarter came in with respect to WSEs. Our confidence that we do have a little bit of a ramp, but again, not meaningfully different percentages. But if you're talking at 10 or 20 basis points, a little bit of a ramp in the second half of the year, which is really a bookings-driven assumption. We're not anticipating -- in the same way we spoke about with ES, we're not anticipating any ramp through the year in the PEO pays per control metric. So really, it's a bookings-driven assumption, and we are investing in the team, we feel the team is very well placed to deliver on that objective. Jared Levine: Great. And then in terms of the PEO July 1 enrollment period, can you talk about your performance there? Did you witness any change in participation rates, enrollment rates or any kind of buydown behavior? Maria Black: Yes, happy to take that. You're absolutely right. We just finished the enrollment period, proud of how the team executed through the cycle. I think there's no secret out there that health benefits are topical and on employers' minds. So continue to see the value proposition of the PEO and specifically how we structure our PEO win out there in the market and really help employers navigate these changing times. I will tell you, health benefits are and remain the norm for all of the higher wage industries that our PEO targets. Those participation rates that we've seen, they're actually the highest for us that they have been -- the highest levels, if you will, for the last 4 years or so. So we have seen actually a bit of a participation uptick. That's great to see because it does substantiate that we're selling to the right industries and those industries do value benefits as part of their offering to drive their overall employment -- or employer value proposition. So I think our PEO fits squarely into how difficult it is for employers to navigate in that size today out there. Operator: Our next question comes from Ashish Sabadra with RBC Capital Markets. David Paige Papadogonas: This is David Paige on for Ashish. I was wondering if you could just provide a little color on the acquisition that you made in the quarter, why it was needed? And I guess, what are the benefits and maybe financial profile if you had one? Maria Black: Yes. So perhaps I'll start. If my voice here holds up -- I'm so glad you asked. We're really excited. As you know, here at ADP, one of our strategic priorities is to lead with best-in-class HCM technology. And that's exactly what this acquisition brings for us. And so we're focused on bringing the best products and services to our clients. And while we've currently had offerings within this space, this is above and beyond what we've currently been offering, and we're really excited to fold this technology into our existing offer. And I think this acquisition is a great approach of how we're thinking about innovation, how we're thinking about the value proposition to our clients. Companies certainly need innovative compensation management software. That's exactly what this is. And so we're really excited to bring it into our portfolio and into our various platforms for both existing and prospective clients. So again, really excited about it, excited to announce it. And certainly, I'll take the opportunity just to welcome all of the associates of Pequity into ADP. Really excited about the work that we'll do together. And then, Peter, if you want to talk about the financials a bit? Peter Hadley: Yes, absolutely. The -- David, it's a small company today. So the financial profile is not meaningful in the context of ADP for this fiscal year. We're excited, as Maria said, about the opportunities for the product. It's an acquisition, a strategic acquisition. But in terms of the financials, not really noticeable in the context of ADP and has been contemplated in the outlook that we've reaffirmed today. So that's all I would have to say on the financial side of it. Operator: Our next question comes from Daniel Jester with BMO Capital Markets. Daniel Jester: Great. Appreciate all the color on the demand environment so far. Maybe I'll just tackle it from a little bit of a different angle. Anything that you'd call out with regards to the difference between sort of the U.S. and international markets? I know last fiscal year, there's maybe a little bit of choppiness on the international side, but just wondering kind of what you're seeing in that mix. Maria Black: Yes, sure. Thanks, Daniel. And choppy is one word. I think we like lumpy better than choppy, and that's not atypical for international for us. It's generally these are large complex deals. They do have a bit of a lumpy pattern to them. And certainly, while we did see a little bit of a softer quarter with international in the third quarter, we also saw incredible strength in the fourth quarter with international. So international, this quarter, Q1 of fiscal '26 were again a bit softer for us, but that's mainly, again, back to kind of the lumpy nature of it. It's not atypical on the heels of what was an incredible finish. The pipeline is solid. They're executing well, and they continue to remain laser-focused on executing throughout this fiscal year so that they can reaccelerate that growth for the finish. Daniel Jester: Great. And then maybe to go back to an earlier topic of conversation on the Workforce Now Next-Gen. For the 20% of new bookings who choose not to take it, is there any commonalities in terms of why that is or friction that you're seeing? And should the expectation be for that segment of the market at some point this fiscal year that gets to 100%? Or how should we be thinking about that? Maria Black: It is a fantastic question, one that I like to ask myself very often. The real answer is I don't know that we will get to 100% at the end of this fiscal because there are clients in that space. Certainly, the mid-market is a space that does a lot of acquisitions, things of that at nature, adds locations. So clients will always want to ensure they have kind of one offering, if you will. So the bulk of that 20% are clients that are, call it, knockouts in some capacity. The most common knockout is a client that's adding a location or adding a company to their existing portfolio. So that's kind of where it stands. Operator: Our next question comes from Tien-Tsin Huang with JPMorgan. Tien-Tsin Huang: Just a couple of questions. One, on the PEO side, thinking about WSEs and how that's tracking and your benchmarking versus your peers, how would you sort of rate your performance there? I'm curious because we're seeing some pretty wide variance in where that's coming out. So it does feel like ADP is doing well from a share side, but just wanted to get your impressions of that. Maria Black: Yes. So I think overall, we feel really positive about the momentum in our PEO. We did see PEO bookings growth continue through the first quarter. Although, listen, it moderated a little bit based on kind of the finish that PEO had in the fourth quarter. So there was a tiny bit of moderation, but it's still -- the growth continued through the first quarter. We actually were just down all of us last week down meeting with our PEO business and spending time with their leadership and their management. And they're squarely focused both on bookings, they're focused on driving retention, which improved slightly last year, and we continue to see slight improvement. And that is really what is going to drive that WSE growth. I would say in the context of others, I think we're winning. We have a winning hand structurally. We have a winning leadership team, really impressed with how they're aligned toward execution and how focused they are specifically on growth and WSE growth. So I don't know, Peter, if you have any comments with respect to our WSEs and versus the others. But I think, certainly, we feel as though we have a winning hand in the context of the other PEOs. Peter Hadley: Yes. No, I would just say, Tien-Tsin, I think you know this, everyone has a slightly different accounting convention for many of these things in the PEO landscape. So in terms of what we measure and how we measure our business, as Maria said, I think we're really happy. I answered the question earlier. The first quarter was slightly ahead, not meaningfully, but slightly ahead as opposed to the alternative, which is always good. So slightly ahead of our expectations on WSEs. And as we both said, we expect -- we have a winning team there, and we are expecting more booking success through the year that will drive the number up a little bit, but not markedly. We're still squarely in the 2% to 3% range. Tien-Tsin Huang: Okay. Good. No, I'm glad to hear it. Just my quick follow-up. I had to ask it here for you, Maria. It's nice to see you at the Fiserv Customer Conference. They're reporting results right now as well and the stock is down quite a bit because they're going through quite a bit of change, cultural shift. So just the commitment on -- obviously, you being at the event shows the commitment, but could this alter some of the -- maybe the targets that you're expecting from the partnership, given they're going through some restructuring there? And I don't know how much insight you have on that, but I thought I'd ask you on the call. Maria Black: Yes. No, I appreciate the question, and thank you. Listen, it was an honor to be there. I think it's almost exactly 1 month to the day that I was on stage with the CEO of Fiserv. We are very committed to this partnership. We're very committed to the sales collaboration, sitting up on that stage and looking out into a sea of analysts, but also potential clients, partnerships, banks. What I have to tell you is what we are doing with Fiserv and other embedded partners by serving up RUN in the platforms that they live and operate is a game changer. And we see that. By the way, we also see it inside of our own ecosystem of distribution. One of my favorite examples that I heard this quarter was a CPA that we've worked closely with for years in our downmarket, bring us a client of theirs that is currently leveraging Clover, and we have the ability to put, again, ADP inside of that Clover relationship with that client, and it made things much easier for the small business, which is the entire goal but also much easier for the CPA. So we're serving the ecosystem as well. And giving that client and the CPA the ability to kind of see their end-to-end cash flow. And so that's really exciting. I have to tell you the work that we've done from a technical perspective is great, from a sales collaboration is great, from a marketing perspective is great. There's no shortage of commitment to it. That said, though, we did just roll it out across the back book. I mentioned that a bit earlier, I think when perhaps Mark was asking about it. And so the bulk of the opportunity is still in front of us. It's very much early innings for us, but there's no lack of commitment. Operator: Our next question comes from Kevin McVeigh with UBS. Kevin McVeigh: I know you talked about the impact of the 1 processing day. Can you just remind us of what that sensitivity is in terms of what the impact is Q1 to Q2? Peter Hadley: Yes. I don't have the number to hand, Kevin, but it's not a big number. I've got Matt -- I'm just looking at Matt here. It's around $10 million... Matthew Keating: It's a modest impact, Kevin, small number. It's not going to be -- you'll see it a little bit, but not much. Peter Hadley: When I was talking about it earlier, I'm talking about -- in terms of the revenue growth rate, I think the main driver in terms of the second quarter revenue growth rate versus first quarter is the fall off of the acquisition -- the anniversary, I should say, of the acquisition effect. We might be talking 10-ish basis points, something like that for the processing day, but I don't recall the exact number, but it's not a meaningful number. It's just something you may observe in the growth rate cadence from Q1 to Q2. Kevin McVeigh: That's very helpful. And then can you just remind us because it was great to see that the increase in the float on both the client funds and the extended strategy. But obviously, the balances are pretty meaningfully different in terms of the principal rate. Just remind us why -- because both went up about $10 million. Is that just purely the difference in rate or timing? It's just -- it's a pretty interesting phenomenon. Peter Hadley: Yes. So our yield expectations essentially haven't moved. Yes, there's slight moves within the 3.4%, but -- because we did have a marginal adjustment, if you like, to the forward curves back in late July when we produced our initial guidance to when we produced this reaffirmation now, but it's really a balance-driven thing. So we saw, as you'll see, I think, in the reporting we did for the first quarter, we saw very strong balance growth in the first quarter. A lot of that is driven by continued strength in wage growth. We have contemplated both in the client fund interest as well as in the PEO -- excuse me, some moderation to wage growth in the rest of the year, which is why we're guiding to 3% to 4% as opposed to the 7% that we delivered in the first quarter. But the $10 million is really coming from the balances from the denominator, not so much from the movement in yields. Operator: Our next question comes from Dan Dolev with Mizuho. Dan Dolev: Sorry, and I was on a different call, so apologies if the question was asked. Like can you maybe touch again on that pays per control, lower pays per control, that would be helpful. We're getting a lot of questions about it. And apologies if that was addressed. Peter Hadley: That's okay. Dan, I'll take that. Again, we've -- you could say we've narrowed our range to the low end of the range. So again, we're talking about probably tens of basis points of movement in our projection on the full year, not meaningful amounts of revenue, not meaningful amounts of margin. It's there, but it's not particularly meaningful. Really, it's just come from the data we see in our own client base in terms of hiring levels. I should add to that in the context, we're also seeing very low levels of layoffs in the base. So it's a very static situation. It felt like a move to the lower end of the range we previously quoted is appropriate just given where the macro is, if that were to change. Obviously, our assumptions may evolve through the fiscal year. But right now, I don't think it's a big surprise that hiring is tight. And as such, we've just narrowed our expectation within the range that we previously guided towards the low end. Dan Dolev: Got it. And hopefully, I'm not redundant again because I should be on the entire call. But on these recent announcements, whether it's Amazon or whatever, is that changing the calculus or it's already included in your expectations? Peter Hadley: Not really. I mean these things -- they make news, obviously, they're headline worthy, but we have a very large base, 1.1 million clients and 26 million workers paid in the U.S. We pay Amazon, in fact, and that's a small fraction of -- a very small fraction of the number of workers we pay for Amazon. So these things are contemplated in our guidance. Again, what we're seeing in the wider macro data is certainly reduced hiring levels, but also, as I said a moment ago, very much reduced layoff levels to sort of lows we haven't seen in a number of years. So the whole hiring situation is relatively static and we believe contemplated in our guidance. Operator: Our next question comes from James Faucette with Morgan Stanley. Michael Infante: It's Mike Infante on for James. Maria, it'd be great to get your perspective on the stablecoin topic potentially being used as a mechanism to pay employees. We can obviously sort of debate the magnitude of adoption, but how do you think about your intention to support that as a rail? And how do you think about some of the regulatory compliance or tax constraints that would have to be cleared in the interim? Maria Black: Yes, it's a great question. We think about it a lot. We think about it from exactly what you're suggesting, which is from a regulatory perspective. So I think that's the big piece that we are keeping a keen eye on is with respect to the regulatory environment. And ultimately, once that clears, how ultimately we will be able to support our clients as they navigate that as an offer in terms of a payment should that happen. So I think those are the questions that we are keeping a keen eye on, both in Washington as well as kind of through the banking environment. But certainly, as it relates to the banking side from our end in terms of real time and rails, we are preparing ourselves for all possibilities as these things evolve. And from a strategic perspective, that's an imperative for us to always make sure that we are in a position to support how client employees want to get paid. And certainly, if things evolve, we'll be at the ready to do it. Operator: We have time for one more question. And that question comes from Zachary Gunn with FT Partners. Zachary Gunn: I just want to go back to last quarter, there's some commentary around the full year guide assuming a continued moderation in the macro. And I recognize just tightening the range on pays per control, more rounding on basis points. But I just wanted to see if that -- if the guide still has some level of moderation baked in or if we've seen the macro move towards those expectations? Peter Hadley: I think -- I mean, I think we have seen a little bit of that. The main metric I'm talking about is pays per control. So again, we said we expected to -- well, sorry, we rounded down to 0% in the first quarter, which was a little below our expectations. So I think we have seen some of that flow through. But again, I would say, consistent with what I've been answering some of the earlier questions, I don't think these are material moves away from where we originally envisage things. You can obviously see that our guide has been reaffirmed. And hopefully, you can tell that we feel confident about our ability to deliver on that guide, particularly when it comes to revenues impacted by things like pays per control. We have our float income going a little bit in the opposite direction. So I think we have the macro contemplated. Of course, things can change outside of our control that maybe none of us are aware of yet, but that's not our base case assumption. I think our base case assumption really is very similar to what we said 3 months ago. We're just sort of refining at the margins a little bit, some of the metrics like client fund interest and like pays per control, call it, either within or very close to edges of the ranges we previously shared. Operator: I'd now like to turn the call back over to Maria Black for any closing remarks. Maria Black: Thanks, Michelle, and thank you to everyone this morning for your interest. I have to say the last few weeks have been a time that I've been thinking deeply about all of our stakeholders, all of our investors, our analysts, the community, our associates. And I've been thinking a lot about who ADP is in our fabric and at our core. And I want to take a minute to really thank our associates for their undying commitment to our clients. It's really incredible to watch our values-driven culture come to life. One of those values-driven culture attributes is, as a company, we provide insightful expertise. So it's with that, I want to take a minute to genuinely thank and acknowledge ADP Research and the team over there who has been tirelessly and diligently innovating and executing over the past several weeks to bring to life a weekly estimate of the ADP employment, National Employment Report, known as the NER Pulse that was made available to all of our stakeholders at the same time yesterday. So this weekly measure is going to bring to life really the mission that they've had at ADP Research all along, which is about making the future work more productive through data-driven discovery. I have to say that we really mean it when we say that we're always designing for people here at ADP. It's in the fabric of who we are, and I'm incredibly proud to be ADP Red. Operator: Thank you for your participation. This does conclude the program. You may now disconnect. Everyone, have a great day.
Operator: Good day, and welcome to the MSA Safety Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Larry De Maria. Please go ahead. Lawrence De Maria: Thank you. Good morning, and welcome to MSA Safety's Third Quarter 2025 Earnings Conference Call. This is Larry De Maria, Executive Director of Investor Relations. I'm joined by Steve Blanco, President and CEO; Julie Beck, Senior Vice President and CFO; and Stephanie Sciullo, President of our Americas segment. During today's call, we'll discuss MSA's third quarter financial results and provide an update on our full year 2025 outlook. Before we begin, I'd like to remind everyone that the matters discussed during this call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, all projections and anticipated levels of future performance. Forward-looking statements involve a number of risks, uncertainties and other factors that may cause our actual results to differ materially from those discussed today. These risks, uncertainties and other factors are detailed in our SEC filings. MSA Safety undertakes no duty to publicly update any forward-looking statements made on this call, except as required by law. We've included certain non-GAAP financial measures as part of our discussion this morning. The non-GAAP reconciliations are available in the appendix of today's presentation. The presentation and press release are available on our Investor Relations website at investors.msasafety.com. Moving on to today's agenda. Steve will first provide an update on the business. Julie will then review our third quarter financial performance and 2025 outlook. Steve will then provide closing remarks and open the call for your questions. With that, I'll turn the call over to Steve Blanco. Steve? Steven Blanco: Thanks, Larry, and good morning, everyone. Thank you for your continued interest in MSA Safety. Before we start, first, I'd like to welcome Julie Beck to MSA. Julie brings extensive experience across all aspects of finance from her previous public and private company experiences. Her leadership and financial acumen will be a tremendous asset to our team, and I'm excited to partner with her in the next chapter of serving our mission of safety for our customers. I also want to extend my heartfelt thanks to Elyse Brody for her outstanding leadership and dedication while serving as interim CFO. Elyse stepped into the role with grace and professionalism and her contributions during this transition have been invaluable. So on behalf of the Board and the executive team, we're deeply grateful for her continued commitment and support. Please join me in welcoming Julie and thanking Elyse for her exceptional work. Now let's move on to our review of the third quarter. I'm on Slide 4. In the third quarter, consolidated reported sales growth was 8% with 3% organic and adjusted earnings per share were $1.94. Our team continued to perform well, delivering a solid quarter despite encountering stronger-than-expected near-term headwinds in the fire service. This was based on sustained strength in detection, along with healthy expansion of industrial PPE driven by fall protection. A decline in the fire service partially offset growth. The M&C TechGroup acquisition contributed $15 million for the quarter. We're pleased with M&C's performance thus far and its integration into the MSA business. Looking at sales by product categories, Detection's 6% organic growth was driven by strength in both fixed and portable instruments. More than half of absolute growth in portables came from connected devices. Organic sales in fire service declined 3% year-over-year. In the U.S., the market dynamics surrounding AFG funding and NFPA standard change had a moderate impact on the quarter, while international markets were mixed. Organic sales of industrial PPE increased 7% with growth across all main categories. Fall protection continued its recent strength with double-digit organic growth. Moving to orders. Order pace across our product categories was encouraging, albeit mixed. Detection orders were up double digits and industrial PPE orders increased mid-single digits. A double-digit decline in fire service orders was principally due to the near-term market dynamics in the Americas as well as the U.S. Air Force comp. I'll address these in more detail in a few minutes. Sequentially, the backlog declined in the third quarter due entirely to timing in the fire service. Overall, backlog remains within normalized levels. Moving forward, we expect to see a near-term negative impact from the fire service order pace in the Americas following the U.S. government shutdown. Our overall book-to-bill was slightly below 1. Turning to Slide 5. I want to provide some notable progress we've made across the pillars of the ACCELERATE Strategy in the third quarter before providing an update on the current dynamics surrounding the fire service. First, we continue to strengthen our leadership in industrial safety technology through customer-driven new product development and continued momentum in these key growth accelerators. I'm pleased to note that we recently introduced the ALTAIR io 6 multi-gas connected portable device and the new H2 V-Gard safety helmet at this year's National Safety Congress. The io 6 is the latest example and addition to the MSA+ platform and is designed for confined space monitoring and sampling solutions. While we do not expect it to provide a significant near-term lift in revenue, we see it as a valuable product that will contribute to the long-term build-out of our connected ecosystem in portable gas detection. The H2 helmet is a Full Brim type 2 helmet that joins our extensive market-leading lineup of industrial safety helmets. And from a growth perspective, we continue to experience the benefits of our investments in our needed now inventory within fall protection, leading to excellent performance in this strategic growth accelerator for the second straight quarter. Centered on customer experience, the organization has been able to decrease lead times and secure new business with better availability. Year-to-date, sales in fall protection are up double digits organically. Second, on the operational and commercial side, we continue to execute our tariff mitigation programs in the third quarter. As a reminder, we are targeting price/cost neutrality in the first half of 2026. We also had another strong quarter for MSA+. I'm pleased to note that not only did we win a sizable competitive tender, but another large customer served as a reference, further emphasizing our solutions benefits and why we remain optimistic about this new customer adoption. Finally, our M&A pipeline remains active, and our strong balance sheet positions us well for growth-oriented deployment and cash returns to shareholders as part of our disciplined capital allocation strategy. Turning to Slide 6. I'd like to take a moment to provide some insights into the current conditions affecting the fire service market in the Americas, including the timing of AFG funding here in the U.S., our largest market for this product category. As we approach year-end, there are 2 dynamics for consideration in this market: the NFPA certification process, which usually occurs every 5 or so years and the annual release of federal assistance to firefighter grants, or AFG, which is typically released in the summer months through September. As we've mentioned, NFPA standard years often see increased short-term volatility as customers decide when to renew their fleets. Nothing has changed here, and we still expect to see approval sometime by early 2026, if not sooner. What is different this year is the timing of the funds release from the AFG program. This program, as always, has been fully funded, but award notifications were issued historically late this year coming at the very end of September. Then the U.S. government shutdown has slowed funding for the awarded departments, creating additional layers of complexity. This had a moderate effect on our revenue in the third quarter. The larger impact is on order timing in the fire service. The delays in receiving the orders will shift some revenue into 2026. Again, our pipeline remains strong. It's a matter of timing. We successfully navigated the approval processes before and seen similar market conditions, and we're fully prepared to serve our customers in the fire service and to deliver the products and solutions they need to keep themselves and our communities safe. With that, it's now my pleasure to turn the call over to Julie to discuss our financial performance in the third quarter. Julie? Julie Beck: Thank you, Steve, and good morning, everyone. We appreciate you joining the call. Thank you for those kind words, Steve, and thank you to the entire MSA team for doing such a great job in my orientation to MSA. This is a wonderful opportunity to work with a company that offers innovative products and solutions, great people with a continuous improvement mindset and a strong balance sheet, providing the optionality to create shareholder value. I am truly grateful for the chance to join MSA and support the mission of safety, which has been a central theme in my career. Anyone who knows me understands I am passionate about what I do, and MSA is a perfect fit for me with a fantastic culture. I see tremendous opportunity to work with the team here, continue MSA's journey and make a meaningful contribution. I have been so impressed with the commitment that everyone here displays for the work they do and the mission we serve. I look forward to meeting all of you over time. With that, let's start on Slide 7 with the quarterly financial highlights. Third quarter sales were $468 million, an increase of 8% on a reported basis or 3% organic over the prior year. M&C added 4% to overall growth and currency translation was a 1% tailwind based on the strengthening euro. As expected, GAAP gross margins continue to face pressure this quarter, declining to 46.5%, down 140 basis points from last year. Gross margins reflect inflation, tariff and transactional FX increases, partly offset by price increases and productivity gains. We are beginning to see the tariff impact become more noticeable in the second half, aligning with our mitigating pricing strategies, and our aim remains to balance this by the first half of 2026. GAAP operating margin was 20.1%, with an adjusted operating margin of 22.1%, which was down 50 basis points from a year ago due to the contraction in gross margins, partially offset by effective SG&A management and variable compensation adjustments. However, our adjusted operating margins increased 70 basis points from the second quarter. We are diligently focused on SG&A productivity, pricing and tariff mitigation plans to counter headwinds. Quarterly GAAP net income totaled $70 million or $1.77 per diluted share. On an adjusted basis, diluted earnings per share were $1.94, up 6% from last year. Now I'd like to review our segment performance. In our Americas segment, sales increased 5% year-over-year on a reported basis or 3% organic as high single-digit organic growth in Detection and low single-digit growth in Industrial PPE was partially offset by a low single-digit contraction in fire service. Currency translation was less than 1% tailwind in the quarter. Adjusted operating margin was 28.3%, down 240 basis points year-over-year. Margin contraction was mainly due to inflation, tariffs and FX, partially offset by price and effective SG&A management and variable compensation adjustments. In our International segment, sales increased by 16% year-over-year on a reported basis with a 7% contribution from M&C, a 5% increase on an organic basis and a tailwind from FX. Double-digit organic growth in Industrial PPE and mid-single-digit growth in Detection was partially offset by a low single-digit contraction in fire service. Adjusted operating margin was 16%, 240 basis points above last year, driven by higher volume, effective SG&A management and the impact of M&C. Now turning to Slide 8. We delivered robust free cash flow of $100 million or 144% of earnings. Quarterly operating cash flow was up 33% from a year ago. As expected, CapEx returned to our normal range following the increase in the second quarter. Year-to-date, free cash flow was $189 million, up $41 million from last year, representing 99% conversion. As for capital allocation actions taken in the quarter, we returned $21 million to shareholders through dividends and invested $12 million in CapEx. Our year-to-date share buybacks offset dilution for the full year. We have $130 million remaining on the current authorization, and we expect to repurchase shares in the fourth quarter following the strong free cash flow generation we have delivered so far this year. We also repaid $50 million of debt in the quarter as net debt was $459 million compared to $532 million in the second quarter. We ended the quarter with net leverage of 1x, and our weighted average interest rate was 4.1%. As Steve mentioned earlier, our balance sheet and ample liquidity of $1.1 billion continue to position us well to invest in our business, and we maintain an active M&A pipeline. Let's turn to our 2025 outlook on Slide 9. We maintain our low single-digit full year organic growth outlook. Overall, our business remains healthy. Certainly, the fourth quarter is impacted by timing in the fire service and the U.S. government shutdown, but the fundamentals there are healthy as we work through current events. The timing of AFG funds being released and approval of the next NFPA standard remain key variables for the balance of the year that are beyond our control. We believe that the AFG timing delay and the ongoing U.S. government shutdown will impact a portion of our fourth quarter sales. However, we expect continued momentum in fall protection and detection as key performance tailwinds. Given some of the moving pieces out there, I'd like to help your modeling a little bit. We have delivered 4% reported growth, including 2% organic growth year-to-date through September and remain on track to be within our low single-digit organic outlook. However, the later-than-normal AFG grant awards and subsequent U.S. government shutdown will impact us in the fourth quarter. While this is dynamic, we now anticipate that the shutdown will take roughly 1% of growth off the full year organic pace we were on, mostly in fire service. In the event of a prolonged government shutdown, we could see additional sales shift from the fourth quarter to 2026. Again, this is simply a timing issue, and we remain confident in our fire service business. In addition to our low single-digit organic growth outlook, we continue to expect M&C to add approximately 2 points to full year revenue growth and FX to be about 1% positive. Our below-the-line items are unchanged from our previous outlook. In conclusion, we remain confident in our business and our ability to navigate macro uncertainty and timing challenges. Our resiliency is truly a strength. With that, I'll now turn the call back to Steve. Steven Blanco: Thank you, Julie. I'm on Slide 10. To close, I'm proud of our team's execution and thank all of our associates for their continued commitment to serving our mission of safety in the third quarter. I remain encouraged that we will continue to deliver strong shareholder value as we execute our Accelerate strategy to drive long-term profitable growth. With that, I'll turn the call back to the operator for Q&A. Operator: [Operator Instructions] Our first question is from Rob Mason with Baird. Robert Mason: Hi Julie, thanks for the additional color around thinking about the fourth quarter. I was trying to do some quick math here. But if I think I interpreted your comments correctly, it sounds like we probably won't see much of the normal seasonal uplift in the fourth quarter. I assume that's all just due to the fire service. Is my math correct? Julie Beck: Correct. That's correct. That's correct. We're relatively consistent between Q3 and Q4, maybe a slight uptick. Robert Mason: Yes. And then, Steve, how should -- so we've tracked the awards coming at the very end of September. Does that -- but the dollars are slower to follow behind that, I guess. Does that preclude your customers from placing orders? Do they wait until they have the dollars in hand? Just -- I'm just curious maybe to parse the timing a little further. Steven Blanco: Yes, Rob. I mean, typically, when FEMA releases these funds, they have up to a year to actually go spend the money. But what usually happens is a pretty large contingent of the fire departments act pretty quickly when they get the funds, when they get the awards. And so they have to -- they go through a process, certainly, and we can walk through that. But they go through the process and then they action that. But with the government shutdown, there's a step they have to take where they have to go in and basically, I guess, you could say, accept the award from the government. So that's a little slower. And plus, I mean, historically, we've always had the funding sooner than this. This was just at the very end of September right before the shutdown. So that really -- usually, what you'd see is you'd see a buildup in incoming, as you know, of the order pace in late Q3 and certainly into early Q4, which was delayed a little bit. Robert Mason: Yes. Okay. And maybe just last question, I'll get back in the queue. Julie, again, nice work and team on the operating expense controls in the quarter. There was the mention around maybe some variable comp adjustments. The thought was maybe we're tracking to $108 million per quarter type SG&A number. It was below that, obviously, in the third. But is that more of a normalized rate? Or have you made some adjustments to that? Julie Beck: Yes. We would expect that our fourth quarter SG&A would return to more normal levels. Operator: The next question is from Ross Sparenblek with William Blair. Ross Sparenblek: Maybe just touching on margins here. FX has recently flipped to a tailwind as you guys called out. Can you maybe just remind us of the cross currents with that transactional risk and then also maybe some of the other moving parts? Julie Beck: Yes. So we had some transactional FX that was negative in the quarter. But really, we've seen some overall inflation in the supply chain as well as we saw a much higher tariff impact in Q3 as the tariffs are hitting the income statement now in Q3. I would say that our costs are up primarily in inflation and tariffs and just a slight bit more in transactional FX. Ross Sparenblek: Okay. And then just on that inflation, I mean, anything specific to call out like steel or... Julie Beck: I would say that when you look at general inflation, you see that overall in the supply chain, wage inflation through the various tiers of the supply chain are causing general inflation to go up. We'd also see some inflation in electronic components. We'd see inflation in metallics and some of those things that are impacting our costs. Operator: The next question is from Saree Boroditsky with Jefferies. Jae Hyun Ko: This is James on for Saree. Kind of going back to fire service here. You noted that pipeline remains strong here. So I believe there are a lot of pent-up demand here. It's just like near-term uncertainties kind of impacting kind of conversion here. So how should we think about like fire service kind of going into 2026 once all this kind of near-term headwind kind of clears out? Steven Blanco: Yes. Thanks for the question. So if you look at it first on the short-term basis, we typically have a really strong end of the year because of the assistance for firefighter grant releases that we talked about earlier. So that typically rolls into fire departments placing orders. And certainly, we want to get the equipment to them so they can do their jobs. So that makes the end of the year typically pretty strong. The nuance here, as we already talked, is that's pushed a little bit, at least for some of it depending on the timing. As you get into '26, I would say you're probably going to have -- excluding when the firefighter grant awards occur, we should have a consistent year with what we'd expect this year to be on -- as far as the demand cycle. Globally, there's some nice things going on in certain regions like we had some international pressure based on some delays in Asia, specifically Mainland China that I think get fixed maybe a little bit in 2026. Certainly, we expect that. North America and our big market, we would expect to be fairly consistent year-over-year. I think what you'll start seeing as we get into the out years, you'll start to see some pace actually, we're really optimistic of the fire service. You get '27, '28, '29, it's going to be -- should be a really good business. Next year should be solid. But beyond that, I think it should be a really good business. Jae Hyun Ko: Got it. Great color. And as a follow-up, I think you guys are still expecting kind of the early 2026 for NFPA approval timing. But are there any risk that this could be further delayed? Or is that pretty -- what is it constant like kind of time line? Steven Blanco: Yes. Our expect -- again, this is a government agency. We don't control when they decide to pull the trigger here. But we certainly have gotten a lot of feedback from the market and others that they expect to really come through with the approval early next year at the latest. It might be yet this year. I think they're lining those things up. And as we've talked before, we've gone through all the process. We're ready -- we certainly know our product is ready. We don't know what the competitive landscape is. But I think there's a relatively high confidence that, that should be taken care of and the approval issued no later than early '26. Again, we don't have control over that, but that's our expectation. Operator: The next question is from Mike Shlisky with D.A. Davidson. Linda Umwali: This is Linda Umwali on for Mike Shlisky. I'll start with this. Should we be concerned about the federal government shutdown? And I know Julie touched on that more broadly affecting your military business or the federal government -- other federal department. Will any of the demand that may be held up by the shutdown eventually be made up once it is all over? And if you could quantify that for us, that would be great. Steven Blanco: We do have some additional impact outside of the fire service, not as meaningful, but some from a detection perspective where we see some delays occurring. I wouldn't say it's something that we're overly concerned, assuming this thing gets settled at sometime in the next few weeks. It's not -- for us, we're managing it. We would expect that then to come through after the fact. But again, from a quantification, it's just a much smaller scale, certainly impactful to the business in the U.S. to some degree, but not significant other than the fire service. So in most of the demand we have, I think we're okay when we come -- when we think about the defense side or government spending. Julie Beck: And just to clarify, we are forecasting that we will have growth -- sales growth in the fourth quarter, and we're forecasting that we will have a slight margin uptick in the fourth quarter as well as sales are up for the whole fiscal year, just to clarify that. Linda Umwali: And then I was wondering if you guys could update us on the MSA+ subscriptions. Has that ramped up through 2025? Steven Blanco: Another strong quarter for MSA+. It continues to be performing very well in the market. We had a few signature wins, which we didn't ship a couple of them in the third quarter, but they came in. Very pleased with that. As we noted, I noted in the prepared remarks, over half of the growth in portable instruments are from MSA+. So it's performing right where we hoped it would. It continues to do really well. I think what's really for us, exciting and really cool is the fact that we have this full portfolio, we have this diversity of capability for the customer. It actually has allowed us and enabled the customer to choose these different options, which then has allowed us to grow share in detection, in the portable gas detection space, not just with the MSA+ connected solution, but with our continued best-in-market traditional solution. So I think that total suite of solutions, the customer gets to see it all from us, and we want them to pick the best solution for their needs, and it's really played out well in both cases. Linda Umwali: Got it. Nice. And then, yes, I wanted to click back on the fire service business. So the Americas portion was -- the organic growth was negative, but the international fire was also negative and the international business did not have a similar NFPA and shutdown issues. Can you provide more commentary on what's happening there? And could it stay negative in the fourth quarter after last year's, I think, double-digit gain? Steven Blanco: So when you think of the international fire service, there's a couple of dynamics that we're playing out -- or we're seeing play out. One is in Asia Pacific, we have seen some delays in order timing especially in Mainland China, they're doing some activities -- have delayed some activity. We expect that to come in probably later in this quarter as well as into 2026. So order pace should improve there, and we expect those orders to start flowing in. And then in Europe, there has been some funding shift from fire to defense for some European countries. Again, really, we see some of that on the larger tenders. So you might see 10-ish percent, 15% fewer units. The interesting thing is it's because they're trying to add investment and funding for defense. So what that means for us is inside the industrial business, if you think of the protective ballistic helmet business, in Europe, that has been very strong, and we're seeing the benefits of that. And a little bit of softness on the international for fire service that the team is going to work through. And that's really the -- I'd say you put those 2 together, that's what you saw in international in Q3. I think Q4, you'll see a little bit, I think, some uptick in international as some of those orders come in we just talked about. And then '26, we're pretty optimistic with. Linda Umwali: That's great. And then one last one. So one area of the 3Q results that were a little surprising was that you did not have many restructuring costs, which were close to 0 after being like $1 million or $2 million a quarter on average for quite some time. Do you have any major restructuring plans for the next few quarters that we should include in our model going forward? Julie Beck: No, thanks for your question. No, we don't have any major restructurings to include in the model. Operator: The next question is from Jeff Van Sinderen with B. Riley. Richard Magnusen: This is Richard Magnusen in for Jeff Van Sinderen. My question goes back regarding the ALTAIR, the detection io 6 that you introduced recently. So the io 6 and io 4 detectors, they address different needs. Are there any other detector applications situations that you're working on where you can give us more detail where you see this MSA+ family going? And maybe can you elaborate on expanding software applications and even how to accelerate subscription revenue growth? Steven Blanco: So thanks for the question. So if I think of io 6, certainly, it will provide nice long-term coverage. It's really a great solution for confined space and the sampling, applications our customers have. Your comment about innovation, absolutely, we continue to innovate in this space. And I think the team is doing a nice job really looking at how we continue to expand capabilities. Nothing to speak of today that we would share publicly on what the next one or when that might be. But the connected solutions we have in portables, we feel really good about, and we think the io 6 will build upon that. When you think of it outside of that space, we have other solutions that allow us to have this expansion in the recurring revenue model. And I think the team is doing a nice job really trying to match the customer with where they're at and their buying behaviors. So that's a focus the team has. And as we talked with our ACCELERATE Strategy, it's a focus that we continue to lean in on. And I think what I like and what we've talked about is we mentioned this during the Investor Day when we launched the ACCELERATE Strategy, but we said, hey, the key categories here where we know we can compete and win very effectively and have the right to really compete is detection, fall protection and certainly, we're going to get through the hump on fire service. That's the communication we had. And you look at the performance the team has delivered, and it's matched that up exactly, right? We've continued to grow the detection business. We're doing that through share growth and addressing some growth in TAM and then fall protection has been a nice tailwind as well, and we expect that both of those to continue. Operator: The next question is from Brian Brophy with Stifel. Brian Brophy: Curious the latest you're seeing on some of your short-cycle businesses, hard hats, anything else to comment on? Curious what you're seeing from that perspective. Steven Blanco: Yes. Thanks for the question, Brian. PPE was strong for the quarter, specifically because of the fall protection I just mentioned, but we're also seeing some growth in the protective ballistic helmets we talked about. The markets are still mixed. Head protection in some areas, pretty solid. Other areas, it's just kind of choppy. It's really been a similar story throughout the year, Brian. We haven't seen that change a heck of a lot yet. It's not down significantly. It's not up significantly. It's just from quarter-to-quarter, we're just seeing it kind of continue on as the employment has been fairly stable overall. And it's market specific. So if you think of the markets we participate in, some markets such as manufacturing, nonresidential construction, a little softer and have been. Energy is okay. It depends on which piece of energy. If you look at downstream, midstream, pretty solid, and we compete pretty well. And then the upstream side, softer, and we don't expect that to change too much. I think the nice thing as we look forward, there's some sentiment that seems to be improving in this regard, and the channel seems to be sharing that as well. So we'll see how that plays out. But it's a continuation of what we've seen really throughout 2025. Brian Brophy: Understood. That's helpful. And then maybe just a little bit more color on how the M&C integration is going and maybe some of your latest thoughts on potentially moving some of that product through your U.S. distribution and when we might start to see some benefits there from some cross-sell activity? Steven Blanco: Yes. So the M&C business, we're really pleased with. They've done a nice job. I think the whole team, it's been a great fit and really pleased with how our team and their team have embraced each other to work together. They're laser-focused on integrating this and looking at opportunities for growth. And we had a nice cross-functional discussion with the team here in the U.S. in the third quarter, and they've identified some really nice growth areas. The third quarter was pretty nice here. U.S., we've unlocked some nice opportunities that the team thinks long term, we can do really well with. I think that's going to be a great business that we'll see continued tailwinds going into the long-term future. Europe, also strong, typically Germany. But as far as growth, I think the Americas is really going to shine there. Brian Brophy: Okay. That's helpful. And then I guess last one for me. Leverage down about 1x, obviously below your long-term target. You talked about some buybacks in the fourth quarter. But just curious how you're -- what you're seeing from an M&A pipeline perspective? Has there been any notable change there? And just kind of curious how active you guys have been there generally. Steven Blanco: Yes. I think we're very -- we remain very active. I would say the pipeline is solid. We were pleased to action M&C in May, and our intent is to continue to look at deals, which we have and continue to evaluate those deals to make sure they're the right fit for MSA and for our strategy. And we've got a great pipeline to do that with. So you talked about the leverage. We gave you kind of as part of the ACCELERATE Strategy, where we think the sweet spot is. So it should give you some idea of what we think we can continue to do, and we expect to continue to move forward with that. Again, timing is -- you got to have the right fit where the seller has the right idea of price that the buyer has and sometimes those don't fit. But if they do, we certainly want to continue to action those. And the pipeline says we can do that. Operator: The next question is a follow-up from Ross Sparenblek with William Blair. Ross Sparenblek: Just back to the price dynamic, can you maybe give us a sense of where the year-to-date price sits across the 3 segments? I mean, has it been broad-based? Or is it more selective? Steven Blanco: Yes. We'll hit this 2 ways. I'll talk about kind of strategically where we're at and then maybe Julie can give some color on the specifics in the pricing side. We really look at the price side. I think, Ross, we did one targeted price increase in the first half of the year in the U.S. and the Americas. We did another one in Asia in the summer and a little bit more broad-based in October based on the sustained visibility to the tariff regime and some of the inflationary environment that Julie talked about. So that's really where we're at. So some of those, you've got to get some flow-through certainly from those tariffs and what's in the inventory and how that processes through and the order book that we have. And then next year, we would expect to get back on the normal cycle where we'd have our January 1 price increase, and we'll manage that. The team also continues to work on efficiencies. I think the nice thing is you saw some of those come through. We did quarter-to-quarter. And sequentially, even with the heavier pressure we had on cost, the team managed that pretty well. And I think we've got a laser focus on how we do that going forward. But maybe, Julie, you can quantify that more. Julie Beck: Yes. I think when you think about our organic growth in the third quarter, it was primarily price. So we're seeing that price hit. We had margin improvement sequentially from Q2 to Q3, and we would expect to have a slight sequential improvement from Q3 to Q4 as well in margins. So -- and part of that will be pricing activities, of course. And so I hope that helps. Ross Sparenblek: That's very helpful. And then just quickly on the fire side, I mean, 1% in the fourth quarter from the U.S. shutdowns the AFG and NFPA slippage into '26 potentially. I mean, can you just give us a sense of what that pipeline looks like relative to the backlog? I mean are we talking a couple of points of growth? Or is it several points of growth going into 2026 when everything straightens out? Julie Beck: Well, it's difficult to say whether it's going to be -- whether some of this stuff will come through in Q4 or Q1 or Q2 of next year into 2026. But we believe that demand is strong and believe in the business going forward. But it's difficult to tell. That's why we gave a range that it may -- the fourth quarter would be impacted, and we would expect that to come back in 2026. Steven Blanco: Ross, if you think about it, that point that Julie referenced, you certainly would -- we see enough pressure there that we think that's a fourth quarter challenge that will push into Q1, Q2, Q3. Now again, you can't -- it all is predicated on when the fire departments, especially with this NFPA standards change, they might -- that might change their thought process of when they want to buy. But it will be sometime in 2026 for that specific point. It's just a matter you can't really lock it down one quarter to the next. Ross Sparenblek: Well, I think -- I mean, instead of just looking at the organic decline this year and taking out some of the large orders for the comps, there's probably some other pent-up demand that's in that pipeline that's just kind of hard to visualize right now. Do you think that's fair? Steven Blanco: Yes. I think the Air Force comp was tough. I think I would look at the demand if I looked at it the way you could think about this is '26 demand-wise is probably going to be similar to a normal year '24, '25 demand, excluding [indiscernible] AFG grant thing. That's how I kind of look at it. You get past '26, you probably are going to start to see a bit different quantified demand curve start to tick up, I would anticipate in the latter half of the decade. But '26 is going to be probably pretty solid and consistent with what we would expect in the '24, '25 demand outside of, as you noted, those extremely large orders. Ross Sparenblek: Yes. That's extremely helpful. And then just one last one on the detection side. Could you help us quantify the split of growth between the fixed and portable? Steven Blanco: Fixed was double digit. Portable was single digit. And again, portable, great strength as we've talked just before the question before is really good growth in the connected space. The fixed business has been really solid. I think what we look at and what we try to come back to on the fixed business, it's another example of the diversity we have. We really like when we get some nice capital investment in some big projects. But even when you don't on that fixed business, you've got this continuation and that's what we're seeing. You see this day-to-day business continue on because we have such a strong, large installed base. So when a customer expands their site and they don't necessarily have a large project spend, we're still seeing the benefit of that. And the fixed is playing out that way. It's a great diverse business that continues to perform very well. Ross Sparenblek: Okay. I mean almost in the sense that fixed has kind of stepped up and structurally higher now. Is that fair or is it just kind of a lumpy project activity? Steven Blanco: I think fixed is -- if you think -- it's certainly the project business is going to be a bit lumpy. And I'll tell you, right now, project business, capital investment-wise, the world is an interesting place. The Middle East is still pretty heavy on some project business, but it's super competitive. In the U.S., the U.S. should be -- we see a lot of things coming into the future on this that I think is going to be good. The rest of the world is a little more challenged. But when you look at the fixed business, it's similar to what we said during the strategy cycle. I think the business is going to be solid. It's going to continue to grow, and we diversified it. You've got the SMC acquisition. You've got the Bacharach acquisition, along with our solutions that are good for mainstream energy as well as clean energy. So I think it's really good. Now add to that, M&C. So it should be a good space. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Larry De Maria for any closing remarks. Lawrence De Maria: Okay. Thank you. We appreciate you joining the call this morning and for your continued interest in MSA Safety. If you missed a portion of today's call, an audio replay will be made available later today on our Investor Relations website and will be available for the next 90 days. We look forward to updating you on our continued progress again next quarter. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, everyone, and welcome to the Littelfuse Third Quarter 2025 Earnings Conference Call. Today's call is being recorded. At this time, I will turn the call over to the Head of Investor Relations, David Kelly. Please proceed. David Kelley: Good morning, and welcome to the Littelfuse Third Quarter 2025 Earnings Conference Call. With me today are Greg Henderson, President and CEO; and Abhi Khandelwal, Executive Vice President and CFO. This morning, we reported results for our third quarter, and a copy of our earnings release and slide presentation is available on the Investor Relations section of our website. A webcast of today's conference call will also be available on our website. Please advance to Slide 2 for our disclaimers. Our discussions today will include forward-looking statements. These forward-looking statements may involve significant risks and uncertainties. Please review today's press release and our Forms 10-K and 10-Q for more detail about important risks that could cause actual results to differ materially from our expectations. We assume no obligation to update any of this forward-looking information. Also, our remarks today refer to non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided on our earnings release available on the Investor Relations section of our website. I will now turn the call over to Greg. Gregory Henderson: Thank you, David, and thank you to everyone joining us today. I wanted to start this morning with highlights on our third quarter and then provide an update on the progress we're making on our strategic priorities. As part of that progress, we're excited to announce the acquisition of Basler Electric. I will speak more about the acquisition and how it fits into our long-term strategy in a few moments, but we look forward to welcoming the Basler team in Littelfuse. Turning to our third quarter. We delivered revenue growth of 10% relative to the prior year, driven by strong Electronics segment growth. We delivered Industrial segment growth despite mixed underlying market demand. Finally, our Transportation segment navigated well through a softer commercial vehicle market in the third quarter. Overall, our third quarter earnings results exceeded the high end of our guidance range, reflecting our team's commitment to operational execution. Looking forward, we expect solid fourth quarter revenue and earnings growth versus the prior year, supported by our third quarter bookings, which were up more than 20% versus the third quarter of 2024. Abhi will discuss specific results and our outlook in more detail shortly, but I want to thank our global teams for their persistent hard work and efforts. Now I want to share the progress we're making on our first strategic priority, which is to enhance our focus on future growth opportunities around the safe and efficient transfer of electrical energy. I wanted to start with the acquisition of Basler Electric. Basler provides essential and innovative electrical control and protection solutions for high-growth power generation and distribution markets. They are market leaders in grid and utility infrastructure and add significant new capabilities to Littelfuse in the areas of high-voltage expectation and very high energy protection. In addition, as data centers have such significant power generation demand, Basler has key exposure to local data center power solutions. Basler has a long history of selling complete solutions to a deeply embedded industrial customer base. They complement our industrial segment portfolio and their addition will broaden our OEM exposure, particularly in grid and utility infrastructure, where Basler is a key partner to industry-leading innovators. We are confident the addition of Basler will deliver long-term value for Littelfuse. Looking forward, strategic acquisitions will continue to be a key priority for us, supported by our strong balance sheet and cash generation. In addition to the acquisition and across Littelfuse, we continue to see meaningful traction in our new business pipeline. Our teams are executing well, converting our growing funnel to future revenue opportunities. Supporting this, our design wins are tracking up double digits year-to-date. As an example of our momentum, in the quarter, we delivered a multi-technology design win for a market leader in a 400-volt battery charging application. This charging solution brings best-in-class safety and protection while delivering an optimized form factor and efficiency. Our solution utilizes our market-leading capabilities of passive and semiconductor overvoltage protection, electromechanical overcurrent protection and our power semiconductor technologies. Combined, our solution enables a more precise and efficient current flow while protecting against potential surges from the power grid. Importantly, this multiyear partnership will start production with revenue contribution in 2026. Our second strategic priority is to provide more complete solutions for a broader set of our customers and to increase our engagement with our key customers and market leaders. To accomplish this, in the third quarter, we formally realigned our sales structure to better serve our broad customer base with our market-leading technologies. As part of this realignment, we established 3 market-facing sales organizations with leaders who bring extensive experience and leadership across our evolving end markets. Our sales leaders will be supported by a realigned sales force that is now market-facing customer-centric and reinvigorated to engage our customers more frequently and with our complete technology portfolio. We see 2 key advantages to this realignment, which is a shift from our historical approach where Littelfuse sales teams were siloed in product-centric roles. One, we can now work more closely with our customers to help better understand and solve their technology challenges with our full product portfolio. Two, we can collaborate more meaningful with our customers on their future technology road maps, which will better inform and ultimately shape our R&D efforts. We believe our sales evolution will enhance our visibility to our end market technology advancements and strengthen our long-term market leadership. While we're in the early innings of our go-to-market evolution, we are beginning to see signs of increased traction with customers. This is best exemplified by our data center go-to-market strategy, where we're early to apply our new sales model. Our data center revenue continues to grow significantly, while year-to-date, our data center design wins are up more than 50% versus the prior year. We are capturing multi-technology wins with leading hyperscaler, cloud and infrastructure customers. We are also deeply engaged with market leaders that are building gigawatt scale AI factories, and we are leveraging strong global collaboration and customer relationships through the data center ecosystem. Further, as we are more strategically focused on the leading customers in the data center market, we are sharpening our R&D efforts and building a strong pipeline around new products. Turning to our third strategic priority. We are focused on driving operational excellence as we grow. Today, I wanted to highlight our power semiconductor opportunity. Enhancing our long-term growth and profitability positioning in this area is a leading priority for our team. Our power semiconductor capabilities are critical to the safe and efficient transfer of electrical energy. Importantly, when combined with our market-leading protection offering, our semiconductor technologies can provide us a unique value proposition. Our long-term goal is to deepen our engagement with power semiconductor customers better utilize our footprint and ultimately drive improved long-term execution. As part of this initiative in the third quarter, we announced the hiring of Dr. Karim Hamed as the new leader of our semiconductor business. Karim most recently served at Analog Devices and brings a wealth of semiconductor industry, technology and operational experience, and we're excited to have him as part of our leadership team. Taking a step back, we delivered a strong third quarter and are well positioned to drive further momentum through year-end. We will continue to execute on our 3 strategic priorities as we aim to scale our company with the goal of delivering long-term best-in-class performance and returns. With that, I will hand the call over to Abhi. Abhishek Khandelwal: Thank you, Greg, and to everyone joining. I want to start by echoing Greg's sentiment as we're excited to announce the Basler acquisition. Today, I will provide some details on the acquisition including financial metrics and the transaction time line. Then I will walk you through our third quarter results, followed by our fourth quarter outlook, and we will end the call with Q&A. If you turn to Slide 7, Basler has demonstrated the leadership in controlling, regulating and protecting mission-critical equipment for evolving power applications over the last 83 years. Their technologies and market position provide a distinct competitive advantage, while their footprint is highly complementary to Littelfuse. The all-cash transaction is valued at approximately $350 million. When adjusted for the present value of expected tax benefits of approximately $30 million, the net transaction value is roughly $320 million. This represents a 13.5x multiple for forecasted full year 2025 EBITDA. At closing, we anticipate our net leverage will be 1.4x versus our current level of 0.9x. We expect Basler will be accretive to adjusted earnings per share in 2026, while we target double-digit returns in year 5 post close. We expect to close the transaction by end of the fourth quarter 2025 and look forward to welcoming the Basler team to Littelfuse. With that, please turn to Slide 8 for details on our third quarter. As Greg mentioned, we delivered strong results with revenue at the high end of the guidance range, while adjusted EPS exceeded the guidance range. Going forward, comparisons I will discuss will be relative to the prior year, unless stated otherwise. Revenue in the quarter was $625 million, up 10% in total and up 7% organically. The Dortmund acquisition contributed 2% to sales growth, while FX was a 1% tailwind. Adjusted EBITDA margin finished at 21.5%, down 20 basis points as solid volume expansion and operational leverage were offset by the impact of higher stock and variable compensation. Third quarter adjusted diluted earnings was $2.95, up 9%. We also delivered strong cash generation in the third quarter. Operating cash flow was $147 million, and we generated $131 million in free cash flow. Year-to-date, we have generated $246 million of free cash flow, and our conversion rate is tracking at 145%, well above our long-term target of 100%. We ended the quarter with $815 million of cash on hand and net debt-to-EBITDA leverage of 0.9x. In the quarter, we returned $19 million to shareholders via our cash dividend. Please turn to Slide 10 for our segment highlights. Starting with the Electronics Products segment. Sales for the segment were up 18% versus last year and up 12% organically. The Dortmund acquisition contributed 4%, while FX contributed 2 points to growth. Sales across passive products were up 19% organically, while semiconductor products increased 5% in the quarter. Within our semiconductor products exposure, protection product sales were strong, while we observed soft power semiconductor demand. Sequentially, we delivered modest power semiconductor growth. Adjusted EBITDA margin of 24% was up 140 basis points, reflecting favorable year-over-year passive and protection volume leverage, partially offset by lower power semiconductor volumes and higher stock and variable compensation. Moving to our Transportation Products segment on Slide 11. Segment sales were flat year-over-year as organic sales decreased 2% for the quarter, but were offset by favorable FX contribution of 2% to growth. In the passenger car business, sales were flat organically, reflecting stable passenger car product demand, offset by sensor declines. Commercial vehicle sales for the quarter decreased 3% organically, as we observed softer end market demand across on-highway, off-road and agriculture markets. For the segment, adjusted EBITDA margin of 16.8% was down 220 basis points. Our Transportation segment margins were negatively impacted by lower volume, higher stock and variable comp and unfavorable tariff timing. We remain pleased with our Transportation segment margin trajectory through a dynamic end market backdrop. Year-to-date, our adjusted EBITDA margin of 18.2% is up 220 basis points. On Slide 12, Industrial Products segment sales grew 4% organically for the quarter. Third quarter sales benefited from solid energy storage, renewables and data center growth. However, we observed softer HVAC demand and continued soft construction volume in the quarter. Third quarter adjusted EBITDA margin was 20.7%, down 310 basis points, driven by unfavorable mix and higher stock and variable compensation. While margins tracked lower in the quarter, we're pleased with the solid year-to-date margin performance, which is up 290 basis points. We will continue to balance profitability with long-term growth investments and remain confident in our long-term Industrial segment growth trajectory. Please move to Slide 13 for the forecast. We entered the fourth quarter with a strong backlog and expect solid growth versus the prior year. We expect typical seasonality given mixed conditions across transportation and industrial end markets. With that in mind, our fourth quarter guidance incorporates current market conditions, trade policies and FX rates as of today. We expect fourth quarter sales in the range of $570 million to $590 million, which assumes 5% organic growth at the midpoint and 2 points of growth stemming from our Dortmund acquisition. We are projecting fourth quarter EPS to be in the range of $2.40 to $2.60, which assumes a 60% flow-through at the midpoint. Fourth quarter guidance also assumes an unfavorable impact from stock and variable compensation of $0.40 and a $0.15 headwind from a higher adjusted effective tax rate. Moving to Slide 15. For the full year 2025, we're assuming $59 million in amortization expense and $34 million in interest expense, 2/3 of which we expect to offset through interest income from our cash investment strategies. We're estimating a full year tax rate of 23% to 25% and expect to spend $80 million to $85 million in capital expenditures. With that, operator, please open the call for Q&A. Operator: [Operator Instructions] And your first question comes from the line of Luke Junk with Baird. Luke Junk: Maybe an apologies, I missed part of the prepared remarks. Maybe if we could start with power semi. I think, Abhi, you mentioned that it did see some growth sequentially despite still being soft year-over-year. Can maybe you just speak to book-to-bill there, kind of the outlook into the fourth quarter in power semi and some of the puts and takes from a demand standpoint and then how you'd expect any improvement to flow to margins as well? Greg Henderson: Yes. Thank you, Luke. This is Greg. Maybe I'll start and then hand it to Abhi to give a little bit more color. But just kind of zooming out on power semi, and we talked about this before, I think our view on the power semi business is that it is strategically important from a strategic perspective as part of our overall portfolio and part of our safe and efficient transfer of energy, actually, in the example I gave on the battery charging solution in the script, that is a protection solution, and it uses our semiconductor protection, our passive protection, but actually also uses power semiconductors as part of the overall customer solution. And actually, Basler also is a customer of Littelfuse today and actually has a lot of semiconductor content in their solutions for protection relays and in their expectation system. So semiconductors is an important part of our business. But I think as we've said before, we have had some issues internally from kind of an execution perspective. So we talk about our strategic priorities as a company on sharpening our focus and improving our go-to-market and improving our operational performance and actually all 3 of those apply to our semiconductor business as well. So we're working on sharpening the strategy, improving our execution. And so this is going to take some time, but we are on the journey. And maybe I'll give it -- hand it to Abhi to give a little bit more specific color. Abhishek Khandelwal: Yes. No, I think Greg covered it, but I think if you kind of think about my prepared remarks, Luke and what I mentioned, if I think about our Q3 performance in our power semi business, Q2 to Q3, we saw sequential improvement, right? Year-over-year, we're still down. But as you kind of think about our performance in Q3 versus Q2, we did see improvement in the quarter. Luke Junk: Very helpful. Just a quick one on the $0.40 stock comp. Is that an outsized impact in the fourth quarter? I know typically, stock comp from a seasonal standpoint tends to be weighted. I think you said 2Q and 3Q this year? Just want to make sure I understand the impact. Abhishek Khandelwal: Yes, absolutely. I can walk you through it, Luke. So there's 2 things here. It's not just stock comp. It's also the impact of variable comp. So if you kind of think about our last year performance and where we ended the year, our teams didn't get paid. So this is a reset back to paying a target. That's majority of the $0.40 headwind. And then a small portion of that is just the year-over-year impact of stock comp. Luke Junk: Got it. So if we -- just to put it in different words as we think into then into 2026 that especially the variable comp piece should kind of normalize. Is that the right way to think about it? Abhishek Khandelwal: That is absolutely correct. If you think about 2026 on a year-over-year basis, '26 versus '25 will be normalized. But given our performance in '24, like I said, we didn't pay the variable comp piece of it. And so you saw a good guide in the P&L. And this year, you're just seeing it being reset back to target. So if you -- just to kind of build on that story then as you kind of think about our Q4 guide, at the midpoint, what you're really seeing is an EBITDA conversion of 60% on our top line growth on a year-over-year basis. Luke Junk: Very helpful. And then lastly, and apologies if I missed any comments on this. But Greg, just be curious to get your kind of incremental update on your efforts in data center, both near-term opportunities hitting maybe things that can move quicker over the next quarter or 2 and then your progress getting designed into sockets on future architectures as well. Greg Henderson: Yes. Thanks, Luke. I think we continue to be excited about our momentum in data center. We continue to make progress. And actually, we talked about in the call this sales realignment that we did across the business. We actually did this a little bit earlier in data center. And we are making progress. Design wins are up more than twice year-to-date. And I would say that data center is -- our growth in the quarter, data center was a meaningful driver of overall growth in the quarter. So we are continuing -- we have meaningful revenue now from data center based on activities that we've had in the past. We have improvement on our go-to-market strategy. Our design wins are up. And with our improved focus from a go-to-market perspective, we're getting closer to our customers. We're working more closely with hyperscalers, with cloud computing companies and starting to work more on our long-term R&D road map around that as well. So I think this is something that is -- the message I would say is it's delivering growth now. And we do believe that with our enhanced focus, it's going to continue over time. Operator: Your next question comes from the line of Christopher Glynn with Oppenheimer. Christopher Glynn: Just want to build on the last question on the data center comment. I think I heard up over 50% and up maybe double just on the last question. about the design wins. So I just want to clarify that. And is that like an account of the design win instances or a dollar value? Just trying to think of what that might imply for growth, what the design in to revenue kind of lead time is like? And maybe if we could clarify what the current scope of the data center business is for Littelfuse? Greg Henderson: Yes. Maybe I'll start with a little clarification. Thank you, Chris, and then I'll hand to Abhi for a little bit more. But just to clarify, right, I think that what we are saying now in the quarter, data center was a meaningful driver of our overall growth. I think that's the first thing I want to say. So that's kind of revenue in the quarter. Design wins being up, it's design wins that are up more 2x on a year-on-year basis. So basically, design wins this year -- design wins year-to-date year-on-year versus a year ago. And we track design wins as when things -- the timing of that varies a little bit, right? So the timing of that varies, so it's a little bit hard to predict just based on that one number. But I would say that data center is one of the faster markets. If you compare to some of our markets like automotive, or industrial, which take longer to go from design win to revenue, data center is probably not surprising, is a relatively faster market. That's what I'll say. And maybe I'll hand to Abhi to give a little bit more color on the relative impact of data center. Abhishek Khandelwal: Yes. So Chris, thanks for your question. I think the best way to think about the data center growth is if you kind of look at Electronics segment performance. It's a good reflection of our data center exposure, and that's where you see the real growth in terms of the segment being up 18%, 12% organic, passive products being up 19% organically, right? Now we haven't quantified the exact impact of data centers for us as a total company, but I would say it's high single digits. Christopher Glynn: Okay. Great. Appreciate that. I'm sure we'll get a further deep dive in February. And then it sounds like the overall company is seeing some good momentum in new business opportunities. How is that funnel looking besides data center? I'm curious, at least especially for industrial, where first half, you had really outsized outgrowth and that moderated a bit. I don't know if there's some noise in any channels or just a real noisy quarter for resi HVAC, which is well known. But curious about the kind of scalability for industrial and NBO funnel there as it pertains to maybe extending the outgrowth that you saw year-to-date. Greg Henderson: Yes. Thank you, Chris. Yes, I think let me just start by, if we zoom out to the Industrial segment, I mean, we had solid growth in the quarter. and actually have had many quarters of solid industrial growth. In the quarter, growth was driven by markets that continue to see strong demand and do well, energy storage, renewables, data center infrastructure and actually some of our industrial business plays into data center infrastructure that continues to see strong demand. That said, as you note, we do have softer residential HVAC demand and the construction MRO continues to be soft. So that's kind of where there's a mixed performance, and that's -- we do have exposure there, which has made maybe a little bit more muted performance on the industrial in the quarter. But if you zoom out from 8 quarters of growth, and this continues to be a significant investment area and growth driver. You mentioned the Basler Electric is an acquisition as well that brings significant kind of industrial exposure and it will be part of our industrial business. Abhishek Khandelwal: And then just to add to Greg's commentary, just one last point I'd point out is if you kind of look at the year-to-date performance for the segment, we're up 12% year-to-date. So that's another positive sign of growth in that segment. Operator: [Operator Instructions] And your next question comes from the line of David Williams with Benchmark. David Williams: Congratulations on the continued progress here. You talked about realigning your sales force and breaking down some of the silos. And just kind of curious if you could provide a little more color there. I mean you talked about be able to engage more deeply with your customers and what that means. But is there a way to kind of quantify what your expectations are and how we can kind of gauge that success? Greg Henderson: Yes. I mean I think it's hard at this point to quantify, but maybe I'll help explain, right? I think historically, our sales organization was basically aligned with our products. And we had kind of these individual product organizations that had individual sales teams and the sales teams were representing our products. Even though as we've talked about, largely, our products are largely about the safe and efficient transfer electrical energy, we often are selling to the same person at the customer, give lots of examples actually in the script, right? The example I gave on the battery charging application had passive overvoltage protection, semiconductor overvoltage protection, power semiconductor solution and passive circuit protection that comes from at least probably 3 of our business units. And so in the past, we would have had 3 different sales teams trying to call on that customer for that solution if they actually even all call on that customer. So 2 things happened. One, we would miss opportunity because we would be selling a part of our solution as opposed to being able to sell the complete portfolio. So in some cases, we're more cases than not, we were missing opportunity because we weren't bringing the full portfolio. But other cases, we're also stepping on ourselves in front of the customer because we have multiple people. So we've realigned to have the -- this is kind of the fundamental change. The sales team is representing our customer, not our products. And we do believe that this is going to bring progress to us. We did this early on some of our e-mobility business and actually also in our data center business. We already see progress from where we had done that early. We've now done this across the sales force. So this is a change. It does -- you have to -- we're in the process of that reorganization. It is a change that's going to take some time, but we believe it's going to bring significant benefits because it puts us, as I said, first and foremost, we get to sell the portfolio we have more effectively. But secondly, it drives our R&D strategy to be more about where the markets are going and making sure that we're developing the right products for where our lead customers are going. And this is really about focusing on aligning with those market leaders to make sure we're in the right position. David Williams: Fantastic color. And then maybe secondly, just on the tariff side, I know you mentioned it in the script. It seemed like it was a modest headwind, but are you seeing anything developing there in terms of do you think that the growth is being tempered by tariffs or any delays? Just any color maybe around the impact of that tariff. Abhishek Khandelwal: Yes, absolutely. I can take that, David. So when I talk about the impact of tariff, what I'm really talking about is if you kind of go back and think about our 2Q call, we had some tariff timing in the quarter where we saw the benefit of -- where we saw the pricing, but the cost hadn't quite flushed through the P&L. That was about a $6 million tailwind in Q2 that was going to be a headwind in Q3. So when I talked about timing of tariffs, that's what I'm referring to. And about $3 million of that hit our Transportation segment, okay? So that's that. Now if you kind of think about where we are today and the guidance for Q4, what we have baked in is a neutral price tariff impact for the quarter. Greg Henderson: Yes. And I'd also say, I think, look, there's still noise that can happen, but I think the market dynamics of this have largely stabilized. We've talked before that we have a diversified manufacturing footprint. We are trying more and more manufacturing close to our customers. So there is some impact, as Abhi mentioned. But broadly speaking, we feel like this is somewhat stabilized in our customer base, and we don't see a major impact from it. Operator: Your next question comes from the line of, again, Christopher Glynn with Oppenheimer. Christopher Glynn: Just on Transportation, I wanted to just ask about the difference between the passenger vehicle fuses up 4% and the sensors down 18% organic. Is the sensors side still engaged in attrition exits product pruning there? Greg Henderson: Yes. Maybe I'll start, and then Abhi can give a little bit more color on the transportation business. But actually, if you zoom out actually in our core passenger products, we have actually had a reasonable quarter given the kind of passenger car builds and so forth. We had a reasonable quarter. But we do continue to have, I would say, lower revenue and profitability of the sensor products. So we talked before in the past about the fact that, that was a business that we were kind of realigning. We continue on that journey. So I would say that if you put aside that sensor which is not really a strategic focus of ours, the core passenger business actually did do pretty well, considering kind of the stable car build and some of the kind of EV slowness that we all see in the market. Christopher Glynn: Okay. Great. And then just back to the power semis and Dr. Hamed joining. So it sounds like you think you can get a lot more juice out of the power semiconductor strategy there, I guess, relative to benchmarking some of the other areas of the business perhaps. But could you comment on that as well as go into what the focus markets are? Is it a middle market strategy and the scope of the -- what you visualize there to kind of bring that up to the standards you envision? Abhishek Khandelwal: Yes. Look, I mean, if you look in 3Q, for example, right, if you look at the performance of our Electronics segment as reported, right, the passive products were 19% semiconductor products were 5%, right? And that semiconductor products is really because the power semis is not performing as well. Our protection semi is actually doing pretty well. So we -- I mean, we have some areas there where we're underperformed. It's really -- like I said before, I think for us, power semis is a microcosm of some of the bigger strategy that we have at Littelfuse, right? The 3 strategic priorities: one, sharpen focus. So where we play and why we win. And again, we want to focus on the high-growth markets. We want to focus on high energy density and growth markets, things like data center grid, utility, et cetera. So that's, I would say, the first thing that we focus on or other areas where we have strong performance, for example, like the medical market in our power semiconductor business. So first, it's about increasing that focus. Secondly, it's about making sure we're focused on the customers. One of the sales realignment benefits we get actually is that we actually have a big pipeline for power semiconductors, but again, some of our sales teams that were representing the other businesses at those customers weren't selling the semiconductor products. So we have opportunity with the sales realignment to improve our semiconductor position to customers. But then it also comes to about execution. We mentioned in the remarks actually about, in Abhi's remarks about using our footprint more effectively. And so this is something that we're going to be focused on as well is optimizing our operational performance in power semiconductors. We believe that ultimately is going to drive both growth and profitability. So it's kind of a microcosm of the bigger picture. But where we want to focus is where we have differentiated value and also where it fits into this broader strategy around safe and efficient transfer optical energy. Operator: There's no further question at this time. I will now turn the call back over to Greg Henderson for closing remarks. Greg? Greg Henderson: Okay. Great. Thank you. I just -- in closing, I have 2 things really. First, I want to just thank our global teams. We did have good performance. And secondly, I'm really excited about Basler. And so I'm really excited to welcome the Basler team and the Basler business and taking significant growth opportunities for us in data center and grid and utilities. And finally, thank you all for joining our call, and we look forward to talking to you more and seeing many of you at the Baird Industrial Conference in Chicago in a couple of weeks. Operator: This concludes today's conference call. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to Trustmark Corporation Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. It is now my pleasure to introduce Mr. Joey Rein, Director of Corporate Strategy at Trustmark. F. Joseph Rein: Good morning. I'd like to remind everyone that a copy of our third quarter earnings release and the presentation that will be discussed on our call this morning are available on the Investor Relations section of our website at trustmark.com. During our call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and we would like to caution you that these forward-looking statements may differ materially from actual results due to a number of risks and uncertainties, which are outlined in our earnings release and our other filings with the Securities and Exchange Commission. At this time, it's my pleasure to introduce Duane Dewey, President and CEO of Trustmark. Duane Dewey: Thank you, Joey, and good morning, everyone. Thank you for joining us again this morning. With me are Tom Owens, our Chief Financial Officer; Barry Harvey, our Chief Credit and Operations Officer; and Tom Chambers, our Chief Accounting Officer. Trustmark's momentum continued to build in the third quarter. Our performance reflected diversified loan growth and stable credit quality, along with cost-effective core deposit growth. During the quarter, we continued to implement organic growth initiatives and added established customer relationship managers and production talent in key markets across our franchise. These investments are designed to further enhance financial performance and shareholder value. Today, in our presentation, I will provide a summary of our performance in the quarter and discuss our forward guidance before moving to your questions. Now turning to Slide 3, the financial highlights. From the balance sheet perspective, loans held for investment increased $83 million or 0.6% linked quarter and $448 million or 3.4% year-over-year. Our linked quarter growth was diversified and led by C&I, other loans and leases, municipal loans and other real estate secured loans. Our deposit base grew $550 million or 3.4% linked quarter. Noninterest-bearing deposits grew at a faster clip of 5.9% linked quarter or by $186 million. The total cost of deposits in the quarter were up 1.84% or 4 basis points linked quarter, very effective cost-effective growth, very cost-effective growth in core deposits. Trustmark reported net income in the third quarter of $56.8 million, representing fully diluted EPS of $0.94 a share, up 2.2% from the prior quarter and 11.9% from the prior year. This level of earnings resulted in a return on average assets of 1.21% and a return on average tangible equity of 12.84% in the quarter. Net interest income expanded 2.4% to $165.2 million, which produced a net interest margin of 3.83%, an increase of 2 basis points from the prior quarter. Noninterest income totaled $39.9 million, up 0.1% linked quarter and 6.3% year-over-year. Noninterest expense increased $5.8 million or 4.7% linked quarter and included approximately $2.3 million in nonroutine items, including the establishment of a $1.4 million reserve for a single property in ORE and $900,000 in professional fees related to the conversion to a state banking charter and other corporate strategic initiatives. Salaries and employee benefits increased $3.2 million linked quarter, principally due to annual salary merit increases effective July 1, increased annual incentive accruals and the cost of additional customer relationship managers and production talent associated with our organic growth strategies. Credit quality remains solid. Net charge-offs were $4.4 million and included one individually analyzed loan totaling $3.1 million, which was reserved for in prior periods. Net charge-offs represented 13 basis points of average loans in the third quarter. Net provision for credit losses was $1.7 million, and the allowance for credit losses represents 1.2% of loans held for investment. Again, very solid credit performance. From a capital management perspective, each of our capital ratios increased during the quarter. The CET1 ratio expanded 18 basis points to 11.88%, while our total risk-based capital ratio increased 18 basis points to 14.33%. During the quarter, we repurchased $11 million of Trustmark common stock. In the first 9 months of the year, we repurchased $37 million of stock. We have $63 million in repurchase authority for the remainder of this year. This program continues to be subject to market conditions and management discretion. Tangible book value per share was $29.60 at September 30, up 3% linked quarter and 10.1% year-over-year. The Board also declared a quarterly cash dividend of $0.24 per share payable December 15 to shareholders of record on December 1. Now let's focus on our forward-looking guidance for the year, which is on Page 15 of the deck. As you can see, we're tightening the range of our guidance for net interest margin and affirming all other previously provided guidance for the full year. We affirm our guidance and expect loans held for investment to increase mid-single digits for the full year '25. Similarly, we affirm our guidance of low single-digit growth in deposits, excluding brokered deposits for the full year '25. There is no change in guidance regarding securities as they are expected to remain stable as we continue to reinvest cash flows. We've tightened the anticipated range of the net interest margin for the full year. The range is now 3.78% to 3.82% for the year compared to our prior of 3.77% to 3.83%. We have affirmed our expectations for net interest income to increase in the high single digits for 2025. From a credit perspective, the provision for credit losses, including unfunded commitments is expected to continue to trend lower when compared to full year '24. This is, of course, an affirmation of the prior guidance. There is no change in our noninterest income and noninterest expense guidance. Noninterest income from adjusted continuing operations for the full year '25 is expected to increase mid-single digits, while noninterest expense is expected to increase mid-single digits as well. We will continue our disciplined approach to capital deployment with a preference for organic loan growth, potential market expansion, M&A and other general corporate purposes depending on market conditions. As noted earlier, we do have remaining availability in our Board-authorized share repurchase program that we will consider opportunistically. You may have noticed the addition of 2 new slides in our deck on Pages 17 and 18. I encourage you to take a look at the progress we've made in improving our financial performance over the last several years. We're very committed to maintaining that momentum here moving forward. With that, I'd like to open the floor to questions. Operator: [Operator Instructions] The first question comes from Stephen Scouten with Piper Sandler. Stephen Scouten: You guys mentioned, and apologies, I missed like the first minute or 2 of the call, but I know you mentioned in the release, some of the expense growth was on progress on the new hire front. Can you give any color around kind of year-to-date hires quarter -- what you saw in the quarter and kind of what you have planned moving forward from a hiring perspective, assuming that's still kind of focused Houston, Birmingham, Atlanta, I think as you've spoken to previously? Duane Dewey: Right. Great question. And I'll start, Stephen. We hired approximately 29 new associates in the third quarter alone. 21 of those 29 new associates are production related, either direct producers or direct support of production. And those across all business units from commercial real estate, equipment finance, corporate banking, commercial banking and the markets you noted are absolutely the markets of focus. Houston, Birmingham, Huntsville, Alabama, the Panhandle of Florida, South Alabama and Atlanta. And the 21 are included in each one of those markets. So we consider that a major focus for the organization here moving forward. I don't know that we'll hit those levels in every quarter. We likely fourth quarter will not reach that level of new associates. But moving into the coming year or 2, we're very focused on that organic strategy in those key markets. Stephen Scouten: Okay. And would you expect to see some incremental expense build in the fourth quarter kind of related to the recent hiring levels? It seems as though to get to the increase in mid-single digits year-over-year, there needs to be a little bit of an uptick in the expense base from this quarter, but I want to make sure I'm thinking about that right. George Chambers: Stephen, this is Tom Chambers. Yes, that's true. What hit us in the third quarter for the additional new hires was about $400,000. And of course, that's because we're hiring throughout the quarter, fully loaded, we would expect that to increase during the fourth quarter. Duane Dewey: I will add to that, Stephen. There are some, we'll call them, nonroutine parts of that expense because there are recruiting fees. There's onetime signing bonuses and things like that, that are mixed into that. So at a run rate level, Tom noted the amount, but I would say there were some nonroutine things that would be included in that total. Additionally, as you know, I mean, the expectation is we're adding the talent to produce revenue as well. And so we will factor that into coming revenue projections. Stephen Scouten: Sure. That makes sense. And then lastly for me, just around the share repurchase. I think you said previously maybe $10 million to $15 million a quarter is the right way to think about that. But just kind of curious, given how bank stocks have been trading and just how rapidly you're building capital, if you would think about upsizing that range potentially and kind of how you think about that earnback on the repurchase versus potential M&A? Thomas Owens: Stephen, this is Tom Owens. I'll start. So yes, we've been very pleased at our ability to continue to deploy capital via repurchase while supporting loan growth and continuing to drive nice accretion to our regulatory capital ratios, I think we're up 18 basis points linked quarter. Certainly, as you suggest, as our capital levels continue to build, it may well be the case that as we enter '26 that we'd probably lean more proactively into share repurchase depending on how loan growth plays out. I think for the fourth quarter, it's reasonable to assume that we'll remain on the pace that we've been, which is about $50 million for this year. Operator: The next question comes from Michael Rose with Raymond James. Michael Rose: So there's clearly been some M&A within some of the markets that you guys operate on. I was just wondering if you could discuss maybe some of the opportunities, maybe expanding on Stephen's question just for hiring as we move forward. And if you think that kind of a mid-single-digit growth rate for -- I know it's a little early, but for next year is something we should contemplate given some of the opportunities that are in front of you and given some of the hires that you put in place. Duane Dewey: I'll start. Michael, absolutely. We think that and prior experience would say that every M&A deal in given markets does present opportunity. It's both to some extent on the hiring side and to some extent on the customer, customer acquisition side. And we look at it like that. I mean it's a competitive world. The one that was announced here recently in the last day or so is very much -- there's a lot of overlap in our markets. And we compete against them today. We have competed against them for a very long time. So it goes with the territory. No real change, I don't think from a real competitive perspective, but we do see it as creating opportunity for us. And it is really in predominantly all markets that we serve today. So I think good opportunity ahead. Michael Rose: Okay. Helpful. And then maybe just stepping back, I do appreciate the new slide you put in. Obviously, there's been some real good progress due in part somewhat to the sale of the insurance business and the restructure a couple of years ago. What's kind of the next evolution here, I guess, is what I'm trying to ask. Where do you think some of those numbers could go? And maybe if you can discuss some of the puts and takes of kind of getting to whatever the new numbers as we move over the next few years might be? Like what are some of the opportunities you guys see? And then what are some of the headwinds you guys think you're going to face? Thomas Owens: So Michael, this is Tom Owens. I'll start. First and foremost, when you look at those slides, I think the fourth quarter is likely to continue those trends. And then to your question about the longer term and what's the next evolution, we're focused on continuing to drive competitive growth in PPNR, which we think mid-single digits is reasonable in that regard. And I think when you add the deployment of capital from our strong run rate profitability, as I just mentioned earlier, as we head into '26, we're likely to -- we'll see where loan growth shakes out. Clearly, that's our preferred method of deployment for capital. But given that we're approaching now 12% in terms of CET1, I think it's safe to say that we'll probably deploy at a more proactive rate in 2026. So I think we're on pace this year to retire something like 2% of our shares outstanding. And so I think if you add mid-single-digit growth in PPNR to low single-digit decline in EPS outstanding, I think we're likely to wind up in high single-digit growth in EPS, would be a baseline. And then I'll let Duane and maybe Barry speak to what the opportunities might be from there. Duane Dewey: Well, I would add to that. And as we already discussed in the prior question, it allows better financial performance, all in all, allows us to invest in that organic strategy. And so we're very focused. We're very focused on key growth markets. We believe we operate already in very significant growth markets in our footprint. And we're focused in all business lines really at expanding in those key markets. And the improved financial performance allows us the ability to do that a little more aggressively than we had in prior years. So we're very optimistic there. A market like Huntsville, Alabama, that would be considered one of the top growth markets in the country, we hired a fantastic group of new bankers in that market. Very, very excited about them joining Trustmark. We've added teams across a couple of the other markets I already mentioned, Atlanta, Birmingham and so on. So the improved financial performance allows us to invest in that organic strategy. And then the last comment I'd say, of course, there's a lot of activity right now. We're very aware of what's going on, on the M&A front around us. There are discussions across the board up and down. So we're staying in tune with that. In a lot of cases, that creates additional opportunities. So we're on it. We like the organic strategy, though, at this point. Operator: The next question comes from Feddie Strickland with Hovde Group. Feddie Strickland: Just wanted to kick it off with a clarification question on expenses. It sounded like you might be guiding towards a little higher expenses in the fourth quarter. Is that the case? Because I thought you might have that $900,000 of nonroutine professional fees and maybe the ORE expense come down a little bit. George Chambers: This is Tom Chambers. Yes, we expect, obviously, those nonrecurrings should fall off, but we're still guiding to mid-single-digit growth year-over-year in expenses. So if you look at our fourth quarter, we will have a slight increase in expense or expected expense without nonrecurring items. Feddie Strickland: Got it. And then just shifting gear to the margin. Just given the asset-sensitive balance sheet, is it fair to assume we see a little bit of compression from here or near term and maybe a little bit of recovery just as deposits catch up down the road? Thomas Owens: This is Tom Owens. I'll take that. It's sort of a yes and no on that. First of all, you saw we printed a 2 basis point linked quarter increase in net interest margin for the quarter from 3.81% to 3.83%. We've talked in the past about the ongoing repricing of the back book fixed rate loans for both loans and securities providing a bit of a tailwind. And I think that's what you saw with the 2 basis point increase in loan yield quarter-over-quarter. We are slightly asset sensitive. And so when the Fed cuts, we have to be pretty proactive in terms of cutting deposit rates to maintain net interest margin on a linked-quarter basis. And clearly, that is our intention. We anticipate that the Fed will cut tomorrow or later today and then again in December. And then I think we have 3 cuts penciled in for 2026, so ending the year at about 3% at the top end of the range. So yes, in the short term, there can be some headwind. It just depends on how depositors and competitors in the market react to those cuts that we make in deposit rates. But we are optimistic about maintaining NIM in this general area of 3.80% to 3.83%. When I look at analyst estimates for the fourth quarter, I think I see something like 3.83%, which is the number we just presented. And then when I look at full year estimates for '26, I think I see a median estimate there of 3.82%. And so I think those are reasonable numbers. I think that there might be some choppiness quarter-to-quarter, as you suggest. But as we manage our way through it, on average, I think we would see net interest margin continuing to be in about this range where we are now. And I'll make the point, we're at about 3.80% year-to-date. And so I think we're stabilizing here, but it might be choppy quarter-to-quarter. Feddie Strickland: Just one other quick question. I was just wondering if you could talk about trends in classified and criticized loans. The provision was a little lower this quarter. So I was kind of curious if either of those were flat or maybe even went down a little bit. Robert Harvey: Sure. Frank, this is Barry. I was just going to mention that we did have a nice trend down of about $49 million in criticized loans this quarter. That gives us a trend down of about $123 million for the first 3 quarters of this year. So very encouraged by that, especially given the fact that we kind of were flat in the first quarter. So that $123 million has really come in the last 2 quarters. And so we're very encouraged by that positive trend. Like most of our peer banks, we trended up all during 2024, criticized, classified. And then we flattened out in the first quarter, felt like that was an inflection point. It turned out to be. And then we've been moving down at a nice pace, both Q2 and Q3 of this year. So we're very encouraged by that. That is part of our lower provision. That is 1 of probably 4 factors that went into the provision being lower this quarter than it has been in Q1 and Q2. Operator: The next question comes from the line of Catherine Mealor with KBW. Catherine Mealor: Just one follow-up on the margin. Just if we can kind of look at some of the components, it was interesting to see deposit costs increase a little bit this quarter. And I know we've got the cut and maybe another one today coming. But can you talk a little bit about where you're seeing deposit cost trends and maybe how you're thinking about the beta over this next round of cuts relative to what we've seen over the past round of cuts. And as kind of growth improves and maybe competition picks up, if it's fair to model maybe a little bit more conservative beta moving forward. Thomas Owens: Sure, Catherine. This is Tom Owens. Yes, the linked quarter increase in net interest margin, it almost builds on the answer that I just gave to Feddie, which is we are asset sensitive. We do have an extremely valuable deposit base, which we continue to demonstrate as we manage our way through interest rate cycles. Because we're slightly asset sensitive, we try to be proactive in pricing down deposits to maintain net interest margin. And it's always a balancing act, right? You're always trying to optimize that. I mean you want to reduce rates paid on deposits as much as you can at the same time as you're trying not to drive unwanted attrition of profitable customers. And so most of what we saw in the third quarter is what I'll call the pushback, right, the extent to which you cut deposit rates, but depositors push back. And so certainly, we have a framework in place where when depositors push back, the more profitable the customer and the stronger the pushback, the more willing and able we are to accommodate with exception interest pricing. And so that's largely what drove that linked quarter increase, Catherine. We also engaged in a pretty proactive promotional deposit campaign during the third quarter. Our loan-to-deposit ratio at the second quarter had risen to 89% from 87% at year-end '24. We wanted to manage that back down a bit. We were very pleased with the execution of that campaign. So that was a bit of a driver to that, but not a big driver. I'd say in the third quarter, it continued to be what I would characterize as a surprisingly competitive environment for deposits in our space with loan growth in the industry generally outpacing deposit growth somewhat. So surprisingly competitive in the third quarter. And I'd say the same thing I said in my prior answer to Feddie, which is the extent to which we're able -- we give you guidance when you look at Slide 9 and when you look at our outlook for fourth quarter deposit costs dropping from 1.84% to 1.72%, that reflects the intended price cut or deposit rate cuts that we'll be making as the Fed cuts today. And the extent to which we achieve that is a function of those 2 factors. It's a function of how well that's received or tolerated by the deposit base, which in turn is also a function of what the competitive landscape looks like, how do our competitors react. But last point I'd say with respect to -- and so that's why I talked about it, to Feddie's point, it could be choppy quarter-to-quarter. But I do believe as we manage our way through this, we should maintain net interest margin on average over the next number of quarters in this range of about 380 or so. And so to your point, Catherine, about thinking about deposit betas, as I said earlier, I think we've got this [Audio Gap] 2.75% to 3%. We've got deposit cost in that scenario going down to about 1.25%, which would be a beta that's cycled by our calculations of about 40%, which is very consistent with the beta that we achieved as the Fed was hiking during the last cycle. Catherine Mealor: Very helpful color and perspective. And then maybe the other side of it, on just loan yields, can you talk about where incremental new loan pricing is coming on today? Robert Harvey: Catherine, this is Barry. It varies kind of dealing with the categories. I would say, outside of CRE, it's remained pretty consistent. We haven't seen a lot of changes there. I would say within the CRE category, it has gotten more competitive than it was earlier in the year and definitely more competitive than it was last year. And so the good news is there's a lot more deal flow. I was looking at the production for the last 4 quarters relative to the prior 4 quarters. And fourth quarter of '24 through the first 3 quarters of this year, our production is much, much stronger on the CRE side. Having said that, the pricing is more competitive. And so when you think about the spread, when you think about the origination fee, we've been yielding and that industry has really been yielding for quite a while. It is getting more competitive just to the number of players who are, I would say, back in the market that hadn't been previously. And that's been pretty much true for this entire year. There's been a lot more opportunities. We've been pitching on a lot more deals. We probably have landed -- we have landed a few more deals than we did in the previous 4 quarters, but not as much as you would think based upon the number of opportunities. And we are landing those. They are -- the price is thinner on the spread and the price is thinner on the fee within the CRE category. The rest of the categories are pretty similar to the way they've been in terms of the competition and the rates that we're able to yield. Operator: The next question comes from the line of Gary Tenner with D.A. Davidson. Gary Tenner: A lot of my questions have been asked. But I wanted to just follow up on your comments around the recruiting in the quarter. As you think of the kind of producer or producer supporting hires, any kind of particular segment that you're leaning into? I think you talked that it's pretty varied geographically. But from a segment perspective, anything you're particularly leaning into or anything you're particularly focused on the deposit side in terms of the hires you made. Duane Dewey: So in general, I'll say we really are focused geographically. We're focused on the markets that we feel present the best growth opportunity. And I've mentioned those previously, the Houstons, Atlantas, the Birmingham, Huntsville, Panhandle and South Alabama present in our mind and Jackson, Mississippi, frankly, but those present the best growth opportunities. So we're focused on our business lines in those markets. To date, I would say if we're focused in specific categories, we've had pretty good success on the equipment finance team, we've added producers in that, which we've talked about the last several quarters as being -- we're very pleased with the growth experienced in that business and are seeing good opportunity there. And we've had a really, really good approach and really nice team build there, and that's been an area of focus. But I would say of the ones that I've mentioned earlier, 21 new hires, it is pretty evenly spread between CRE, corporate banking, commercial banking. We've even actually in a somewhat challenging market has created some opportunity on the mortgage front. In markets where we have not had a mortgage production side, we've added a handful of mortgage producers. So it's pretty well diversified across all the business lines that we serve with a little more focus on specific growth markets. Gary Tenner: I appreciate the comments there. And then just on the deposit side, given the guide you gave for the fourth quarter, in terms of the public funds deposits, which are 13%, 14% of your total deposits, what's the repricing timing of that segment? Thomas Owens: This is Tom. So with respect to the public fund balances, by and large, those are administered rate or floating rates, even indexed down. It's a really small percentage of those that are bid on some fixed rate for any extended period of time. Operator: The next question comes from the line of Christopher Marinac with Janney Montgomery Scott. Christopher Marinac: Tom, you had touched a little bit on funding in some of the earlier questions, but I kind of wanted to ask at large. I mean, what is your thought about initiatives to fund the balance sheet the next couple of years? Should we expect to see the loan-to-deposit ratio around the sort of high 80s? Do you think it can trend differently? And I guess just is M&A a part of that funding strategy in the big picture? Thomas Owens: So there's a lot there, Chris. It's a great question. I'll start off by saying that, as I said earlier, loan growth had outpaced deposit growth in the earlier part of the year, and we were -- in the first half of the year, and so our loan-to-deposit ratio had floated up to 89%. We really want to keep that in the mid-80s, mid to high 80s. We do not want that floating up into the 90s. And so yes, you should expect us to maintain that type of liquidity. As I said, we were really pleased with the execution of the promotional money market program in the third quarter. And I think we had -- so we had conducted a similar campaign in the third quarter of '24. And then fourth quarter '24 through second quarter of '25, we were not nearly as proactive in terms of promotional deposit campaign activity. So to your point, do we have the opportunity to continue to fund deposit growth to match loan growth. We're very confident in our ability to do that. The way I think about that is going to a more sort of always-on approach in terms of the next promotional campaign, and there's certainly different and more proactive techniques that we can employ. The techniques we've employed have been reasonably conservative in that regard, and so pretty cost effective in bringing on new balances. But we're confident in our ability to fund loan growth cost effectively. And I guess I would maybe turn it over to Duane to address the issue to the extent to which that does or does not play into our view on acquisition opportunities. Duane Dewey: Yes. Just a couple of notes. I mean one thing I did not mention when I was answering Gary's question a minute ago, the other element of that production staff has been on the treasury management side. So we have added treasury management talent. All of our RMs across our entire system have deposit growth goals. And Tom, you may have the number in front of you of commercial growth in the third quarter, but we have experienced solid commercial deposit growth as well, which has been part of that strategy. As we talk about our organic strategy, it's very focused on full relationship, including the deposit side. And like I said, in the third quarter, we're very pleased with progress there. And as we bring on the new talent, that's -- of course, loan growth, deposit growth, they're all part of the strategy. So that's a key part. In terms of M&A, yes, deposits, core deposits, core funding, that's all part of the equation. And as I stated a bit ago, there is a lot of discussion going on out in the market. We're continuing to be very focused and very disciplined executing on our organic strategy and hopefully opportunistic when the right partner presents itself, and we'll consider that as it goes. And I would say, yes, deposits are a part of that consideration. Thomas Owens: And I would just follow up then, Chris, to Duane's point. You look at the $370 million of deposit growth we had in the third quarter, it was pretty evenly balanced between personal and commercial. Commercial was something like $180 million or so. And then of the personal, that was pretty evenly mixed between the promotional campaign that I mentioned and then just fundamental organic growth. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Duane Dewey for any closing remarks. Duane Dewey: Thank you again for the questions, and thank you for being on the call. We look forward to getting back together at the end of the fourth quarter, and hope you have a great rest of the week. Thank you. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day and welcome to the quarter 2025 earnings call. Please note that this conference is being recorded. At this time, I'd like to turn the conference over to Brian Ezzell, Vice President, Investor Relations, Treasurer and Corporate Finance. Please go ahead. Brian Ezzell: Thank you, and good morning, everyone. Welcome to Flowserve's Third Quarter 2025 Business Update. I'm joined by Scott Rowe, Folserve's President and Chief Executive Officer; and Flowserve's Chief Financial Officer, Amy Schwetz. Following Scott and Amy's prepared remarks, we'll open the call for questions. Turning to Slide 2. Our discussion will contain forward-looking statements that are based upon information available as of today. Actual results may differ due to risks and uncertainties. Refer to additional information, including our note on non-GAAP measures in our press release, earnings presentation and SEC filings, which are available on our website. With that, I'll turn it over to Scott. Robert Rowe: Thank you, Brian, and good morning, everyone. I'll start on Slide 3. The momentum we built in the first half of the year continued in the third quarter as we delivered exceptional results across bookings, margin expansion, earnings and cash flow. We remain focused on driving growth while leveraging the Flowserve Business System to accelerate margin expansion. With 3 quarters of the year now behind us, we have increased confidence in our ability to meet our 2025 objectives and we are raising our adjusted EPS guidance range for the second time this year to $3.40 to $3.50. The midpoint of our revised guidance represents a 31% increase from last year. and an increase of more than 60% from 2023 and highlights consistent execution of our strategy and our confidence in the growth opportunities ahead. In the quarter, we delivered bookings of $1.2 billion and revenue growth of 4%. We also continued our enduring margin expansion journey with adjusted gross margins increasing 240 basis points to 34.8%. While adjusted operating margins were 14.8%, driven by incremental margins of 115% during the quarter. Adjusted earnings per share was $0.90, an impressive increase of 45% compared to the prior year period. We also returned $173 million of cash to shareholders in the quarter, including $145 million of share repurchases. We have a healthy balance sheet, low leverage, and we continue to see improved cash flow performance from the business. This, coupled with what we viewed as a discounted share price relative to intrinsic value makes repurchasing shares an attractive capital allocation decision. Later in the call, Amy will provide more detail on our full year guidance and our approach to capital allocation. She will also provide more details on the separately announced divestment of our legacy asbestos liabilities, which will further enhance our capital allocation optionality on a go-forward basis. I'm proud of all the Flowserve associates for continuing to navigate a dynamic environment while driving relentless execution of the Flowserve Business System to expand margins, drive growth, simplify our product portfolio and ultimately deliver enhanced value for our customers and shareholders. Now to Slide 4. Bookings for the quarter were $1.2 billion, improving sequentially by over $130 million and growing 1% versus the prior year. Our strong aftermarket franchise continued to deliver with Q3 representing the sixth consecutive quarter of bookings greater than $600 million. In fact, 2 of the last 3 quarters have seen aftermarket bookings above $650 million. I remain excited about the opportunity to leverage our capabilities to drive further aftermarket growth. Project activity in the quarter was steady and improved sequentially with strong growth in the power markets and solid trends across most other end markets. For the quarter, we delivered over $140 million of nuclear bookings, a record for the company. Our 2 largest bookings in the quarter were both nuclear awards related to 2 separate new reactors in Europe. Each of these bookings was approximately $30 million. Many of the project delays we saw in the second quarter did come to market in the third quarter. However, we continue to see some slowness in project timing for larger engineered projects, primarily in the energy end market. Over the last 5 years, we have evolved Flowserve into a more resilient business. 10 years ago, large-engineered projects often represented 20-plus percent of our bookings which naturally led to more cyclicality based on project investment cycles. Today, engineered projects remain an important part of our business, but this mix is typically around a mid-single-digit percentage of our bookings. The shift in mix is driving more consistency in our bookings and revenue, allowing us to manage more effectively through cycles. We have also sharpened our focus on capturing more aftermarket opportunities while selectively pursuing the most attractive engineered projects that deliver better margins and a healthy aftermarket entitlement. For the quarter, if we were to exclude engineered pump original equipment bookings, our bookings growth was an impressive 9% across the remaining portfolio. Turning to Slide 5. Our end markets remain stable with strength in areas, including traditional power and nuclear. Power demand continues to represent an exciting and significant opportunity while general industries is benefiting from continued industrial build-out in emerging areas of opportunities like pharmaceuticals, food and beverage. Mining has been an area of excitement for us, though project deferrals have hampened bookings over the past 12 months. In the third quarter, we saw mining project activity start to pick up with overall mining increasing over 60% versus last year. Within energy, asset utilization for large process industries remains elevated and maintenance spending has continued as expected. Chemical remains our lowest growth end market. However, we were encouraged by improvement in North America Chemical in the quarter and the potential for an improved outlook in this space. With our year-to-date book-to-bill at 1.0x and a strong project funnel, we are optimistic about delivering on a full year book-to-bill of approximately 1.0x. Additionally, our commitment to the Flowserve Business System should drive growth in 2026 and beyond as we leverage commercial excellence and 80/20 principles to further grow our business. Moving to Slide 6. Let me take a moment to highlight the significant opportunities we see ahead in the power space and specifically nuclear. Our offering of pumps, valves, seals and actuators play an important role across the nuclear spectrum. Today, we have content in over 75% of the roughly 400 nuclear reactors operating across the globe. Our mainstream isolation valves and actuators play a critical safety role in the nuclear island with other types of valves used across the balance of the nuclear facility. Our pumps are often found in the turbine island, helping to ensure the cooling process runs as intended with additional legacy pumps within the containment zone itself. Importantly, we have the critical quality assurance certificates and customer approvals necessary to leverage our technology across the global nuclear landscape. We also maintained great relationships with key industrial partners and customers around the world as Flowserve's nuclear equipment is essential to their operations. This set of key capabilities and domain expertise that we bring to the nuclear space makes us one of a few preferred vendors for pump valve seal and actuation content worldwide positioning Flowserve for leadership and nuclear flow control for decades to come. Moving to Slide 7. Today, power represents roughly 7% of our revenue with about half of that coming from traditional power and the other half coming from nuclear. Our bookings show an evolving picture with accelerating growth across all power and nuclear growing at the fastest rate. On a year-to-date basis, our total power book-to-bill is 2.0x. The expansion of artificial intelligence, cloud computing, data centers and broad scale electrification are creating significant growth for power broadly and specifically within nuclear power generation. Looking forward, we see the potential for 40 new large nuclear reactors to be under construction in the next 10 years across North America, Europe and parts of Asia. In addition, technology for SMRs or small modular reactors, continues to progress, and we believe this technology represents an additional growth driver as the expansion for the global nuclear fleet begins to accelerate. While the technology still is in the development phase, many of our SMR partners are making significant progress and industry data suggests as many as 30 SMRs could be under construction in the next 5 years. The existing fleet of nuclear reactors is also aging, and we expect almost all existing large reactors will go through life extension upgrades over the next decade, providing further opportunity for Flowserve. We are working very closely with nuclear power operators to refurbish and supply equipment to enable life extensions, power uprates, refurbishments and restarts of reactors that have previously shut down. Turning to Slide 8. Power nuclear represents one of the most compelling multiyear growth opportunities for Flowserve. With our strong market position, differentiated product portfolio in decades of domain expertise, we are exceptionally well positioned to capitalize on the accelerating investment in this space. As global electrification advances and new nuclear capacity expands to meet AI, data center and energy security demands, we see a sustained growth cycle emerging with nuclear becoming a larger contributor to our business over the next 5 to 10 years. Based on our current content opportunity of approximately $100 million plus per gigawatt, we believe that nuclear flow control opportunity set could be $10 billion plus over the next decade. Importantly, nuclear carries attractive, accretive margins, offering the potential to drive substantial value creation for Flowserve over the long term. With the potential for double-digit growth in the nuclear and power and our non-power business benefiting from healthy demand and reindustrialization, we believe we are well positioned to continue driving long-term growth. Before I turn it over to Amy, I will conclude by saying that Flowserve is in a strategically advantaged position. We have a robust and expanding aftermarket franchise with additional upside and capture rates, balanced by a diverse mix of industries that includes both high-growth power demand opportunities and stable recurring end markets. The Flowserve Business System is driving quantifiable improvement in execution and margin expansion and we see significant runway ahead. Our cash flow generation continues to strengthen, enabling greater capital deployment and incremental returns to shareholders. We remain focused on driving sustainable growth, expanding margins and enhancing cash flow, all with the goal of delivering superior value for our shareholders. With that, I'll turn the call over to Amy. Amy Schwetz: Thank you, Scott, and good morning, everyone. Turning to Slide 9. We delivered another strong performance in the third quarter, an outcome of our growth strategy and exceptional delivery through the Flowserve Business System. Third quarter revenues were $1.2 billion, a 4% increase versus last year. In the quarter, organic sales were flat, while the Mogas acquisition contributed 3 points of growth. We continue to see strong growth from aftermarket, while revenue from original equipment was slightly lower in the quarter due to the timing and composition of projects in the backlog. Our profit performance in the quarter demonstrates our execution focus. Adjusted gross margins increased 240 basis points, driven by actions taken under the Flowserve Business System including improvements in operational excellence, our 80-20 complexity reduction program and improved cost performance. With additional leverage from SG&A, adjusted operating margins increased 370 basis points to 14.8%. This represents the second consecutive quarter of operating margins within our long-term targeted range of 14% to 16%, which we originally set out to deliver by 2027. Our ability to continue to deliver in this range well in advance of initial expectations is a testament to the more resilient business model we have created and an impressive execution by our associates around the world. Moving to the performance of our segments on Slide 10. I'll start with FPD. FPD continues to deliver strong performance with another quarter of adjusted operating margins around 20% in line with best-in-class peers. The 80/20 program is driving clear results for FPD with the year-to-date benefits from 80/20 pacing ahead of our initial expectations coming into the year. Aftermarket also remains a strength with bookings growing in the mid-single digits for the quarter. We continue to improve our aftermarket capabilities, and we see further opportunity to capture more from our large base of installed equipment over time. Bookings in the quarter were negatively impacted by lower engineered pump projects, which Scott referenced earlier as well as some year-over-year timing of project awards. Overall, FPD book-to-bill for the quarter was 1.02x, a healthy level as we continue to grow the business even with lower levels of large energy project activity. Turning to the FCD segment. We delivered strong performance in the quarter with bookings growth of 24%, sales growth of 7% and adjusted operating margins expanding 230 basis points. Bookings in the quarter benefited from strong aftermarket growth as well as a large nuclear award and project activity in the Middle East. FCD adjusted gross margins increased 220 basis points year-over-year and 130 basis points sequentially, largely driven by improved execution and better performance from Mogas. Combined with improved SG&A leverage and accelerated synergy realization from Mogas, adjusted operating margins improved 410 basis points sequentially. For the quarter, Mogas operating margins were accretive to FCD, consistent with our expectations for the business when it was acquired. The fabricated modules that hampered Mogas and FCD margins in the first half of the year have been shipped with the remaining exposure related to final installation and completion. With these projects largely behind us, synergies accelerating and the Mogas business now fully on the Flowserve Business System, the team is focused on driving growth opportunities across the globe through our expanded offering of severe service fallouts. I'll add that Alice DeBiasio joined the company as our new President of FCD. We're excited to have her on board and look forward to leveraging her unique set of industrial experiences across product management, software solutions and engineering to continue the progress in FCD. Turning to Slide 11. I'll take a moment to highlight one of the many areas of significant progress within the Flowserve Business System. When we launched our 80/20 complexity reduction program in 2024, we had conviction around the opportunity to drive significant value and margin improvement over time. We were intentional with the approach focusing on individual business units within our segments and ensuring we let data lead the way. From the start, we have viewed this as a way of doing business, a process and not a project, and something we wanted to embed in our culture. Our Industrial Pumps business unit was the first to come into the program and is now in its second year of driving 80/20 actions. The team has made tremendous progress on a number of 80/20 pillars. First, within Industrial Pumps, we reduced our original equipment SKU count by 45% leading to a more efficient manufacturing process, less working capital and importantly, better value for our customers. While the SKU reduction had some initial impact on top line performance, the team has quickly pivoted to maximize opportunities with a core set of products. These target selling efforts led to a 21% increase in year-to-date bookings for key customers. By reducing SKUs and focusing efforts on our best products, the team has made a difference for both our customers and shareholders, improving gross margins by roughly 150 basis points compared to last year. In addition to these efforts, the 80/20 program led us to a decision to divest a small gear pump business within the Industrial Pumps business unit. This decision was made using our analysis of the market opportunity, our right to win and our ability to deliver profits in line with our expectations. After analyzing this business closely, we determined it was better off in someone else's hands. While this divestiture was immaterial to our overall financials, it is a decision that ultimately improves our profitability, working capital and cash flow. We are focused on continuing to execute utilizing the 80/20 methodology, not only in Industrial Pumps but across our entire portfolio, and we'll share more details over time. Turning now to Slide 12. Our continued focus on managing working capital and converting more profits into cash, combined with the merger termination payment, led to significant cash from operations of $402 million in the quarter. For the quarter, adjusting to exclude the net impact of the merger termination payment, our free cash flow conversion was an impressive 174%. As I look at our year-to-date cash flow performance, our improved working capital management under the Flowserve Business System, and our healthy leverage level, I'm encouraged by our ability to allocate capital in growth-enhancing ways. In the quarter, we returned $173 million to shareholders. including $145 million of share repurchases. We continued share repurchases into October for an incremental $55 million bringing our year-to-date repurchases through October to $253 million, with $200 million remaining on our share repurchase authorization. Looking ahead, we'll continue to allocate capital in a disciplined manner with continued commitment to our investment-grade rating. On Slide 13, in another example of our disciplined approach to capital allocation, we are excited to announce today that we have reached an agreement to divest our legacy asbestos liabilities. The transaction simplifies our capital structure, reduces volatility and improves our annual cash flow, all of which will enhance our ability to focus capital allocation on growth opportunities. We have found a great partner for this transaction, and we look forward to closing the transaction in the fourth quarter. Turning to our outlook on Slide 14. As a result of strong year-to-date performance and increased confidence in executing through the Flowserve Business System, we have increased our earnings outlook for the second time this year. We continue to deliver strong year-over-year margin expansion and now expect to deliver over 200 basis points of margin improvement for the full year. The midpoint of our full year guidance represents a 31% increase in EPS year-over-year and an impressive increase of more than 60% since 2023. I'm proud of our teams, their strong delivery and our focus on execution. In closing, our performance in the third quarter and year-to-date in 2025 has been outstanding. Adjusted EPS for the first 3 quarters of the year is up 31% versus prior year. Aftermarket growth is strong, margin expansion is accelerating and cash flow performance continues to outpace historical levels. The 80/20 program is early in its life cycle, but we are seeing tangible benefits with performance in the quarter in line with our long-term margin targets. And while we execute using the business system, we have been able to allocate capital to opportunistic share repurchases to drive shareholder value. These efforts, combined with healthy end markets and significant expansion in power, including nuclear, creates a compelling opportunity for profitable growth in 2026 and beyond. We look forward to providing a more robust view of 2026 including our financial outlook for the year on our fourth quarter earnings call. And with that, I'll turn the call back over to the operator for Q&A. Operator: [Operator Instructions] We'll go right to Michael Halloran with Baird. Michael Halloran: Would you put in context what you're seeing from an environment perspective, more of a pipeline funnel thought process? I know you mentioned some of the larger projects may be pushing to the side a little bit, a lower percentage of the portfolio today. But if you think about what the underlying trajectory looks like, both from an order perspective, from a funnel perspective, how that's converting? Are we talking about a framework on a forward basis, '26 specifically or however you want to think about it, that's pretty consistent with what your long-term thought process here is? Or do you think there's something in the environment that pushes you one way or another relative to that framework? Robert Rowe: Sure, Mike. Let me start by just breaking this into aftermarket and then kind of our OE business because I think it's really important. On the aftermarket side, we delivered another very strong quarter at $650 million. That's 2 out of the last 3 now. And we've got a street going over $600 million a quarter now for many quarters. And so we feel really confident that, that continues, right? And that work is on the back of refinery utilization, chemical plant utilization, desalination plants operating, just general health of the macro environment allows that business to continue to grow. And then additionally, we continue to drive our capture rate up. We're doing that through a lot of different levers in terms of making sure that we can be responsive to our customers. We're in the proximity with them with our quick response centers, but then we're also doing really good things to make sure that we're providing the support and service. And then ultimately, we think we can continue to grow that by moving more from just parts and service and repair to driving full-scale solutions. And so I would say long-term growth there is tremendous, and we feel really good about our ability to continue to capitalize on aftermarket. And then if you go to OE and projects, and we put this in the slides, like that's -- this becoming less important for us than ever before. And so historically, this was roughly 20% of our business, so large kind of OE projects. Now we're talking roughly high single digits, less than 10% of our business and we're doing that deliberately. That's part of our diversification strategy. And it's really something that we're looking to do to drive cycle resiliency as we go on the forward look. With that said, we're still very much in the project game. We feel that projects -- the project environment is reasonably constructive. We talked in Q2 about project slippage. Some of those came to fruition in Q3 and I would just say the Q3 environment was slightly more constructive than what we saw in Q2. And then on the forward look, if we break this down to end markets, we're obviously very excited about power and nuclear. We think that is a significant growth rate going forward at a tune of double-digit growth. We put out some markers there that I can talk about maybe in a follow-up question. But we also think the rest of the markets are generally in a good space. And then the other thing I would point to is in 2025, the Middle East Energy projects are at a very low level. And for us, it's roughly a 5-year low. We believe that, that doesn't go down from here. There's a lot of opportunities in our funnel there. They just got to work through some of the larger projects and some of the diverse projects as we turn the corner to 2026. And so all of that said, I think we're in a good position to grow our business. The geopolitical and macro environment needs to settle down a little bit to give operators confidence in their ability to cost projects and ultimately move things over the financial investment decision line. But overall, we feel constructive about 2026 and beyond. Michael Halloran: And then follow-up question is just maybe a thought on pricing. How pricing looks in the marketplace, receptivity, competitive dynamics and how we should think about price cost on a forward basis? Appreciate it. Robert Rowe: Sure. Yes. You can't talk pricing without tariffs sadly. And so we've really hammered price in the U.S. on the back of all of the tariff changes. I think we've done 3 or 4 price increases this year. What we're finding is in the run rate business, the aftermarket business, our MRO replacement business, that price been incredibly sticky. We're seeing the peer group and the other industrials doing very similar things that we're doing there. And we feel very good that we're at a price cost neutral basis, if not slightly positive on the forward look. And so I'd say that's working, and that obviously is more of a U.S. phenomenon than anything else. And then as we think about the project pricing, this has always been the case since I've been here. The bigger the project, the more exciting or flagship the name of the customer or what it's doing, it seems to just attract more attention and there's always an element of competitiveness. And so that's kind of the nature of the game there, the EPCs make sure there's several bidders. But I would say, we're not seeing anything fundamentally different than what we've seen in the last couple of years or anything in my tenure here. And so we believe that the environment is constructive for us to be selective with our bidding, especially with the large pump projects. And when we say selective, it's making sure that we have the right to win. We're working with customers that we know we can execute on. We know there's a large aftermarket content where they support that and then ultimately bringing margins in that will drive value creation for Flowserve. And so I think we're in a good place there. We're more focused on pricing than ever before, and we feel we can be on the positive side of price cost as we go forward. Operator: [Operator Instructions] We'll move next to Andy Kaplowitz with Citigroup. Andrew Kaplowitz: Scott, can you give us a little more color into the margin inflection you saw in FCD this quarter? How much of the improvement was Mogas improving versus core FCD? And you mentioned that both of your segments are in line to at least make the range of 16% to 18% segment adjusted operating margin that you set for FY '27. But as you know, FPD is already higher than that. So could that range end up being conservative? Robert Rowe: Sure. Maybe I'll hit the Mogas piece because I was there last week, and then I'll let Amy talk about just the margin progression in general at FCD, and we can touch on the Pump division as well. Look, Mogas is going incredibly well. I was able to -- I was in their site last week with Alice, and we had a fantastic visit. And I'd say, some of the takeaways there is the integration has gone incredibly well. The Flowserve Business System is fully embedded. And when I mean business system, the operational excellence is in place, shop floor daily management, problem solving, how we do inventory, all of that is now embedded and operating at a level that I would say is equivalent to the rest of the Flowserve peer group. We've really pushed the portfolio excellence side, and so they're on the 80/20 program now, and we look at that as a severe service kind of ball valve offering, and we're now making -- we've been making rationalization type decisions with our other offering. And now we're moving into commercial excellence. And so the commercial excellence is about driving growth and making sure that we get clean orders into the facility itself. But I couldn't have been more pleased with the progress that they've made. And so in the quarter, Mogas margins were accretive to FCD. As Amy said in the prepared remarks, the modules that had given us some concern and maybe a little bit of -- we were slower to deliver than what we had expected when we signed up the deal. Those have now shipped in the third quarter. And then there's minimal revenue from the modules in Q4 and Q1, and that's associated with the installation and commissioning work. And so now the focus is on bookings and driving growth, and we're excited about what that product offering can be. And as a reminder to everybody, the end markets here are mining and refining. And what we've seen in the mining space is that funnel has increased, we had a pretty decent booking number in the quarter, but the outlook continues to improve. And so structurally, we think the end markets will support Mogas growth and leaning in with commercial excellence and the 80/20 principles, we believe that we'll get to that $200 million that we keep talking about. And then lastly, I would just say, this is a great example where we're applying the business system as part of an integration. And what we saw -- and what we've seen now is in a relatively short period of time. We can take a family-owned business that maybe wasn't highly focused on business process and turn that into something that we're extremely proud of that we know can drive enhanced margins to the FCD portfolio, but also drive enhanced growth with our customers and outlook here. Amy Schwetz: Yes. And Andy, I'd just add with respect to FCD, we improved 410 basis points sequentially. You don't do that without all boats rising within the FCD platform. And we've been talking about some of the levers that we had available to us, whether or not that's operational excellence and some footprint decisions that had been executed in late 2024 going into 2025, as well as other tenets of the operational excellence program. 80/20 is taking hold in the platform. We're seeing that start to contribute as well. And then obviously, the story behind Mogas as well. And so we continue to think that there's runway with respect to FCD margins. And then once again, with respect to FPD, obviously, a great story there as well in terms of both platforms being within the range of their long-term targets, actually FPD being on the outside in a good way of that range. And so I think we'll go through our annual planning process this year, knowing the additional levers that we have to pull from a margin expansion standpoint, both in 2026 and beyond, and we'll look to reset those long-term targets in 2026. Andrew Kaplowitz: And Scott, you talked about that $10 billion nuclear flow control opportunity over the next decade. What do you think your share could be of that opportunity? And then nuclear bookings per quarter, we know are lumpy, but they seem to be rising overall. I think they've averaged higher than your specific nuclear sales exposure that you mentioned, maybe close to high single digits of bookings -- high single-digit percentage of your bookings each quarter over the last year or so. Could they continue to average that amount or even more over the next couple of years? Robert Rowe: Sure. So let's look back first, and then we'll talk about the forward look. The nuclear bookings are rising. Power in general, has been up double digits for us, and we've had 3 quarters now over $100 million in the last -- of the last 4 quarters for our nuclear bookings. And so I would just say, with all the noise in the nuclear space in a positive way, the noise in a positive way and all the recent announcements, we only see nuclear starting to move forward in a -- with a trajectory and in an inflection that's higher than what we have today. And so we're incredibly excited about the nuclear opportunity. It's why we put 3 slides in our presentation. But maybe to frame up the $10 billion a little bit, we do have substantial share within the nuclear space. And so we're leveraging our domain expertise, we're leveraging our installed base, we're leveraging the partnerships and the quality certifications that we have around the world that put us in the forefront and allow us the opportunity to do this work as we go forward. And so we're -- and I would just say the barriers to entry here are really, really high, right? The quality plans and what our customers are looking for are pumps and valves and actuators that will work for the 30-year planning life. And they take it very, very seriously and getting an in-stamp in the U.S. is incredibly hard. And so we just feel like we're in a great position to carry on with this work with companies that we've worked for, for decades. And so we're excited about the prize. We did put some kind of market share numbers in there, and it's to orient folks, there's roughly 400-plus nuclear reactors out there in the world today. We have equipment in 75% of those. And we called out some geographies because it is important. In North America and Europe, we do incredibly well. We do really well in Korea, and then we believe we can do well in India as they're going forward. And so those are the areas that we'll target. Obviously, China is a massive market in putting -- growing more reactors than any other region at this point. With China, we have installed base in the early reactors and the early facilities. But over time, they've shifted to a more nationalistic approach on all of their equipment. And so that's why we've deliberately kind of excluded that as we talk about our numbers. And then as you build to kind of the $10 billion prize, we put some numbers out there around 40 reactors in the next 10 years. That could have up to $100 million of content for Flowserve. We talk about SMRs progressing and moving forward, and we believe we're well positioned with what we think are some of the winners in the SMR technology. And so there's a large contribution in the $10 billion number on the back of SMR. And then our aftermarket today is roughly $100 million of bookings a year. That number only grows with our increased installed base. And so we feel very comfortable that continues, if not grows pretty aggressively over the 10-year period. And then finally, on the last category there would be extensions and rerates and then kind of where we're bringing assets back to life. And this week, both Google and Brookfield announced 2 projects of bringing existing sites back online over time. And I would just say those are incredible opportunities for Flowserve. And so one of those examples, we have pumps and valves installed, and we will absolutely be a part of that project. And then the other one, the pumps and valves that we did manufacture got pushed to a different site or actually 2 different sites, but we're confident that we'll pick back up that work. And so again, we feel like we're in an advantaged position. We've got the expertise, and we're leaning in to make sure that we'll position our offering to capture the full benefit of this nuclear growth. Operator: Our next question comes from the line of Deane Dray with RBC Capital Markets. Deane Dray: I'll start with congratulations on the announcement regarding the legacy asbestos. It's such a smart move here. We've seen companies like Honeywell do this successfully. And if you just take us through, like, am I correct that you paid something less than $200 million to resolve this? And could you just clarify what the cash flow implications are? Amy Schwetz: Sure. So one, thanks, Deane. This was something that we were excited to get done. It just made sense given our cash position and obviously puts us in a great position going forward to have a more simplified approach to capital allocation. And so we think that the benefits are -- will range from a cash flow perspective between $15 million and $20 million a year going forward. We do have about $200 million, $199 million of cash that we will allocate to the sale in the fourth quarter of the year. But for us, this is about really simplification of the capital structure, doing an 80/20 on the administrative work that we do in the Flowserve corporate office and taking out some volatility for our investors in the process. Deane Dray: Great to hear. And Amy, just sticking with the free cash flow. It's outstanding this quarter and you were clearly -- you laid out how you were excluding the windfall from the deal termination. Is there anything else within the free cash flow, the working capital, any kind of improvements that you would cite there? And what does this mean for free cash flow for the year? Because it looks -- this puts you ahead of plan? Amy Schwetz: Yes. So I think that as we look at free cash flow now, we're targeting something at the 100% level or a little bit better. I think for us, really free cash flow starts with margin expansion. That's the quickest way to improve the free cash flow for any company, but working capital has been a huge focus. And we've made some improvements there. 80/20 is actually helping us with the process, even decisions that we made during the quarter around the small divestiture paid dividends in terms of simplifying the inventory that we need to keep on hand. But I'll just point out with working capital. And if I didn't remind you, Scott would remind me to remind you that our work is not done. And so we continue to have a substantial amount of improvement that can be made in this area, and we are focused on it. We are focused on it at the leadership team level. We're focused on it at the platform level and at the BU level. And so we're going to continue to do everything that we need to do to make free cash flow a real strength for Flowserve and its investors. Robert Rowe: And Deane, just to reiterate, we talked about this last month, but 80/20 helps on working capital dramatically plus the operational excellence program. And so we're not done. We've made progress. We're not celebrating our working capital numbers right now. But we feel like we're moving in the right direction in a very positive manner. Operator: We go next to the line of Damian Karas with UBS. Damian Karas: Scott, I appreciate your comments on the certifications required to compete in nuclear pumps and valves. But I just wanted to ask how you're thinking about the profitability of these awards? When I just think about how your industry has sometimes behaved in the past, it's gotten pretty competitive when you have these mega growth cycles, just like thinking about past oil and gas booms where the OE margins were slim to none. So could you maybe just talk a little bit about where you are projecting these nuclear awards you've been winning to line up kind of relative to the rest of your project base? And just as the capacity build-out for nuclear continues, how you're thinking about how to price that in your bidding process? Robert Rowe: Yes. I think it might be helpful to just kind of walk through the life of a new build nuclear reactor. And I would just say, these are very different than even kind of an oil and gas project or a water project or anything like that. And the amount of years on the front end to get the process dialed in fully and to ensure that the quality requirements are at a place that they're comfortable with is multiyears. And so when we win work on a new reactor, it's somewhere -- the time horizon for us is somewhere in that kind of 4- to 5-year mark to where we -- before we can start shipping equipment. And those first 3 years are all about engineering and quality. And so I just feel like as we go forward and we think about the folks that are designing these type of reactors, that's a Westinghouse, it's your EDF, it's your Korean nuclear authorities, like for them to make a change in terms of what they've been doing historically and introduce a new supplier is really -- it's really, really difficult to do. And so the barriers to entry here are incredibly high. With that said, obviously, we have to perform. And we have to perform with delivery. We have to perform with increasing our capacity to support the nuclear growth. And we've got to perform with our ability to be competitive to allow their financial decision to get over the line. But again, we've worked with these players for decades. We're very confident in our ability to retain that type of work, if not grow that work. And so we're leaning in on our opportunities. We're making sure that we can support the industry, and we're making sure that we can support our customers in the regions where they're operating. Amy Schwetz: Yes. And Damian, I'd just add one thing from a color perspective. I was with our sales leadership team on the pump side as well as our BU leaders last week. And there is focus on 2 things in this space. One, making sure that we have the resources in place to support these opportunities, and that includes adding nuclear expertise at the corporate level within Flowserve, but it also means that we're making sure that we remain competitive and that we're doing things to not be complacent about our cost structure where we can to really continue to protect this business, the margins and keep those barriers to entry as strong as we can. Damian Karas: That's all really helpful. And I wanted to ask a follow-up question on the asbestos transaction. Are you anticipating that is going to have any impact on your cost of financing? And curious what you plan to do with this new found increased balance sheet flexibility. Amy Schwetz: Sure. So probably from a financing perspective, I would say, it's credit enhancing, but given the size, probably not too terribly impactful. I think overall, we find ourselves in a position at Flowserve where we have more opportunities for capital allocation than ever before. We've made some of those decisions in the fourth quarter already with some opportunistic share repurchases in October as well as earmarking a little under $200 million towards this transaction. But I think what you've seen us do over the last several quarters is pretty indicative of the disciplined approach that we'll take. We're focused on sort of growth opportunities and earnings-enhancing opportunities around capital allocation. And so it's going to be environmental specific. It made a lot of sense for us to buy back shares over the last few months. We'll continue to keep that at the ready. We've got about $200 million of authorization still available to us under our share repurchase plan. But over time, we're also interested in growing the business. And as Scott pointed out, the Mogas -- kind of the Mogas turning point in the third quarter, their adoption of the Flowserve Business System, us now turning our attention to really growing that business over time gives us more and more confidence that M&A utilizing our strict criteria around value creation can be a powerful tool for us over time with respect to capital allocation. Operator: We'll go next to the line of Brett Linzey with Mizuho Securities. Brett Linzey: Congrats. I wanted to come back to the energy business and apologies if I missed it, I jumped on late, but the bookings down 19%. I was just hoping you could drill down a bit on some of the moving pieces there. And does any of the quoting in that segmentation and form this could be snapping back in the coming quarters here? Robert Rowe: Sure. Yes. When we think about the compare versus last year, it was a difficult comp. We had 3 large projects in the Middle East that were all energy a year ago, and those didn't repeat this year. And so I think that's the easiest way to describe that. Energy on the OE side for us is primarily Middle East. It's a lot of that kind of midstream processing and storage and then also on the downstream side. And we had a lot of activity last year. And quite frankly, we're in a little bit of a lull right now with the Middle East energy type project bookings. With that said, I feel confident that there is work to do in the Middle East, there are a lot of plans to move forward with some of the investments that have already been made public but have been delayed in terms of that project timing. And so we're incredibly well positioned to capitalize on that growth. And I would say, with just a little bit of stability in the system, maybe oil pricing coming back a little bit to provide them a little bit more cash flow to fund new projects, we could see a positive trajectory here in 2026 and beyond. Brett Linzey: Yes, that's great. And I appreciate the detail on nuclear. I guess thinking about the content and some of the ramp over the first 3 years, is there anything to be aware of in terms of development costs and how that might play out as you're ramping for some of these opportunities? Or do you think you can simply just repurpose some of the R&D to these areas? Robert Rowe: Yes. For us, it's a relatively low development cost. We are working with some of the SMRs on maybe some modifications to our existing products to support a slightly different reactor. But overall, this is not big dollars for us in terms of needing to redevelop our products. And so a lot of this is just making sure that we're meeting the current requirements and that we can adapt to the -- what's happening in the space. And so I wouldn't expect to see from us any massive incremental expense to make sure that we're positioned to win this work. Operator: We'll go next to the line of Nathan Jones with Stifel. Nathan Jones: I guess I'll dig a little bit more on the nuclear side of it. $10 billion of flow control opportunity over 10 years. Maybe looking for a little bit more color on what your expected market share is? I know Andy asked about it, but I'll see if we can get a little bit more color on it. I mean, when you look at large utility scale reactors that have been out there for decades now, I'm sure you understand what your market share is on that, maybe a little less so on the SMRs given they're really still under development. But I'm just hoping you could give us any color on what your expected win rate on that kind of $10 billion worth of content over that time period was because 5% market share is very different to 50% market share of that opportunity. Robert Rowe: Yes. So Nathan, I'll point to Slide 6, where we talk about the current market share, and I'll try to give some color on the go-forward basis. And so of the 416 reactors that are out there, we have content in 75% of that. And so that could be a pump, it could be a valve, it could be our in seals, but we're very well positioned. And in my comments earlier, we do really well in North America with the Westinghouse technology. We do really well in Europe with Westinghouse and EDF technology. We do really well in Korea. What we -- where we don't do well today is in China. And historically, we have done well in China, but just because of their policy and moving to domestic supply, even though we have a strong presence in China, we typically will not win the new Chinese work. And so then if you think on the go-forward basis, who is involved with the forward North America growth, the forward Europe growth, what's happening in potentially India, in China -- or sorry, in Japan and in Korea, we're incredibly well positioned there with those operators. And so on the valve side, I would be disappointed if we did not have the highest share of mainstream isolation valves where we have the primary product globally for the main safety -- the safety valve and all the nuclear reactors. We have large content on the cooling pumps. We put a number out there at kind of a 50%. I think we can maintain that on a go-forward basis. And then we are moving back into some of the reactors with the primary cooling pumps within the reactor itself. We haven't done that work in a long time, just given the lack of some of the newer builds, but we're starting to secure our position there. And so I fundamentally believe that our market share could actually go up as we reposition some of our products to take on the balance of plant. But I think you could expect us to be a market leader here, certainly within pumps and valves on the go-forward basis. Nathan Jones: And so the $10 billion excludes China? Robert Rowe: We did not put China in our estimates. Nathan Jones: Got it. I would figure the biggest ticket item coming out of here would be the pump at that greater than 50% of currently operating reactors with Flowserve pumps would probably be reflective of the biggest dollar opportunity. Is that correct? Robert Rowe: I think that's fair. Yes. Nathan Jones: Okay. I think that gives a bit more color on potential win rates. So I'll leave it there. Operator: We go next to Joe Giordano with TD Cowen. Joseph Giordano: So I think we all appreciate the need for the power gen pickup here and nuclear is a logical way to do this. Like as you chase this business, we're throwing around a lot of numbers, right, all the companies, like $80 billion here, $100 billion there, all these gigawatts. Like how do you, one, like can we build all this stuff? And two, how do you have to think about who's backstopping this? Like on the SMR side, we're talking a lot of new companies making big commitments with like no revenues at this point. So how do you kind of judge where you want to chase and like how solid is the ground that you're walking on when you do it? Robert Rowe: Yes. Those are really important questions. Let me start with capacity, and then we'll start -- then we'll go to our customers and how we think about that. On the capacity side, we -- again, we've been doing this for decades. We have a designated facility for valves in North America. We have a designated facility for pumps in Europe. We can expand capacity at both of those sites. We're looking at making nuclear Center of Excellence is where we can put all of our product together into a site that then allows us to leverage the engineering, the project management, the quality and things like that. And so I would say we're confident in our ability to ramp. Back to some of my previous comments on this is when you win an award, you've got 3 years of kind of office type work and engineering and quality before you start delivering the equipment. And so you do have lots of visibility in terms of making sure that you've got the capacity. And the other thing I would just say is on the supply chain, that is an area that we're working today to make sure that we are investing in our suppliers to ensure that they can come along on the journey with us to be -- to participate and allow us to deliver as expected. And so I'm highly confident in our ability to expand capacity and to keep up with the industry at least at this point in time. And then on the customer side, it is -- I would -- this is a dynamic landscape, and there's announcements it feels like every week or every month in terms of some of the players here. And obviously, it's attracting a lot of money and names like Brookfield and Google and Amazon that are funding and backing some of these projects with large dollars just to make sure that these reactors can get back online and be a part of the power on a go-forward basis. With that said, we have been selective in who we are working with. And we have hired what I'll call is a nuclear expert that worked with the NRC for a couple of decades and then worked in the White House. And so he is helping us to be really selective on where we put our resources and where we put our efforts. And so we identified a few of those customers on our slide here. But I would say on the SMR side, we've narrowed that list down to kind of 10 to 12 players that we're actively engaged with that we believe will be successful in the long run. I don't think we'll be 100% right there. But if we're at least 60% or 70% right on who we've chosen, then we're in a really, really good place from a partnership perspective. And so I'd say, we've been very methodical about our approach and making sure that we're not overburdening some of our business development and engineering resources on the front end of this to get locked in into the future. Joseph Giordano: And then as a follow-up on that, are there any obvious gaps in the portfolio where you can tuck in new product that would be like specifically geared towards nuclear? And is it fair to think that given your commentary about the timing, like as you guys report as in the coming years, would we expect like the percentage of delivery over the next 12 months out of backlog to kind of move down commensurate with the amount of bookings you're doing in this sector? Robert Rowe: Yes, I'll let Amy hit the backlog conversion. I'll start with the other one. Amy Schwetz: Yes. So I think from a capital allocation standpoint, as we look at attractive end markets, nuclear is certainly one of them. We try and take a pretty good product approach for all we do on the M&A front. And so that sort of starts with mapping what we have, what we don't have. And although we are pleased with our product portfolio at this point in time, I think there's always ways that we can look to strengthen that portfolio through M&A. Robert Rowe: Yes. And so I think the thing for us is we may have some pumps on a facility, we may have a mainstream isolation valve, but not have the control valves or not have the butterfly valves. And so really, the focus is making sure that we can package more of our content together as we work on these new projects. And so that's the effort right now. There's a huge opportunity in front of us. And then to Amy's point, what we are looking to do is potentially on the programmatic M&A side is acquire other companies that may have the certifications and may have that installed base already in there where you're not having to work through some of those barriers to entry that I talked about before. Joseph Giordano: And then on the backlog conversion? Amy Schwetz: On backlog conversion, I would say, overall, last year, you started to see this in the context of our backlog with that ticking down from -- to kind of mid-80s overall for Flowserve. And I think we'll see that continue in some ways around the nuclear portfolio. I will say that, that is being slightly offset by the strength of our aftermarket business. So our aftermarket business, which converts relatively quickly is at historical highs. And so -- and we're continuing to be focused on that. So those 2 tend to offset a bit, but I would say there's probably slight pressure on backlog conversion with the nuclear content. Operator: We'll take our final question from Andrew Obin with Bank of America. Andrew Obin: Can you hear me? Robert Rowe: Yes, we can hear you. Andrew Obin: Excellent. So just nuclear bookings have been great. But if you look at underlying power bookings ex nuclear, it seems that they've been quite weak this year. I think we calculate down high teens. What is this a reflection of? And does core power pick back up because I would imagine the power gen trend is broader than nuclear? Yes. Robert Rowe: Yes. I think in the quarter for the traditional power, it might just be a little bit of a timing impact. We are seeing investments in all forms of power. And so you're seeing coal-fired power plants get extended where we have a lot of content on both pumps and the valves. We're seeing new kind of single cycle combined cycle plants going forward, where we may not have as much content, but we do have content there. And I would say this phenomenon is happening all over the world. And so we're excited about that opportunity. It is a more competitive type environment. And so we've got to be really selective in terms of making sure that we can get the right product in front of the right customers, the folks that value our aftermarket. And so I'd just say that's -- we're a little bit more selective here just given the wider -- the broader kind of competitive offering with the traditional power set. Andrew Obin: Got you. And just to help us understand, last year, bookings grew 9%. This year, bookings are sort of flattish. So how do we think about the relationship -- given that you're changing a business model, how should we think about the relationship between bookings and revenue? And just how did this year's bookings translate into hitting the 5% revenue target next year, right? Because the 9% bookings growth last year have really flowed through the P&L as top line. And no complaints about... Robert Rowe: I'll let Amy talk about the conversion to revenue. I'll talk a little bit about the growth. And so we're obviously right at kind of a book-to-bill at 1.0 is what we're committing to, which -- and the growth this year on bookings is lower. And we said this earlier, but a lot of that's your Middle East kind of OE project business has come down. When we think about the rest of the business, all other aspects, excluding kind of OE, Middle East or OE energy projects, has grown at 9%. And so we actually feel like we're doing a nice job growing and leaning into that growth. We need that kind of energy bookings to come back in 2026 to kind of get us back to what we want. And the last thing I would say is on the commercial excellence in 80/20, the teams are incredibly focused on growth. So commercial excellence is 100% about growth and aligning the sales organization the right way with the right incentive structure and the right project pursuit strategy and all of that good stuff to capture more share. And then on 80/20, we're now starting to move more and more into the growth side of 80/20. We showed some numbers with our industrial pumps that's growing our target selling accounts at 21% this year. And so I do feel like that we can -- with this kind of renewed commercial excellence and the 80/20 focus, we get back to this kind of 5% kind of -- over time, a 5% growth rate feels right for me. Amy Schwetz: Yes. The only thing I'm going to add there is I think overall, our conversion rates on sort of this quicker turn business is actually improving over time. The efforts that we've made around commercial excellence are reducing -- around operational excellence are actually reducing our lead times. And so that combined with our aftermarket strength, which we have no intention of slowing the intensity of those efforts does help with conversion. And so as Scott pointed out, with the overall health of a number of the end markets that we're focused on in addition to the efforts around commercial excellence and target selling, we see those things in conjunction with some Middle East opportunities, not just in traditional energy, but within power and water moving into 2026 as sort of more than offsetting headwinds that we see from 80/20. Operator: We have no further questions. I'll turn the call back to Brian Ezzell for any additional or closing remarks. Brian Ezzell: Great. Well, thank you, everyone, for joining the call today. We look forward to seeing many of you at upcoming conferences and investor events. And then, of course, we'll provide another update early next year. In the meantime, if you have any questions, please feel free to reach out to the Investor Relations team, and we'll be happy to talk through anything. And with that, we hope you have a great day. Operator: This concludes today's conference. We thank you for your participation. You may disconnect at this time.
Operator: Good morning, and welcome to Bausch + Lomb's Third Quarter 2025 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to George Gadkowski, Vice President of Investor Relations and Business Insights. Please go ahead. George Gadkowski: Thank you. Good morning, everyone, and welcome to our third quarter 2025 financial results conference call. Participating on today's call are Chairman and Chief Executive Officer, Mr. Brent Saunders; and Chief Financial Officer, Mr. Sam Eldessouky. In addition to this live webcast, a copy of today's slide presentation and a replay of this conference call will be available on our website under the Investor Relations section. Before we begin, I would like to remind you that our presentation today contains forward-looking information. We would ask that you take a moment to read the forward-looking legend at the beginning of our presentation as it contains important information. This presentation contains non-GAAP financial measures and ratios. For more information about these measures and ratios, please refer to Slide 1 of the presentation. Non-GAAP reconciliations can be found in the appendix to the presentation posted on our website. The financial guidance in this presentation is effective as of today only. It is our policy to generally not update guidance until the following quarter unless required by law and not to update or affirm guidance other than through broadly disseminated public disclosure. With that, it's my pleasure to turn the call over to Brent. Brenton L. Saunders: Thank you, George, and good morning to everyone joining us today. I'm going to provide an overview of our impressive third quarter performance and speak to how our strategy and patience is paying off. Sam will go deeper on the financials and update 2025 guidance, and I'll close with a look at products driving growth and opportunity. I'd like to thank my 13,000 colleagues around the world upfront because without their commitment and belief in what we can achieve together, we'd be stuck in neutral. Instead, we're delivering on the vision we laid out in 2023. 6% constant currency revenue growth was once again fueled by a base business engine that continues to hump and the steady introduction of innovative products across categories. Pharmaceuticals was a standout, thanks to $84 million in Miebo revenue. Miebo growth helped bolster our comprehensive dry eye portfolio, which is front and center for eye care professionals, patients and consumers. Effective selling has also meant more surgeons implanting enVista intraocular lenses, helping drive 27% constant currency revenue growth in premium IOLs. Our loaded and differentiated pipeline will be on full display in just a few weeks at Investor Day. Importantly, the pipeline products we'll highlight aren't aspirational. These are clinical stage programs with anticipated launches over the next several years. Every part of our nearly 3-year journey since I returned as CEO has been aligned to 1 or more of 3 categories you've all become familiar with: selling excellence, operational excellence and disruptive innovation. Those aren't optional. They are imperatives. While our journey is nowhere near complete, given how far we've come, we've introduced a fourth category, financial excellence. This is our opportunity to deliver sustained profitable growth that reflects our real potential. We'll show you what that looks like at Investor Day when we share our 3-year plan. We've reached a pivotal point in our journey to becoming the best eye health company. Being the best means elevating the standard of care in eye health, which is why our pipeline is filled with products that have the potential to be truly disruptive and reset expectations for eye care professionals, patients and consumers. You'll learn much more about the science behind our pipeline and market opportunity at Investor Day, but here's a sneak peek. In consumer, new formulations of LUMIFY, PreserVision and Blink Triple Care will make category leaders even more appealing and are expected to unlock significantly larger audiences. In Pharmaceuticals, next-generation lifitegrast would change the dry eye disease treatment paradigm. Our ocular surface pain medication would be the first of its kind, and our glaucoma medication would be the first to improve visual acuity. The contact lens market has been starved for innovation. There's been no material science breakthrough since 1999, which we're addressing with a first-of-its-kind bioactive lens. Our highly successful SiHy platform will expand with a cost-competitive daily disposable, a frequent replacement offering and a lens designed to slow the progression of myopia in children and young adolescents. Finally, in Surgical, we're building on a steady stream of premium products representing consumables, equipment and implantables, the holy trinity of that business. We delivered growth across all segments in the third quarter, once again demonstrating our holistic strength. I mentioned Pharmaceuticals as a standout earlier, but I would be remiss if I didn't recognize Vision Care, which captures contact lenses and consumer offerings. Several franchises in both categories are highlighted here, including Blink with 37% reported revenue growth, Artelac at 24%, Daily SiHy offerings at 22% and eye vitamins at 12%. Our overall contact lens portfolio grew a healthy 6% on a constant currency basis. We'll discuss new iterations of some of the highlighted products at Investor Day as we work to make established high performers even more popular with meaningful scientific advancements. I'll now turn it over to Sam for a closer look at the financial metrics, including significantly improved cash flow figures and an update on 2025 guidance. Sam? Osama Eldessouky: Thank you, Brent, and good morning, everyone. Before we begin, please note that all of my comments today will be focused on growth expressed on a constant currency basis unless specifically indicated otherwise. In Q3, we delivered strong performance with year-over-year revenue and adjusted EBITDA growth. We're also very pleased with our cash flow generation this quarter. Turning now to our financial results on Slide 8. Total company revenue for the quarter was $1.281 billion, which reflects year-over-year growth of 6%. The revenue growth was across all our segments. For the third quarter, currency was a tailwind of approximately $19 million to revenue. Now let's discuss the results of each of our segments in more detail. Vision Care third quarter revenue of $736 million increased by 6%, driven by growth in both consumer and contact lenses. The consumer business grew by 6% in Q3 as our key brands performed well and consumption trends remained steady. We delivered solid growth in the quarter while absorbing a destocking impact of approximately $6 million. Let me go over a few highlights. Eye vitamins, PreserVision and Ocuvite grew by 11%. LUMIFY generated $48 million of revenue, up 2%. In the quarter, we continue to see strong consumption. Year-to-date, LUMIFY revenue is up 13%. We saw strong execution in the consumer dry eye portfolio, which delivered $113 million of revenue in Q3, up 18%. Our 2 key franchises, Artelac and Blink, once again contributed to the strong performance. Artelac was up 18% and Blink was up 36%. Contact lens revenue growth was 6%. Our contact lens business has outpaced the market, and we saw strong performance once again in the quarter. The growth was led by Daily SiHy, which was up 24%. Biotrue was up 7% and Ultra was up 4%. In Q3, our contact lens business saw growth in both U.S. and international markets. The U.S. was up 9% and international was up 4%. Moving now to the Surgical segment where we continue to see steady market dynamics and procedure volume. Third quarter revenue was $215 million, an increase of 1%. Excluding the enVista recall, Q3 revenue growth was 7%. In Q3, implantables were up 2% and 14% sequentially. As Brent will discuss, we are continuing to make solid progress with the enVista return to market, and we are regaining momentum in premium IOLs. Consumables were flat on a constant currency basis and up 4% on a reported basis as we lapped last year's notably strong Q3, which saw stronger volumes driven by resupply to the market. Finally, equipment was up 4%. Revenue in the Pharma segment was $330 million in Q3, which represents an increase of 7%. Our U.S. branded Rx business was up 13% in the quarter. Miebo delivered $84 million of revenue in Q3. This represents sequential growth of 33% and a 71% increase year-over-year. It also reflects TRx growth of 110%. Xiidra delivered $87 million of revenue in the quarter, which is in line with our expectations. Xiidra TRx growth was 8%. Our international pharma business was up 12% in the quarter. We continue to make progress in our U.S. generics business. As anticipated, we are seeing sequential growth with U.S. generics up 2% this quarter compared to Q2. Now let me walk through some of the key non-GAAP line items on Slide 9. Adjusted gross margin for Q3 was 61.7%, which represents a 130 basis points decrease year-over-year. This was mainly driven by product mix and the onetime impact of the investor recall. In Q3, we invested $95 million in adjusted R&D, which represents an increase of approximately 13% over Q3 of 2024. Third quarter adjusted EBITDA, excluding acquired IP R&D was $243 million, up 7% year-over-year on a reported basis. Q3 adjusted EBITDA margin, excluding acquired IP R&D was 19%, which represents a sequential increase of 400 basis points. We are continuing to execute our margin expansion strategy as we transition from the most active product launch cycle in the history of the company to a growth phase and as we remain focused on disciplined cost management. Adjusted cash flow from operations was $161 million in the quarter, and adjusted free cash flow was $87 million. We are pleased with the continued progress of our efforts to drive cash flow optimization initiatives. Net interest expense for the quarter was $98 million. Adjusted EPS, excluding acquired IPR&D, was $0.18 for the quarter. Now turning to our 2025 guidance on Slide 12. We are maintaining our full year revenue guidance at a range of $5.05 billion to $5.15 billion. This revenue guidance represents constant currency growth of approximately 5% to 7%. Shifting to adjusted EBITDA. We are updating our adjusted EBITDA guidance to a range of $870 million to $910 million from a range of $860 million to $910 million. The raise in the lower end of the range is driven by the strength in the performance of the business. In terms of the other key assumptions underlying our guidance, we continue to expect adjusted gross margin to be approximately 61.5%. For the full year, we continue to expect investments in R&D to be approximately 7.5% of revenue and interest expense to be approximately $375 million. We continue to expect our adjusted tax rate to be approximately 15%. We now expect full year CapEx to be approximately $295 million. Consistent with our previous guidance, our current guidance excludes any potential onetime IPR&D charges that we may incur in 2025. Finally, a brief word on tariffs. The tariff policy remains fluid, and we are continuing to monitor updates. Based on where the policy stands today and the actions we're taking, our updated guidance assumes we will be able to offset the impact of tariffs in 2025. To conclude, we had a strong quarter and our business fundamentals remain solid. We are committed to our strategy to drive sustainable growth and margin expansion. I look forward to seeing you all at our Investor Day on November 13. And now I'll turn the call back to Brent. Brenton L. Saunders: Thanks, Sam. Let's spend some time highlighting growth drivers in each business. There's not much I need to say here as these charts plotting TRx growth for Miebo and Xiidra speak volumes. 110% year-over-year prescription growth for Miebo is outstanding, especially considering there was a new entrant in dry eye disease treatment. Xiidra is doing what we said it would, steadily growing in volume while maintaining a sizable market share. We expect both medications will continue to benefit from ongoing category expansion as dry eye awareness and education increase. As a reminder, we're at the tip of the iceberg when it comes to treating the millions of Americans who suffer from dry eyes. We often reference a thoughtful approach to expanding our daily SiHy portfolio as was the case in the third quarter when we launched a toric model in Japan. We're now in more than 50 countries and the portfolio still shows no sign of slowing down with 24% constant currency revenue growth in Q3. We're still in early innings, but remain excited for additional expansion and anticipated introduction of new SiHy offerings under development. At a macro level, in consumer, we saw impressive consumption considering a work-down of inventory in the trade. That's a testament to brand building and confidence in our products among eye care professionals whose OTC recommendations carry significant weight. It's worth taking a moment to remember that we only acquired the Blink family of eye drops a few years ago in a deal that was largely overshadowed by our Xiidra acquisition. In that short period, we've completely revitalized the global brand and introduced new options, helping drive nearly 40% reported revenue growth in the third quarter. Earlier, I referenced Artelac, which, as a reminder, continues to be our most global dry eye option with availability in more than 40 countries and plans to expand further. Double-digit reported revenue growth is common for the brand and Q3 was no different. Eye vitamins saw a nice uptick with 12% reported revenue growth. Our new formulation of PreserVision, which we expect will be on the shelves in the first half of 2026, could significantly increase the addressable market for age-related macular degeneration. One caveat on LUMIFY performance. Our typical growth wasn't reflected in the third quarter due to the timing of a large promotional order shipped to Costco in June. Then that we saw the benefit in the second quarter with 27% reported revenue growth. LUMIFY's popularity and category dominance is clear with consumption seeing 14% growth in Q3. Two call-outs for Surgical, both related to our momentum in the high-margin premium market. While not fully recovered, progress on our return to market for the enVista IOL platform and Envy in particular has been faster than expected, thanks to the tireless work from the team and our deep relationships with ophthalmic surgeons. Total enVista sales in the third quarter reached 82% of Q1 or pre-recall levels, with Envy coming in at 91%. In September, Envy sales surpassed first quarter average monthly sales. While enVista Envy has a foothold in North America pending additional launches, our LuxSmart premium offering continues to expand in Europe with 6% constant currency revenue growth in the third quarter. I've already said as much as I can on our pipeline. The rest we'll save for Investor Day, which will take place at the New York Stock Exchange on November 13. What I can say is we put a premium on durability of growth through innovation and that these are exciting times for Bausch + Lomb. Let's now move to Q and A. Operator? Operator: [Operator Instructions] And the first question today is coming from Patrick Wood from Morgan Stanley. Patrick Wood: I'll keep it to one just in the interest of time. But not to steal the thunder from the Investor Day, but you added obviously that financial excellence pillar. High level, any kind of commentary you could give us on like how we should interpret that? Are we thinking about is this a cash conversion thing? Is this like a margin structure thing? What was the impetus at least behind kind of adding that? Curious what you can add at least ahead of the Investor Day in November. Brenton L. Saunders: Yes, of course. And thanks, Patrick. Look, under our roadmap, which we've been talking about since I joined 3 years ago, we've made really strong progress across our 3 core pillars: selling excellence, operational excellence and innovation. This fourth pillar, financial excellence, is really about sharpening how we execute really on a day-to-day basis. In essence, really ensuring every dollar we spend drives growth and/or efficiency. So look, we announced this Vision '27, which you'll see some greater detail in 2 weeks. But essentially, we're being very intentional about controlling operating expense, improving our mix and setting up for meaningful margin expansion over time. So it's not really about just cost cutting. It's really about disciplined execution and better outcome and resource allocation. But I'll turn it over to Sam; maybe you want to add some more color. Osama Eldessouky: Absolutely. And what Brent said here, Patrick, is very important because it outlines our strategy. So let me give you more insights on how we see this strategy drives both the top line growth, the margin expansion and the strong cash flow generation. So when you think about the effects on the revenue, we've been driving gross all our businesses. And our team executed really well, and you see that throughout the last number of quarters, and you also see that in Q3 as we reported this morning. We expect to continue with this momentum with our guidance suggest above-market growth as we go forward. And as we look forward, again, we'll say more in a couple of weeks, but we see that momentum carrying forward with us. On the margin expansion, it has been a focus for us. And this quarter, we're seeing a margin improving sequentially 400 basis points. We're seeing the benefit of the work that have been sort of going on with the Vision '27 that Brent announced earlier in the summer. And we're seeing these benefits this quarter with a lower SG&A percentage sequentially and year-over-year, which is very important. That sets the foundation for us as we think about margin expansion for this quarter and more importantly, for the future as well. And then the last pillar of the financial metrics is the cash flow. On the cash flow, we've been working on optimizing our cash flow generation and we're seeing the results this quarter with a strong cash generation, adjusted cash flow from operation by $161 million. That's a 66% conversion to EBITDA, which is very strong. And what's important here is that sets also the foundation for us of what we were able to generate this quarter, but also as we go forward. So the point that I can't emphasize enough is what we've been doing and executing on the work that we've been doing for the last number of quarters is setting us up well for what we delivered this quarter in Q3, but more importantly, setting us up well for the rest of this year and what we will be able to do beyond 2025, which we'll talk about more on November 13. Brenton L. Saunders: Yes. And I would just add a little bit more color. I think it's important to know that our Vision '27, which is the project that instigated our financial excellence pillar, is very broad. Almost all 13,000 colleagues are included. There are hundreds of projects. We have a dedicated PMO that we put our -- some very high potential people in full time to manage. And so this is a really comprehensive initiative. And there's no project that's too small. And obviously, every dollar counts. And so this is a full core press to really deliver financial excellence over the next few years. Operator: The next question will be from Joanne Wuensch from Citibank. Joanne Wuensch: My favorite question is always to ask about your contact lens business and you put up growth ahead of the market growth rate from what we can calculate. I'd love to get your impression of your share and the market. And there was an article in the Wall Street Journal that talked about changes in the contact lens market, and you were quoted in it. And I was interested if you had any additional color you could add. Brenton L. Saunders: Yes. Thanks, Joanne. So look, I think the lens market is growing still in the mid-single digit, probably at the lower end of the mid-single digit. We'll see when a few more of our competitors report, but that's probably where it's at. We have now, I think, for several quarters, grown the fastest in the industry and growing faster than -- significantly faster than the market. And I attribute that to new product innovations and good execution. And I've said this before, but the thing that I've always been very proud about our team is that they continue to grow our new products, our Daily SiHy INFUSE or Ultra Daily while continuing to maintain growth in the older products and thereby really avoiding the leaky bucket syndrome, and that's a big contributor to our growth. With respect to, I guess, the Wall Street Journal article and the Cooper situation, I want to be very clear about one point that the matter is that they're facing is strictly between Cooper and its shareholders. We have no intention of getting involved. That being said, what I did say, which I do believe, that a more scaled competitor certainly would strengthen competition and be beneficial to consumers and patients. And so look, we continue to evaluate it, but it really is a matter for Cooper and its shareholders. Operator: The next question will be from Young Li from Jefferies. Young Li: I guess first one is just on Miebo dry eye and the launch of TRYPTYR. So I heard your comments about Miebo's performance even with the competitive launch, went to AAO and joined some of the sessions where docs were talking about using products and combo, either TRYPTYR or Xiidra to stimulate tear production and then Miebo to sort of lock that in. Can you maybe expand on that thought a little bit where you talk about just the use of combo drugs to help expand the dry eye market opportunity? Brenton L. Saunders: Yes, absolutely, and thank you for the question. And Yehia Hashad, our Head of R&D and Chief Medical Officer, is here. And so maybe he can weigh in here as well. But look, when I look at the third quarter, and I've been through competitive launches. I remember when I was at Allergan when Xiidra launched, we're seeing the same pattern here when TRYPTYR is launching in the face of this market, which is the market tends to expand. And there's no better proof point than looking at TRx growth of 110% for Miebo and 8% for Xiidra in the face of a competitive launch from an established significant player in the industry. So that's a really good sign. I think when you look at -- and always difficult to do, so I wouldn't read into this precisely, but I think it's helpful to think about it directionally. If you look at TRYPTYR on a launch-aligned basis with Miebo, it's running at a very small percentage of TRx compared to where Miebo was. I think in last week's number, it was around 20% on a launch-aligned basis of the MBO launch. So clearly a different type of launch with a different type of profile and curve. That being said, we do think that there is a place for a drug that stimulates tear production. There are other drugs in the market. TRYPTYR is not the first to do it. Restasis has that in its label as well as a few of the other smaller products. And so that leads to the last point, which is this is a multifactorial disease. The 2 most prevalent conditions are evaporation and inflammation that probably makes up somewhere close to 80% of the patient population, and thereby creates a great opportunity for combination therapy to allow ECPs to really have the, what I call the easy button of not trying to -- and many of them don't even have the diagnostic capabilities to determine the etiology of the disease in the patient. And so having a product where lifitegrast and Miebo or Xiidra and Miebo are combined really is, I think, an advancement for patients and certainly an advancement in treatment. But Yehia Hashad, please jump in. Yehia Hashad: I think, Brent, you addressed really the critical points just to reemphasize that dry eye disease is a multifactorial disease. Naturally, it could actually be triggered by either aqueous deficiency or much more common by evaporation of the tear film. Miebo is the only product that's been approved for the evaporative component of the dry eye. Regardless it's an aqueous deficient or evaporative, if the osmolarity and with the chronicity of the disease if the osmolarities changed, this could trigger a visual circle of inflammation. And actually it's a very good reason to start to think about combining 2 mechanism of actions in order to address the disease. It has the potential of more efficacy and also it has the potential of more compliance for the patients, and it has also the potential for maybe less adverse events due to much better innovative formulations. So I think this is where we are targeting our new programs as well with the combination between Miebo and Xiidra. And we still are actually very confident about our profile of products as the only evaporative -- the only treatment for evaporative dry eye, which is Miebo. Operator: The next question will be from David Roman from Goldman Sachs. David Roman: I was hoping, Brent, you could spend a little bit more time on the surgical business. And I appreciate you sharing the metrics around the evolution of the franchise, both in third quarter and how you exited relative to where you had started pre-recall. But maybe you could just contextualize a little bit the enVista launch with where it's going, what feedback you're getting, how the recall may have impacted the overall trajectory and how to just think about the business as we head into Q4 and then just next year maybe directionally? Brenton L. Saunders: Sure. And David, welcome. So look, progress on the enVista platform, I think, has been impressive and certainly faster than we expected. This was an all-out effort on everyone in our Surgical team, but in particular to our frontline sales colleagues who worked so hard to work with surgeons and ASCs to make sure that they manage through the recall and came out with trust in us and our products. I would say the other unintended super big benefit of this is the way we handled the recall. I think really even at this AAO, where the recall is something that was really not discussed at all, but the trust that we developed in how we handled it, I think, was on full display and many, many surgeons always commending us for doing the right thing and handling it with such transparency. When you look at all the metrics though, you can really see that the recovery is strong, showing both a year-over-year basis and sequentially. And we are, as we had planned quickly approaching Q1 pre-recall revenue levels. In fact, Envy slightly surpassed that in the month of September. So third Q '25 revenue relative to Q1 '25 pre-recall, total enVista sales in Q3 reached 82% of Q1 pre-recall levels. Envy sales in Q3 reached 91% of Q1 pre-recall levels. And as I mentioned September, Envy sales surpassed Q1 on a monthly basis. Revenue growth year-over-year in the total implantable portfolio was 2% sequentially and total premium IOLs was 27% sequentially. When you look at Q3 '25 versus Q2, so on a sequential basis, the implantable portfolio was up 14% sequentially and the premium IOL was up 67% sequentially. I think to just answer the last point of your question, there is still some impact, right, which is many of our sales colleagues, particularly in North America, really spent the last several -- well, 3 or 4 months managing the recall, right? We had to go and get the inventory back. Our reps had to help establish new consignments and the like. And so that did probably shift some focus from some of their other responsibilities to focusing on managing this situation. I think that's nearly behind us now, and we're back out on our front foot and moving quickly. I think with respect to consignment, we have most of our brands in full consignment with Envy getting there and probably before Investor Day, we should be back at full consignment in the market. So we're at the very tail end of hopefully having to talk about recalls anymore and just focusing on growth. David Roman: Super helpful perspective. And maybe just a follow-up on the P&L here. Clearly you're starting to see a lot of SG&A leverage as a reflection of the focus you've put on financial excellence. But maybe just can you help us think about the sustainability of that trend and how you balance reinvesting in the business for growth given the plethora of opportunities you have in front of you versus driving financial leverage? And I know you'll get into more of that at the analyst meeting, but just maybe help us think about Q3 in context here. Brenton L. Saunders: Yes. So maybe I'll start and then Sam could add some color. Look, our goal is that it is sustainable, and we've been saying this for some time. I think now we're trying to put some points on the board to show you that we can deliver. And really, the emphasis of the Investor Day is to walk you through our 3-year plan to show you what we believe we can deliver and how sustainable it really is. And I would say that under Vision 27, some key factors here, not just about cost and OpEx discipline, but some of our launch products are moving more to growth mode, right? So where we overinvested, now we can come back to just growing some of these products that are no longer in launch mode, but just growth mode. So that's a piece of it. Product mix continues to be a large portion of how we can improve margins. And then lastly, I would say some of our manufacturing efficiencies are probably towards the tail end or the back end of the 3-year cycle just because of the timelines, and regulatory burdens and whatnot of improving manufacturing capabilities. But all those things are in motion, and you'll get much more color when you see the 3-year plan in 2 weeks. But Sam, anything you'd add? Osama Eldessouky: Yes. Let me give you more insights here and put in context for you in terms of the numbers. And when you think about the Q3 P&L and you think about what we accomplished, again this is -- we're very pleased with what we have done from an execution because it really sets the foundation, like Brent said, of what we will be able to do going forward. And we'll speak about that more as we go into the Investor Day in a couple of weeks. But just to focus on Q3 right now and the trajectory short term this year, SG&A hit its lowest point this year in Q3. We're running SG&A roughly about 40%, which is about less than what it was sequential, about 290 basis points on a sequential basis lower. When you look at it on a year-to-year basis, about 130 basis lower than compared to Q3 of last year. So, we're seeing the sequential improvement, and that's really setting the new foundation for us of what we think about. And it's all about not just the quantum of SG&A declining or going down, it is actually also the shift in the mix of what we're doing with the SG&A and repointing many of the dollars within SG&A to revenue generation. And you're seeing that in the top line growth here, David. So really, everything is pointing into the right direction for us in terms of what we've been doing and the execution that we've done is going pretty well. And that will be setting up the foundation for us as we wrap up 2025 and more importantly, as we go beyond 2025. Brenton L. Saunders: I would add one other thing because you asked the question, David, how do we prioritize investment? You see this nice improvement in the quarter despite a 13% increase in R&D expense. And that's because we are prioritizing this continuous stream of innovation, which Yehia and his team are going to be, I think, very proud to highlight in 2 weeks. So I think we can continue to invest in R&D and reallocate towards internal R&D development and still deliver the margin expansion we discussed. And so that's the balancing act, but I think we figured it out. Operator: The next question is coming from Matt Miksic from Barclays. Brenton L. Saunders: I guess we lost Matt. We'll see if he gets back in the queue, but let's move on. Operator: Certainly. The next question is coming from Robbie Marcus from JPMorgan. Lilia-Celine Lozada: This is Lily on for Robbie. I heard you said you expect to be able to offset tariffs in 2025. But how should we think about your ability to offset that in 2026? And with where things stand now, how big is the gross tariff impact for next year, if you're willing to share any color on how we should be thinking about the magnitude of that? Brenton L. Saunders: Yes. So Lily, I think we've been very transparent about tariffs and the impact and our ability to mitigate it. The problem is that the situation remains very fluid. One of the biggest impacts to us from tariffs is the reciprocal tariff from China. And as we know, the President is on a trip to Asia right now and is meeting with President Xi Friday to try to finalize trade negotiations. He did tweet or Truth Socialed yesterday that he expects a deal to be done and tariffs to be lowered. That would obviously be easier if that were to go the other way, then we'd have to continue to work hard to mitigate. The point, I guess, I'm making is I know people were upset with us after the first quarter where we just didn't add it to our guidance because of the fluidity of the situation. I think we turned out to be correct, and we managed through it. I would hesitate to guess what the President is going to tweet tomorrow. But I think the long story is we can absorb it, we can manage it. Our team is -- we've got a dedicated team that tracks it and mitigates and we've got a lot of levers we can pull to do it. Now if something came out of left field, we'll have to deal with that. But I think we feel like we're on very solid ground now with tariffs. Lilia-Celine Lozada: Great. That's helpful. And just as a follow-up, I heard you said contact lens market growth at the low end of the mid-single-digit range, which sounds like it's a little bit softer than what you had been pointing to previously. So if you could just dig into that a little bit more, that would be helpful. What's driving what sounds like a slightly softer outlook? And how big of a contributor do you think price can continue to be? Brenton L. Saunders: Yes, absolutely. So I always think about this as a mid-single-digit market, but that could be 6% one year and 4% another. I think we're probably more between the 4% and 5% this year. There is some softness in different parts of the world. We see a little bit more softness in Southeast Asia. China is a watchout. We do see consumer softness in the data, in the global data. We grew 10% in China, but we do have it on our watchlist. We have a very important event on November 11. Singles' Day is a very big event for us with our DTC approach in China. And so I'll know a lot more when we get to Investor Day after we see the results of Singles' Day for the Chinese market. That being said, big online players like Alibaba have seen big, big decreases. And so you just have to be thoughtful and watch. The data is mixed. There were some positive data Monday out of China on exports. So we watch it carefully. I think when you look at the market, maybe there's a little bit of a bifurcation. I think some of the lower income consumer is, I think, feeling more stress than the higher income consumer. There's a nice bifurcation there. And so some of the private label or cheaper lenses seem to be growing the market a little bit slower than the more premium part of the market. And even in the U.S., we're in this weird place where you see the stock market at all-time highs, yet consumer confidence on a relative basis quite low. And that's hard to reconcile. And so we just keep monitoring it very closely. But our outlook is positive. We'll grow faster than the market. We feel good about our business, but some of our competitors may have some different struggles. Operator: [Operator Instructions] The next question is coming from Pito Chickering from Deutsche Bank. Pito Chickering: Just sort of digging into sort of the gross profit margin that you saw this quarter, just looking at the strong constant currency growth coming from pharma and the mix tailwind that that provided, and then can you sort of walk us through sort of the other moving parts sort of within this quarter, including tariffs and/or FX changes. Brenton L. Saunders: Yes. Sam, why don't you take that one? Osama Eldessouky: Yes. So let me put in context for the gross margin. When you look at the gross margin this quarter, we had roughly about 130 basis point year-over-year decline. And that's really, as I said in my prepared remarks, there's the element of that we're still ramping up the reintroduction of the IOLs with enVista. That's a higher margin. So you're seeing the impact in the quarter from a mix perspective. And also you see product mix playing out in some of our businesses driving some of that remainder of the 130 basis points. So it's really more of a product mix story plus the enVista recall adjustment on a year-to-year basis. Pito Chickering: Right. Then for the guidance, I guess, implied on the fourth quarter that that ramp from 3Q to 4Q, that's primarily from enVista coming back online. Or are there any other moving parts we should think about there? Osama Eldessouky: Yes, there's 2 parts here. I think the enVista, as Brent said earlier, we're seeing the ramp-up in enVista continue. So that will continue in our Q4. So that playing a big factor there. The other part of it is also our seasonality in our business, which tend to be -- Q4 tends to be a stronger quarter out of all 3 -- out of all 4 quarters. So you'll see that seasonality playing out into the gross margin. Operator: The next question is coming from Matt Miksic from Barclays. Matthew Miksic: Sorry about earlier. Just a couple of quick follow-ups, one on surgical and one on pharma. So congrats on the great kind of comeback from the recall and momentum and interest in Envy and the rest of the portfolio. Just on the market, I know you're in a position of, I'd say, it seems like share growth, share recovery maybe from the recall. Just health of the market, volumes in the market, it was kind of a question and debate over the weekend at AAO. I'm just wondering your thoughts on that. And as I mentioned, just one quick follow-up on pharma, if I could. Brenton L. Saunders: Yes. I think that the health of the market is steady. I was also at AAO, and I talked to hundreds of surgeons there as well. I look at all of our data on a regular basis. And I really see a very steady market in cataract. We know that there is a growing patient population as the world ages. And so I don't see any real watchouts or anything to worry about in terms of the health of the market. I think it's pretty steady and over time should expand. Matthew Miksic: That's helpful. And then just on pharma, the Miebo momentum has been impressive. I'm not sure, but I'd love to hear if you feel like you're at a full sort of array of coverage at this point. Or is that something that's still improving? And then on Xiidra, if you could just remind us when you begin to annualize some of the investments that you made late last year, early this year as you get into next year? Brenton L. Saunders: Yes. So I think coverage for both products is pretty steady in the 70% range, which is for this product category is pretty much full coverage. So, I think we're -- we've made those investments. We feel good about where we're at. With Xiidra, the investments were made this year. So this year, 2025, establishes the new baseline. And so I think we're in the fourth quarter now, so we're near the end of that investment cycle. Operator: Our next question will be from Gary Nachman from Raymond James. Gary Nachman: So back to dry eye, Brent, just talk about the overall market growth and where you think that could go and how underpenetrated it still is. And if that factors into how you'll be investing behind Miebo going forward, if you can still taper that spending, if you want to still grow the market meaningfully since you guys are the market leader there. And then I have a follow-up. Brenton L. Saunders: Yes. I mean I think being the market leader with the 2 products, and we saw growth in U.S. pharma around 13% for the quarter. Most of that is driven by Miebo and Xiidra. And so I think the market is growing roughly around 10% plus. And I do think that that can sustain itself for some time for at least the next several years. I think combination therapy, when we bring that to market in a few years, would be an additional opportunity to expand the market. And so I think this has a very long runway. With respect to our spend, it is not necessarily about significant tapering. It's about surgical tapering of our spend where we get the highest ROI. We will continue to maintain the largest field force. Obviously, with the pipeline, it would be important for us to maintain the largest field force and continue to drive patients into the channel -- into the prescription channel. So it is a, again, a delicate balance, but we're very experienced in the dry eye market. A lot of us, including me, have been doing dry eye for a long time. And so I think we've got it sorted out and we'll continue to grow it while being more prudent with our investments. Gary Nachman: Okay. That's helpful. And then just what else are you looking to do to accelerate U.S. generics? It sounds like you made some good progress there in the third quarter. And I mean, longer term, any thoughts on potentially divesting it? Or are you definitely committed to it, I guess, when you look out over the next 3 to 5 years? Brenton L. Saunders: Yes. So look, I mean, we saw sequential improvement in the generics. Obviously, the first quarter was a bit of a surprise to all of us, and we'll see sequential improvement into the fourth quarter as well. But I think the way to think about that business is it's really opportunistic for us. We have a plant in the United States that makes our -- most of our U.S. pharmaceuticals, including our generics. And that plant is quite good. And so we look at generics as being very opportunistic. 1, it creates absorption in the plant; but 2, it creates opportunities for when there is a disruption in the market or another competitor goes out, that business can generate very good margins and profitability as well. So it's not about growth necessarily in sales. It's more about maintaining profitability and being opportunistic. Operator: The next question is coming from Doug Miehm from RBC Capital Markets. Douglas Miehm: First question, just to continue on Miebo to get that out of the way. When you think about the profitability of that drug, I know you've always guided to 2026 though. But given the strength in the most recent quarter and what's likely to happen in Q4, is there a possibility that that could shift ahead to later this year or certainly into early 2026? And my second question just has to do with capital allocation. As the company becomes more successful and more profitable over the next year or 2, with that incremental cash, do you expect to be paying down debt or reinvesting it in the business at reasonable multiples? And I'll leave it there. Brenton L. Saunders: Yes. Maybe I'll answer the part of the capital allocation and turn it over to Sam for the remaining answer in the Miebo profitability question. Look, capital allocation is pretty always a debate, right, and something that you have to take quite seriously. Clearly, we are committed to delevering. A lot of that will come from EBITDA growth, but also from debt paydown. And with respect to M&A, we're always looking for smaller tuck-ins that we can drive profitability from quickly and/or investing in R&D or intellectual property that we can develop into successful products. But I would say managing our -- or lowering our debt ratios is a very high priority for us. Sam, do you want to add some more color? Osama Eldessouky: Yes. So let me take them and I'll start with the capital allocation. I'll come back to Miebo. But when you think about capital allocation, really the framework for us is continue to strengthen the balance sheet and ensure that we're delevering. And we'll talk more about our sort of leverage as we go forward into our Investor Day. But our North Star remains unchanged, which is targeting an investment grade. So that's really where the path that we're going after from that perspective. Investment in the business is always very important. And now we've seen that in the last, I would say, 2 years, we've seen the investments that we put into the business, and they're all been paying quite high level of dividends. We're seeing that on the top line growth, and we're seeing that this quarter starting with the margin expansion as well. So it's really good to see the rewards from the investments in the business. That's something we'll continue when it makes sense to continue to invest in the business. And then the last like sort of to the stool here, which is very important, is how we can continue to increase shareholder value. And as we think about that capital allocation, where we drive the shareholder value is going to be a very important metric for us to think about and deploy that cash appropriately. So that's really -- it's a good position to be in with the cash -- strong cash generation that we had this quarter and the conversion that we had. So again, it's a good place to be in and we look forward to building that foundation. Now just going back to the Miebo profitability timing. I want to just emphasize one point that Brent made, which is very important around the investments in the business and sort of the shift in terms of how we're thinking about the SG&A because even within the dollars of SG&A, although the quantum of SG&A is coming down and as a percentage of revenue is coming down, the deployment within the SG&A dollars is very important where it's going. And we are continuing to ensure that this deployment is putting and providing a very high level of ROI for us. So it's really what we described on the Miebo as we were in the launch phase. And as we wrap up '25, we're exiting that launch phase and we're going to a growth phase, which means that we're going to continue to invest behind Miebo. But we're going to be very deliberate about that investment and where we're going to make this investment. So I think we'll see that as part of the overall leverage in the P&L story as well as the margin expansion. And again, we'll speak more about it as we go into our Investor Day for 2026. Operator: And the last question today will be coming from Tom Stephan from Stifel. Thomas Stephan: Quick one for me. Just on Miebo ASP, a bit choppy year-to-date. I know coverage has been the focus. But Brent or Sam, maybe if you guys can talk about the moving parts there and notably why this quarter was up a lot sequentially by our math on the realized ASP. And then is this 3Q base maybe where we can work off moving forward? Brenton L. Saunders: Yes, Sam? Osama Eldessouky: Tom, you -- probably the best point I'll highlight you or I'll point you to is it's very difficult to look at just any given quarter. It's only 90 days in terms of trying to sort of extrapolate from that point of view. The way I would encourage you to think about the ASP and the Miebo, think about it as with the gross to net is about mid-70s and you think about that more of an annual rate. So if you do it on an annual run rate, I think that probably will get your math sort of closer to what we are seeing as well. Operator: Thank you. And this concludes our question-and-answer session. I would now like to hand the call back to Brent Saunders for closing remarks. Brenton L. Saunders: Great. Well, thank you, everyone, for joining us. I'd like to end where I started, which is thanking our colleagues around the world for all the hard work and dedication on delivering an impressive third quarter. We look forward to an even deeper dialogue around our 3-year plan and more specifically around our R&D pipeline on November 13 at the New York Stock Exchange. And we hope all of you will join us either in person or via webcast, and we look forward to seeing you. Thank you, guys. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Ladies and gentlemen, a very warm welcome to the GSK Q3 2025 Results Call. I'm delighted to be joined today by Emma Walmsley, Luke Miels, Deborah Waterhouse, and Julie Brown, with Tony Wood, David Redfern, joining for Q&A. Today's call will last approximately 1 hour with a presentation taking around 30 minutes and the remaining time for your questions. Please ask only one to two questions so that everyone has a chance to participate. Before we start, please turn to Slide 3. This is the usual safe harbor statement. We will comment on our performance using Constant Exchange Rates, or CER, unless otherwise stated. I will now hand over to Emma on Slide 4. Emma Walmsley: Thank you, and welcome to everybody joining us today. Please turn to the next slide. Our third quarter results once again demonstrate GSK's continued strong performance with positive momentum driving an upgrade in our guidance for the year. They also further demonstrate the quality and strength of GSK's portfolio with sales driven by sustained growth across specialty medicines in RI&I, oncology and HIV. Total sales were up 8% for the quarter, with leverage delivering core operating profit up 11% and core earnings per share up 14% to 55p. Alongside this, we're continuing to make excellent progress in R&D, strengthening our late-stage portfolio and already securing four FDA approvals this year, including BLENREP last week and with the fifth, depemokimab before year-end. Cash generation also continues to be very positive at GBP 6.3 billion for the year so far. This supports investment in our growth priorities and returns to shareholders, including a dividend of 16p for the quarter. And finally, I'm very proud of the progress we continue to make with our trust priorities, in particular, this quarter with the positive Phase III data reported for our low-carbon version of Ventolin. This successful transition will reduce GSK's carbon footprint by up to 45%, and it's a meaningful development for the 35 million patients who rely on Ventolin worldwide, and we expect to launch in 2026. Next slide, please. Our #1 priority remains investing for growth, and I'm pleased with the progress we are making, both in the late-stage portfolio and in the work ongoing to build the next wave of innovation at GSK. With the addition of efimosfermin, the long-acting FGF21 for steatotic liver disease, we now have 15 scale opportunities with peak year sales potential of greater than GBP 2 billion, all with the potential to launch before 2031. By the end of the year, we expect new pivotal trials to have started for several of these 15 opportunities, depemokimab for COPD patients, efimosfermin in MASH, GSK'981 for second-line GIST and our GSK'227 ADC in extensive stage small cell lung cancer. It's worth noting that those last 3 assets have all come from focused, successful business development and BD remains a key driver of our pipeline expansion. And we continue to add high-value innovation at earlier stages of development. For example, I'm excited by GSK'261, a new monoclonal antibody for polycystic kidney disease, which received orphan drug designation by the FDA. Lastly, and very importantly, we continue to optimize our supply chain to scale up capacity for our new medicines and vaccines. Last month, we confirmed our intention to invest $30 billion in R&D and advanced manufacturing in the U.S. over the next 5 years, including the imminent construction of a new biologics flex factory in Pennsylvania. Next slide, please. Since 2021 and then GSK's successful launch as a new focused biopharma company, we've delivered 18 consecutive quarters of profitable sales growth, upgraded annual guidance each year, improved our medium-term outlooks and upgraded long-term outlooks twice from an initial GBP 33 billion by 2031 to now more than GBP 40 billion, all underpinned by a much stronger balance sheet. We've all been resolutely focused on this step change in sharper operational performance alongside accelerating investment in R&D and significantly improving the quality and scale of GSK's innovation. So today, GSK is a very different company in performance, pipeline and prospects. And this team is determined to sustain and improve upon this track record. As we look ahead, we are again upgrading our guidance for the year with meaningful improvement for 2025 sales and profits. And this momentum positions us well as we go into 2026 and to deliver on the long-term commitments for growth we've set out for shareholders. So let me now hand over to the team to take you through more of the detail on our performance, starting with Luke. Next slide, please. Luke Miels: Thanks, Emma. Please turn to the next slide. In Q3, we delivered growth across all our product areas and in the regions with GBP 8.5 billion of sales, up 8% versus last year. Growth in the quarter was driven by Specialty Medicines, up 16%. And and another quarter of strong Shingrix, Arexvy and meningitis demand in Europe. And in the U.S., we navigated the impact of the Medicare redesign from the IRA and the impact is now expected to be closer to the lower end of our GBP 400 million to GBP 500 million range. Next slide, please. Specialty Medicine continues to be the most important driver of our diversified business with double-digit growth once again in all therapy areas. Starting with RI&I, sales were up 15%, driven by strong demand. Benlysta, our treatment for lupus grew 17% with global guidelines supporting earlier use of biologics and recommending Benlysta as a preferred treatment option. 84% of bio-naive patients are now starting on Benlysta, and we continue to differentiate with strong organ damage prevention data and a well-characterized safety profile. Nucala, our anti-IL-5 biologic, grew 14% in the quarter, driven by COPD uptake and continued growth across all in-line indications. Moving to our growing oncology portfolio, which is up 39%. Jemperli sales were up for the 10th quarter in a row as our teams continue to differentiate Jemperli from the competition, as the only immuno-oncology medicine to demonstrate overall survival in endometrial cancer. Jemperli's global market share in endometrial cancer is now higher than the leading competitor in DMMR. And Ojjaara sales were up 51% in the quarter, driven by increasing first- and second-line patient demand in the U.S. and volume growth in Europe following EHA, where new data emphasized the importance of early intervention. And BLENREP is now in the early days of launch with approval in 8 markets and more on that in a minute. And with the strong momentum we're seeing across RI&I and oncology and the continued performance of ViiV, we are now increasing our full year specialty guidance from low teens to mid-teens percentage growth. Next slide, please. In Q3, we had a very strong start for Nucala and COPD with the latest NBRx data showing we are now getting close to 1 out of every 2 prescriptions. Our differentiated label is enabling us to reach a wide spectrum of COPD patients, including those with emphysemia and EOS counts down to 150. We've now reached 95% of our top ACP targets and have a broad formulary coverage. In this population, hospitalizations remain a critical unmet need with 1 in 2 patients dying within 5 years of their first admission, and there is plenty of room to grow in this market with less than 5% biologic penetration in the U.S. The success we have had with this launch gives us further confidence in the potential we have for depemokimab, our long-acting IL-5, which we expect to launch early next year. There are 4 compelling reasons underpinning why we believe depe will be a very material medicine. First, there's plenty of room to grow in the market, starting with bio-naive patients as only 27% of them currently receive a biologic. Second, patients discontinuing therapy is an issue with up to 65% of new patients on current biologics discontinuing therapy within the first 12 months. And unsurprisingly, less adherent patients have worse clinical outcomes, including around a 30% increased rate of inpatient and emergency department visits. The 72% reduction that depe has demonstrated in hospitalization with just 2 doses a year is material. And finally, we know ACPs want this medicine with 86% of pulmonologists surveyed believing it could become a standard of care. Next slide, please. Our oncology portfolio is progressing well. Starting with BLENREP, we now have approval in 8 markets, 7 in Europe and international regions in the second-line plus population and now the U.S., where just last week, we received approval in the third-line plus setting. This U.S. approval is a significant step forward for the U.S. patients and the indication granted reflects that BLENREP has demonstrated superior efficacy versus the standard of care daratumumab triplet and now gives us certainty and the ability to launch. Data from DREAMM-7 in this population is very compelling with a 51% reduction in the risk of death and a tripling of median progression-free survival versus the dara-based triplet. We see a significant opportunity here as of the 71,000 patients in the U.S. receiving treatment today, over 1/3 are treated in the third-line plus setting. And BLENREP is the only anti-BCMA option, which is practically able to be used in the community where 70% of patients are treated and could benefit from a much needed novel MOA. We also have a new and significantly simplified REMS program, including, importantly, the use of optometrists versus the original REMS, which required ophthalmologists only. This will make it much easier for patients and HCPs to manage eye care. And while we anticipate a slower ramp-up in the U.S. with the initial third-line plus label, as we said previously, we will take the time to ensure a positive patient and provider experience to achieve the long-term potential of this highly effective drug. Our clinical development and evidence generation plan continues. And again, working closely with the FDA, this will now be expanded in the U.S. and will support the use of BLENREP in earlier and all stages of multiple myeloma globally. In summary, we expect BLENREP to meaningfully advance treatment options for patients with multiple myeloma, and we continue to expect BLENREP to be a material growth driver for GSK in the next 3 to 4 years. Moving to future indications for Jemperli. We're looking forward to the opportunity we have to change the lives of patients with rectal cancer. And following the transformative data showing a 100% complete response rate in Phase II, we initiated the AZUR-1 pivotal trial and expect to see results in the second half of 2026. And additional trials are ongoing to understand the benefit Jemperli can bring patients with colon and head and neck cancer. Finally, we continue to progress our key oncology pipeline assets, starting with our B7-H3 antibody drug conjugate or GSK'227. We're now recruiting for our Phase III trial in second-line extensive stage small cell lung following a clear signal we saw in the early-stage clinical data from Hansoh, our partner. And our KIT inhibitor for GIST, GSK'981 acquired earlier this year, will start Phase III in second line by the end of the year and first line in 2026. And GSK'584, our B7-H4 antibody drug conjugate is expected to advance to Phase III in endometrial and ovarian cancer next year. And overall, this oncology portfolio offers significant future growth opportunity for GSK and is a clear priority for investment and resources alongside RI&I. And with that, I'll now hand over to Deborah to cover our great momentum in HIV. Deborah Waterhouse: Thank you, Luke. Our HIV portfolio continues to deliver double-digit growth, up 12% in the quarter, primarily driven by 10 points of strong patient demand growth for our long-acting injectables and Dovato. Demand continues to increase across all regions and major markets, particularly the U.S., which grew 17% and where we saw total share gain outpacing the competition. We are delighted with the continued transition we are seeing to long-acting injectables. More than 75% of our growth now comes from long-acting injectables. And in the U.S., they already represent around 1/3 of our sales. Cabenuva, the first and only long-acting injectable HIV treatment regimen grew 48%, driven by strong patient demand. Our competitive performance is reinforced by the acceleration of Cabenuva switches from competitors in the U.S., which this quarter reached 75%. As we anticipated, in long-acting prevention, we saw continued positive momentum of Apretude in the U.S. with competitive growth also of 75%. This quarter, we shared results from CLARITY, a Phase I study comparing acceptability and tolerability of single-dose CAB LA for PrEP marketed as Apretude and lenacapavir. We know patient experience is an important factor for injectables. Results showed 69% of participants found CAB LA to be totally or very acceptable with 90% of participants and 86% of HCPs preferring CAB LA over lenacapavir in terms of injection experience after a single dose. These data add to the growing body of clinical and real-world efficacy, safety and tolerability data we have for Apretude and will help inform expectations and decision-making when initiating long-acting injectables for HIV prevention. We expect continued growth momentum in Q4. And so today, we are upgrading our 2025 guidance from mid- to high single digit to grow around 10%. Next slide, please. Our industry-leading pipeline with best-in-class integrase inhibitors at the core continues to progress and have multiple long-acting options with strong profiles that deliver what we know patients want and need. This pipeline will further drive the transition we are making in our portfolio to ultra-long-acting regimens and will help us navigate the dolutegravir loss of exclusivity towards the end of the decade. Building on our established 2 monthly injectable regimens, we believe 4 monthly dosing in PrEP and treatment will be important options, delivering longer dosing intervals and ensuring continuity of care. We have a confirmed date from Janssen on rilpivirine Phase III clinical trial supply that leads to a delay to the start of Quattro, our Q4M treatment registrational study to H1 2026. Despite this, we remain on track to file in 2027, and we look forward to launching this next wave of innovation in 2028. building on continued strength and performance of our Q2M Cabenuva, the world's first and only LAI for HIV treatment. At the launch of Q4M treatment, we still expect to have the only long-acting injectable treatment regimens on the market for years to come. Looking ahead to our twice yearly injectables, we're on track to confirm the dosing regimen for Q6M treatment in 2026 and expect to file and launch both Q6M for treatment and PrEP between 2028 and 2030. For Q6M treatment, we remain excited about the potential of VH184, our third-generation INSTI, which has the best resistance profile seen to date and IP protection through to at least 2040. To partner with our selected INSTI, we are evaluating 2 assets, VH499, a capsid inhibitor and N6LS, one of the broadest and most potent bNAbs in development. Regarding N6LS, this quarter, we again showed more positive results from Part 2 of our Phase IIb study in BRACE and are pleased to confirm the next phase of this study is now fully recruited. As a reminder, Q6M for treatment in PrEP is not yet in GSK's outlook for 2031. Our long-acting injectable portfolio is backed by 3 years of real-world evidence and implementation science. As we look to the future, we expect our industry-leading long-acting pipeline powered by unparalleled patient insight to deliver 5 launches through 2030. We remain confident in our ability to drive sustained long-term performance and look forward to sharing more at meet the management investor event in Q2 2026. With that, I'll hand back to Luke. Luke Miels: Thanks, Deborah. Turning to Vaccines. Sales were up GBP 2.7 billion in the quarter, up 2%, driven by continued strong demand for Shingrix, Arexvy and Bexsero, particularly in Europe, which was up 35%. Shingrix sales grew 13% overall, largely due to the strong performance in Europe, up 48%, where we're driving across multiple markets and with significant new uptake in France, and a strong performance in Germany, the Netherlands and Poland. In international, sales in Japan continue to grow following the expanded public funding. Ex U.S. sales now account for around 70% of global Shingrix sales. And in the U.S., penetration is now 43% of the eligible older adult population with immunization rates slowing as expected as we access harder-to-reach patients. In meningitis, our portfolio was up 5%, driven by double-digit growth for Bexsero in Europe, where the updated recommendation and reimbursement in Germany continues to pull through and in France following a meningitis B outbreak and the implementation of mandatory newborn vaccination requirements, along with new reimbursed cohorts. Also in the quarter, even though the ACIP recommendation came slightly after the back-to-school season window, we booked the first sales of our pentavalent vaccine, Penmenvy in the U.S. with initial CDC purchases. We expect this vaccine to simplify immunization schedules and contribute to increased coverage and protection against a serious life-threatening illness. Turning to Arexvy. Growth was driven by Europe with good commercial progress in Germany, Spain and Belgium. International also grew driven by tender volumes in Canada. And in the U.S., we maintained our market-leading share in the older adults population. However, the U.S. declined due to lower preseason channel inventory build and slower market uptake in the 60-plus population. In Q3, our flu vaccines were down in part due to competitive pressure in the market where we compete for healthy younger cohort populations who are harder to activate in older adults for flu vaccines. And Established Vaccines were down primarily due to the prior year impact of our divested brands. So in summary, with the Vaccines business, we now expect to land towards the top of our vaccines guidance range of declining low single digit to stable. And as we look forward, although we continue to remain cautious in the near term on vaccines in the U.S., we are confident in the prospects pipeline and benefit this business offers over the long term. Next slide, please. Turning to General Medicines. Sales were up 4%, driven by the strong growth of Trelegy in all regions, up 25% in the quarter. And the SITT class remains very strong, up around 23%, driven by GOLD guidelines, new data and competitive share of voice. Within the SITT class, Trelegy continues to gain more share than any other brand and is the top-selling brand for both COPD and asthma globally. We also have completed IRA negotiations on Trelegy in line with expectations and our outlook. The remaining portion of the portfolio was stable, reflecting continued generic competition and expected adjustments in rebates and returns. We continue to expect sales to be broadly stable in 2025 and are looking forward to future opportunities in this portfolio, including launching low-carbon Ventolin and further establishing our anti-infective portfolio through building access in the U.S. for Blujepa in uncomplicated urinary tract infections and also filing tebipenem in complicated UTIs by the end of the year. All 3 of these represent practical innovation for important areas of medical need. I'll now hand over to Julie. Julie Brown: Thank you, Luke, and good afternoon, everyone. Next slide, please. Starting with the income statement for the quarter with growth rates stated at CER. As already highlighted, sales grew 8%, driven by the specialty portfolio across HIV, oncology and RI&I. Core operating profit grew 11%, reflecting a 5% increase in SG&A as we continue to invest to support key asset launches alongside driving productivity. R&D growth of 10% was driven by accelerated pipeline investment across key specialty medicines. Our royalty income benefited from the Kesimpta performance as well as new RSV and mRNA royalty streams. Core EPS grew 14%, aided by a tax rate of 16% in the quarter and benefits from the share buyback, partially offset by higher NCIs relating to ViiV's strong performance. Turning to our total results. The significant growth reflects the Zantac settlement charge taken in Q3 last year. Next slide, please. The operating margin improved 90 bps in the quarter, largely driven by SG&A margin improvement of 70 bps. This increase demonstrates the efficiency gains achieved through our returns-based approach as we invest in new product launches whilst continuing to generate productivity improvements in the promotion of the existing portfolio. Additionally, in the quarter, gross margin improved, reflecting mix benefits from the continued transition towards specialty and R&D expenditure increased as we reinvest additional royalty income into our pipeline, supporting the acceleration of the ADC programs and pivotal trial starts for efimosfermin and GSK'981 in second-line GIST. Year-to-date, our operating margin is now 33.9%, up 100 bps at constant exchange rates, driven by sales mix, productivity gains and growth in royalties. Next slide, please. Turning to the cash flow with commentary before the one-off impact of Zantac payments. Cash generated from operations year-to-date was GBP 6.9 billion, improving GBP 1.7 billion, benefiting from increased operating profit, favorable movements in return and rebate provisions and the CureVac IP settlement announced in August. This was partially offset by increased working capital, impacted by higher Arexvy and Shingrix collections in Q1 of last year. Free cash flow increased GBP 1.8 billion versus last year, driven by strong CGFO and favorable phasing of tax payments, partially offset by higher spend on in-licensing deals. Zantac payments year-to-date totaled nearly GBP 0.7 billion, and we expect the remaining GBP 0.5 billion to be paid by the end of the year, drawing a line under the settlement agreed and disclosed last October. Next slide, please. Turning to capital allocation. In line with our framework, we continue to deploy cash in a disciplined manner and underpinned by a strong balance sheet. Our net debt to core EBITDA ratio remains broadly aligned with the end of 2024 at 1.3x. Our priority is always to invest for growth as demonstrated by our sustained acceleration of late-stage R&D, the next wave of pipeline innovation and targeted BD. In 2025, we have signed multiple deals, including the acquisition of IDRX-42 and efimosfermin as well as the Hengrui licensing agreement and earlier-stage pipeline and platform technologies. We have also made GBP 3 billion in shareholder distributions so far this year through the dividend and the buyback program, of which GBP 1.1 billion has been executed so far with a cumulative total of GBP 1.4 billion expected to be completed by the end of the year. Next slide, please. As Emma shared, we are upgrading our guidance on the back of the continued strong performance this year. We are raising our full year sales expectations from 3% to 5%, to 6% to 7%, with underlying upgrades for Specialty, including HIV, and we now expect to be towards the top of the vaccines range. Alongside this, we're also raising our guidance ranges for operating profit to 9% to 11% and EPS to 10% to 12% -- looking through the P&L guidance, we maintain that gross margin will benefit from product mix, partially offset by supply chain charges of around GBP 100 million to be taken in Q4. SG&A will grow at low single digits for the year as committed, including Q4 charges of around GBP 150 million to fund further productivity initiatives. And R&D continues to increase ahead of sales as we reinvest incremental royalty income into our pipeline. We are upgrading our expectations for higher royalties to GBP 800 million to GBP 850 million, supported by income from the CureVac settlement announced in August and lower net interest costs than previously guided due to the strong cash generation and the later timing of Zantac payments. Finally, in line with previous guidance, we expect the tax rate to be around 17.5%. In summary, we look forward to delivering a fourth consecutive year of double-digit EPS growth, notwithstanding the Q4 charges of around GBP 250 million, demonstrating the successful execution of our strategy since we became a stand-alone biopharmaceutical business. As a reminder, our guidance is inclusive of tariffs enacted and indicated thus far. We are positioned to respond to these with mitigation actions identified. And looking beyond, we remain very confident in our medium and longer-term outlooks to 2026 and '31. Next slide, please. Moving to our road map, which illustrates our progress towards major milestones and upcoming value unlocks. We have made good progress through 2025, and we expect to continue to build momentum as we move towards 2026. Over the coming months, we will continue to focus on flawlessly executing the 5 key asset launches. The FDA regulatory decision for depemokimab is due this December. And we are looking forward to delivering multiple pivotal readouts across our 15 scale opportunities, including bepirovirsen, cabotegravir, camlipixant, depemokimab in EGPA and Jemperli in rectal cancer next year. And with that, I am pleased to hand back to Emma. Emma Walmsley: Thanks, Julie. So in summary, our Q3 results demonstrate the continued momentum in our business with strong financial performance reflected again in our increased guidance for 2025 and through meaningful R&D progress. Our portfolio continues to demonstrate strength and quality and we're excited by the prospects in our pipeline. All of this positions GSK strongly for the next phase in the company's development to deliver our long-term outlooks, outstanding impact for patients and sustained value for shareholders. So I'm now going to open up the call for Q&A with the team. But before I do so, of course, we know that alongside questions on our results, many of you will be eager to ask our new CEO designate for his views on the future. Well, Luke and I both respectfully ask that you don't. I am, of course, so delighted and very proud to be passing the baton to Luke, but that is in January. And today, we'd like to focus on our Q3 performance. So with that, let's please now open up the call for your questions with the team. Operator: Thank you very much, Emma. The first question comes from Peter Verdult from BNP Paribas. Peter Verdult: Pete Verdult here, BNP Exane. Two quick questions. Firstly, for Julie or Emma, there's a EUR 6 billion revenue gap between market expectations in 2031 and the GSK revenue target over EUR 40 billion. If we move BLENREP's obviously a major point of disconnect. But can you just remind us which other assets you believe are being materially underappreciated? And then secondly, I hear you about not asking questions about strategy, which I will -- won't go down, but just a factual question for Luke. Is it your intention to either reiterate or tweak the go-forward strategy at the full year results? Or do we have to wait for your unveil later in '26? Emma Walmsley: Thanks. Well, I'll ask Julie just to comment on the difference between our full team shared confidence in the short, medium and long-term outlooks and where the market is today. As we've said before, it is largely in oncology and RI&I. The only other point I would make is that as well as a gap between the top line, there is also quite a material difference, as we've said before, in our view of the continued leverage of SG&A and where the market currently sits. But Julie, do you want to comment just quickly on that? Julie Brown: Yes, sure. Thank you very much, Emma. Peter, for the question. So the major areas, as Emma mentioned, oncology and respiratory, immunology and inflammation. And we do think the data readouts and commercial execution will make the difference here. But clearly, the BLENREP launch is one of the areas. Within oncology, I think people are also waiting for the rectal readout in Jemperli. And then the other difference, of course, is the ADCs recently licensed in from Hansoh, which we're very optimistic about in terms of the future. Within respiratory, I have to say the gaps are closing. They've improved. So we've obviously got the depe PDUFA date in December this year. People are clearly waiting for that. And then the other one, of course, is camlipixant, where we've got the data readout from CALM this year and then CALM-2 next year. So we think these are going to be the key trigger points that will make a difference between ourselves and consensus. Emma Walmsley: Thanks, Julie. And as you pointed out before, it's always we know, going to be a combination of the launch execution delivery as well as the data that comes. And it is quite pleasing with our upgraded guidance this year as a reminder that our initial outlook of 33 billion to be delivered by 2031. We are well on track to be delivering this year, 6 years early. So Luke, the second part of the question was related to what's coming despite our shared request in what's coming for 2026. And as usual, we are not going to give a huge amount of detail now about what's coming in '26, but we do want to all as a team reiterate our very high confidence in those not only '26 outlooks, but also '31 outlooks, which are forecasted by this team and committed by this team, as you've heard us all do together again today. At the beginning of -- with the full year '25 results, you'll hear the outlook for '26. And then later on in the year, the building blocks to delivering that longer-term 31 outlook. But Luke, I know you don't want to say too much, but is there anything else you'd like to add to that? Luke Miels: Sure. Thanks, Emma. Thanks, Peter. Look, what I'll say is, look, the number 40 is doable, and I stand behind it. Look, the majority of the products in it were forecast by me. Emma Walmsley: Right. Well, that's clear. And you'll hear more next year. So next question, please. Operator: Next question comes from Matthew Weston, UBS. Matthew Weston: Two questions, please. The first for Luke on Shingrix. There was a great benefit ex U.S. from the rollout in France, both in Q2 and Q3. Can you give us some help for the pushes and pulls on Shingrix into '26? Should we assume that there's been a France bolus, which wanes next year? And then we need a geography to take up the baton. If so, which one? Or do you think there's just consistent rollouts, which mean Shingrix ex U.S. can keep growing? And then the second one for Julie, another quarter of great margin leverage. I know this -- I promise it's not really a '26 guidance question. But can you at least help us with pushes and pulls on OpEx? So obviously, a statement about R&D reinvestment in 4Q -- how much should we assume that carries on, but also depemokimab, Nucala COPD and BLENREP launches, should we think of needing more next year? Emma Walmsley: Right. So Luke, first on Shingrix and then Julie, on our continued drive for meaningful SG&A leverage, please? Luke Miels: Thanks, Matthew. I mean the short answer in Europe is yes. I mean if you step back, we've quietly pursued a 3-stage strategy, and I've mentioned this on multiple quarterly earnings calls when Shingrix has come up in line with the current label. The first step, of course, was max the U.S. and get to a point where we penetrated and where that starts to slow. So we've got an immunization rate of 43%, which is in line with the 3% to 5% increment that we've signaled. It's very much linked to flu though, and flu is softer. And then the plan, of course, was within the U.S., which we started to pivot on to focusing on the comorbid and high-risk subgroups. And that's just started now in June, and I think the results are encouraging. Maybe with hindsight, we could have gone there earlier. But again, we're getting traction there. So that's a good sign, but the U.S. will still be tough because of sort of macro factors around vaccines, which I doubt we'll get into later. In Europe, I mean, really, the strategy was to maintain pricing discipline and then build the evidence of the launch in Europe and Japan, and that's exactly where we are now. So the average immunization rate in the top 10 markets ex U.S. is around 10%, about 9.7% to be exact. So there's more opportunities, more work to do as we broaden those populations in those countries. And then the third part, which we're really not in yet, is a pivot to emerging markets in the midterm with more pricing flexibility. We did start there with China. We had a bit of a challenge there, but we've got a pathway, again, focusing on comorbid and that is resonating despite a tough backdrop. So it's very much a midterm story with China and emerging markets. But yes, net-net, I think we're in good shape with Europe, and we just need to keep that going. Emma Walmsley: Right. Thanks, Julie? Julie Brown: Thank you very much. Thanks for the question. In terms of -- first of all, we're confident in reaching '26 margin target that we laid out of more than 31%. To your point about investment in R&D, we have deliberately been putting more investment behind R&D now for a number of years, and we expect the same next year that R&D will grow ahead of sales. And then in terms of the investment in the launches, we are totally investing in the new launches. We're here to grow the business. So definitely investment gone already into BLENREP, depemokimab coming up, et cetera, Nucala COPD. These are big areas of investment. The thing that we're doing in parallel, as you've probably seen, is that we are driving productivity benefits also through SG&A and the gross margin. And basically, we're looking at operating model cost and tech to modify and simplify what we do. These are really important components. And we now have a track record of doing this. We've guided at more than a 31% margin by '26. This will be over 500 basis points of accretion for the company between '21 and '26, which is really a considerable achievement as well as funding those launches. Emma Walmsley: Yes. And as I said, I think we all expect that to continue. I mean just don't underestimate how much technology is changing the way you can effectively and efficiently do sales and marketing work very differently than it has been the history of this industry, and we're all seeing that change happen whilst allowing us to invest very competitively behind the launches that you're considering -- continuing to see us deliver competitively on. Next question please. Operator: Next question comes from Michael Leuchten from Jefferies. Michael Leuchten: Two questions for Luke, please. One for depemokimab with the pending approval. Luke, can you update us on your latest thinking on phasing of access, likely source of business for the product into 2026? And then BLENREP, there's been a lot of debate after the approval on label, scope, REMS and the like. Is there any learnings you can point to from the -- albeit early experience in Europe or small experience in Europe that helps us understand sort of how the shape of the curve could look like in the U.S. Emma Walmsley: Luke? Luke Miels: Thanks, Michael. I mean I'll start with BLENREP first. Yes, I think there's a number of lessons. I chair a task force every 2 weeks to look at this to ensure cross-functional learnings, and we're certainly incorporating those. I think the key, again, no surprise is that once people have experience with this product, they tend to be, how would I say, pleasantly surprised by the reputation leading into this versus the experience of using it. And that's why we've been very focused on supporting physicians with those first 5 patients to ensure that they understand the dosing and how to manage that and how to hold doses and integrate that into their practice. And that's everything that we will then take into the U.S. We also have close to 8,000 patients now who've been exposed to BLENREP globally. So we've got a lot of clinical and operational experience in those centers as well. On depe, look, it's obviously a competitive environment right now. So I'll be careful around some of the phasing around access and our strategy there. But what I will say is I think this is quite a fascinating opportunity. The basic facts when I try and look at that sort of simplify things is that you've got a lot of eligible refractory patients who, by definition, are at risk of exacerbation. And in the U.S., access is actually extremely good for all biologics. Yet the conundrum, the paradox is that only 27% of them actually get a biologic. And then I think a few physicians must scratch their heads on this one. Those that do get a biologic, we see this with our data, it's true with Dupixent, Fasenra, et cetera. After 12 months, you're losing around 2/3 of them. So -- and of course, if you're not adherent, you are put on a biologic for a reason. And if you're not adherent, then you have a higher risk of an exacerbation and subsequent ER visit, for example. So for us, there's a clear opportunity here for ATP-driven administration with long intervals between dosing and a strong efficacy that's associated with that. The market research is very, very consistent. This is probably the most market research product in GSK. And yes, 86% of pulmonologists say this could be a new standard of care when we show them the target label and 82% of pulmonologists said they would consider using this product ahead of other MOAs. So our strategy is very simple. We will be focusing on the naive new patients that are first going on to biologics. Emma Walmsley: I think this is just an extraordinary opportunity when you see the material difference in compliance the material reduction, 72% reduction in the kind of attacks that cause hospitalization and consequently, a very significant cost sparing benefit for health care systems in such a scale disease as asthma. And then, of course, we're very excited about taking depe into COPD and other indications, too. Operator: Next question comes from Luisa Hector from Berenberg. Luisa Hector: And maybe I could take this chance, Emma, end of an era. So thanks to you on behalf of all of us, many insightful conversations and I think many significant achievements whilst navigating some of the challenges. So thank you very much. And my questions would be on business development because we've seen a very neat series of small deals. So where are we now in terms of appetite capacity for the next round of deals and any changes in terms of size or area phasing, et cetera? And perhaps a quick check on the comments you made on J&J and rilpivirine. Should we assume that they can now supply everything you need and that this would not be any kind of constraint when you get closer to filing and launch? Emma Walmsley: Great. Yes. I mean I think we are really supremely confident in our long-acting portfolio, both because of the momentum in the business and the prospects in the pipeline. I'll ask Deborah to talk about that. And in terms of Look, and once again, Luke and Tony and David have been all been co-architects of some deals that we are extremely pleased with the progress on. It's great to see 3 out of the 4 Phase III or the pivotal trials that are due to start at the end of this year are from deals that we've been very pleased to sign. We're thrilled with the discipline we've put through in terms of value and returns when we look at these deals, whether it's in the -- what's become more fashionable FGF21 market or indeed our ADC plays or of course, we're very excited to see what's going on in terms of pipeline development in China and thrilled to see where that partnership with Hengrui will do. And then, of course, once again, we added a couple more deals just this week in our earlier stage pipeline because we're all very focused and you're all very focused on the models of what's happening with the [ Core ] 15, but I know how much the team are also thinking about that next wave of development through the 2030s when we come out the other side of successfully digesting dolutegravir. So I think you should expect that BD will continue to be a very -- it's about half of our pipeline, and it will continue to be a very material contributor to our pipeline with a focus on RI&1 and onc and the kind of scale and pace. But we're always going to be looking out at things and review it very, very regularly. And obviously, the market stays competitive, and we're right in the middle of that. So not much more, I think, to add on that. But let's get back to long-acting. Now 1/3 of our -- or 30% of our business in the U.S. already. So Deborah, do you want to talk about that and the pipeline question? Deborah Waterhouse: Yes. Thanks, Emma. So just to start, delighted with the Cabenuva performance, 75% growth in the quarter. And actually 75% of our Cabenuva switches now come from competitors. And our long-acting injectable performance is at the heart of why we've been able to upgrade our HIV guidance this quarter. So let's just talk a little bit about Q4M. So our Q4M QUATRO Phase III study start is going to be delayed into H1 2026, and that's due to a delay in the delivery of recovering clinical trial supply by Janssen. There is no ongoing issue, which would cause us anything but complete confidence from Janssen. They're a great partner. This is just a one-off. I think the key thing to communicate is that this is a clinical trial, supply delay is not related to efficacy or tolerability concerns at all, and we remain committed to 2027 file and 2028 launch of Q4. We've looked over the financials and there's no material impact on outlook from the delay because we've got Cabenuva in the market already, and that product is performing so well. Demand is high. We've got really fantastic momentum. And whilst we're disappointed, obviously, not to be able to launch Q4M at the end of 2027, as we originally said, actually, this is a marketplace where there's no competitor for a long, long period of time. So we are the only long-acting injectable in treatment, and we're going to remain that way for the foreseeable future. Cabenuva will power on, and we will do everything we can to get Q4M into the marketplace as soon as we can. And then obviously, we've got Q6M coming next year. We will be doing our regimen selection for Q6M, and then we will be launching that asset as the next phase of our long-acting injectable journey. Emma Walmsley: It's just so important to remember that we are the only one on the treatment market for a very long time ahead, and that is a business that continues to accelerate momentum. Deborah Waterhouse: And there are obviously, Emma, as we've seen ourselves, some sort of bumps in the road of long-acting injectables that we and our competitors experience. So I think it's just a complicated area, mainly around CMC. But in terms of the patient benefit, really significant and the demand from patients is also very material. Operator: Next question comes from Sachin Jain from Bank of America. Sachin Jain: Just a follow-on actually to the Q4M question. So thank you for that update, Deborah. I wonder if you could just talk about the commercial impact of delay relative to Gilead's weekly oral len plus islatravir, which is probably 6 to 12 months ahead. We hear mixed KOL feedback on weekly oral versus Q4. Secondly, I wonder if you could just update on U.S. policy. So any color you're willing to give on ability to do a deal with the administration given your high Medicaid exposure? And then how is dialogue around IRA going? And then just one quick clarification, if I can chance my arm for Luke as a follow-on to earlier question on BLENREP depe. Clearly bullish commentary, Luke, but just trying to triangulate versus '26 consensus for both, which is around GBP 200 million. I know it's a tough question, but any color directionally would be helpful. Emma Walmsley: Luke, do you want to say anything on that? Luke Miels: Look, I would just say these are big assets in the long term. I can't give any sort of color, but clearly we're going to approach both assets very aggressively. And I would just point to the performance in Nucala COPD, where in May, we had 0% market share, and we've now got 46% of those new patients in COPD against Dupixent. That's not a read across depemokimab. It just tells you that the team is very effective at executing, and we're going to be focused on that asset and BLENREP already in the field and receiving very good feedback. Again, it's going to be more of a stage process to give people experience and confidence to use the product more broadly. Emma Walmsley: Great. So on MFN, I'm not really going to give any more detail or get ahead of anything, except to say, as you would expect, we're engaging, as I've said, very constructively with the administration. Medicaid is 10% of our total U.S. business. I'm really confident in our ability to navigate this over the last 4 years through a variety of different environments. The strength and quality of our portfolio has continued to allow us to do repeated upgrades and navigate through these kinds of challenges. The U.S. is our #1 priority market. We've committed to very material investments there. And we fully agree that we should be partnering and working towards being in a place where step change innovation can be made affordably available and sustainably available for innovators to American patients. And we also fully agree that we'd like to see all countries recognize the value that innovation can bring -- to bring down the demand care on health care. So the demand, sorry, curve and therefore, the cost on health care. So continue to engage here and we'll keep you updated and very much bearing in mind and sits with a strong underpin to our confidence on our outlook overall. You mentioned IRA. I think Luke already said it. We're very pleased to have concluded the latest rounds of IRA negotiations and all fully factored into our outlook. So nothing more to report on that. And on islatravir, I think that is an important point to remind people of. Deborah Waterhouse: Yes. Thanks, Sachin. So there is an expectation that LEN plus islatravir will launch in 2027. All of the research that we have done indicates that the once weeklies will cannibalize other orals. And actually, there is on that particular asset, a bit of a mixed view, firstly, because of the history of islatravir and the CD4 depletion. But secondly, I mean, we absolutely believe that you need to have an integrase at the core of any 2-drug regimen, whether it is an oral weekly or a long-acting injectable because integrase have got incredible potency, tolerability, high barrier to resistance and 78% of those people who are on treatment today are on an integrase inhibitor because they are the cornerstone of HIV treatment. Now we know that obviously, the other once weekly from our competitor, which is the prodrug of LEN and an integrase inhibitor is on clinical hold. So again, you've just got the islatravir plus the lenacapavir option in '27, and we don't think that's going to be a challenge to our Q4M, one, because the long-acting injectables is a very unique value proposition; two, because we've got an entity at the core of that particular regimen. So we're feeling very confident about our ability to keep driving our HIV business forward and growing strongly and helping GSK navigate through the loss of exclusivity of dolutegravir. Operator: Next question comes from Simon Baker from Redburn. Simon Baker: Two, if I may, please. Luke, going back to something I asked you on the BLENREP call on Friday around the 2031 target. Back in '21, you gave a number of peak sales estimates for products in RSV, BLENREP, Juluca and Jemperli. You've reiterated the EUR 40 billion target. I just wonder if you could give us thoughts on the pushes and pulls. You always said that there were a lot of factors going towards the aggregate figure, but just a check on where you see the pushes and pulls there would be very helpful. And then for Deborah on HIV and the Q4 slight delay, that pushes it a little bit closer to the Q6 launch, but not materially so. So I'm guessing you've always thought that it's not one duration fits all. I just wonder if you could give us some thoughts on how the long-acting market will pan out with the various injection duration options that you will be offering? Emma Walmsley: So I'm going to come to Deborah first on this. But also -- and I will turn back to Luke. But just to be clear, as we've already said, it will be beginning of next year when Luke will give an outlook for '26 and more likely much later in the year when he will talk about the building blocks to deliver on more than 40 and his more than 40 in 31. So I just want to give Luke the permission not to get into detail of the ups and downs as the portfolio continues to mature. But Deborah, let's come to you first. And Luke, if you want to add anything to that, then I'll let you. Deborah Waterhouse: Thanks for the question, Simon. So with Q2M, 15% of patients would be willing to take that regimen to treat their HIV. When you get up to Q4M, it doubles to 30%. And then when you get to Q6M, half of the people who are living with HIV and all of our research say that they would be willing and keen to take a 6-month long-acting injectable. Within the research, though, and with physicians, too, you are right. Some people say, actually, I would like to give Q4M to my patients on an ongoing basis because I like to pull them back into the doctor's office 3 times a year to have viral load testing, sexually transmitted disease testing and all the things that they do to care for their patients. Others are very keen to see that their patients go to Q6M. So there will not be one size fits all, but what there would be is a market expansion that is significant as we extend the duration between administration from 2 to 4 to 6. And obviously, when we get to Q6M, it's a brand-new set of medicines because you've got the third-generation integrase inhibitor, VH184, which has a unique resistance profile and is a third-generation integrase inhibitor. And then you have a capsid inhibitor or N6LS depending on which regimen we select for our Q6M, and it's great to have options. So feeling very bullish about the future of Q6M, but also see a place for Q4M as patient choice remains critical. Emma Walmsley: Thanks, Deborah. Luke, any comments you want to add? Luke Miels: Thanks, Simon. I mean I would just say, again, confident overall in the late-stage assets. And yes, we look forward to updating everyone with the team next year. In terms of BLENREP, I mean, look, it's going to be material. I said that over the next couple of years. And the key is obviously the initial launch and then the pathway to second line, which Tony is very much in hand and the usual pushes and pulls with competitive data sets. Operator: Next question comes from Sarita Kapila from Morgan Stanley. Sarita Kapila: Thanks for the color on Nucala. I was just wondering if we could have a little bit more on the rollout in COPD, how the launch is going versus your initial expectations and where you're seeing the most use? Is it in the 150 to 300 eosinophil group? Or is it in the over 300 where it would be more head-to-head with Dupixent? And then the second one on Jemperli, please. It seems to be a very strong rollout in the U.S. or momentum in the U.S. How penetrated are you now in endometrial cancer? And is this momentum sustainable into 2026? And should we think about Jemperli being able to get to your guide of over $2 billion in the existing indications? Or would you definitely need the pipeline to hit that? Emma Walmsley: So we'll come to Luke on both Nucala and Jemperli, but I think it would be good as well when we've heard on the Nucala launch, just to hear a little bit from Tony because I think we are all want to know, we're all getting more and more ambitious on the portfolio for COPD, whether that's depe or the other assets that we're bringing forward. I know when we announced the deal we just did, the statements that it's going to be the leading cause of hospitalization in coming years. And we're talking about hundreds of millions of people. So this is really a scale disease where we have a lot of expertise for the pipeline coming forward. But in terms of what's in hand right now, do you want to comment on Nucala and? Luke Miels: Yes. I mean -- thanks, Sarita. It's broad. I mean when I was talking to the BU head in the U.S. about this, he said broad several times, broad label, broad uptake, broad resonance. And I mean, another market research point that's interesting is 9 out of 10 U.S. pulmonologists strongly agree that preventing severe exacerbations is essential to COPD management. I'm not sure about the 1 in 10. I don't suggest you go and visit them. Yes, clearly, it's landed well. But as I've said on other calls, this is a population of prescribers that only use it in 1 in 3 patients for many reasons. So that is just a balancing caution, but how we're going against Dupixent is very encouraging. Yes, it's across the label, both bronchiotetic emphysemia and different EOS levels. Tony Wood: Just moving on and on Jemperli. In terms of endometrial, obviously, we're pleased that we have the only and first label with dual primary endpoints of PFS and OS and endometrial cancer. We're following that up with a study called DOMENICA, which is looking at evaluating gemperirdine a chemo-free regimen. Importantly, as well, obviously, the rectal studies continue to progress well, where we have fantastic complete responses. Just a quick reminder on some of those programs for you, AZUR-1, which is the locally advanced MSI-H rectal results, which we're expecting to read out in the second half of '26. AZUR-2, which is colon cancer, and there's an interim for that in '28 and the JADE study, which is in the unresectable head and neck setting for which we're also expecting readouts in '28. So lots of momentum going around Jemperli to continue to support the growth of that medicine. Emma Walmsley: Anything you want to say on COPD? Tony Wood: On COPD, just look, I'm delighted with where our COPD portfolio is currently sitting. You may have noticed we have now 3 Phase III studies starting in COPD. There are the ENDURA-1 and 2 studies in the more typical COPD population and a study called VIGILANT, which is looking at earlier COPD patients. These are individuals who are not treated typically with bios, but for which they have secondary factors. that predispose them to rapid progression. Coming along behind all of that solidly is the long-acting TSLP and IL-33 options. And as Emma has mentioned, the ongoing option in PD3/4 and the latest deal that we have with Empirical that was announced this week with an entirely new novel mechanism, which is [ oligo-based ]. Luke Miels: Yes. And Sarita, back on your question on Jemperli and endometrial. And I think the good news overall, if you just look just in the last 12 months, you've gone from 80% of ONK using IO typically in endometrial to now 96%, which is great. 90% of these patients are now on some form of IO. For us, there are clear opportunities if a physician can accurately cite the RUBY overall survival figure, then the likelihood of using the drug is double that versus someone who can't. So that's our focus is the DMMR population. We do have the broad label, of course. MMRP tends to be more dominated by pembro. But globally, there's about a 5% difference in market share in our favor against pembrolizumab, which is very encouraging. Emma Walmsley: Yes, lots coming on. Operator: Next question comes from Zain Ebrahim from JPMorgan. Zain Ebrahim: This is Zain Ebrahim from JPMorgan. So my first question is on BLENREP. You talked about it, but you mentioned that you expect to see a material growth driver over the next 3 to 4 years. So how much of that growth do you expect to come from the U.S. based on the current label versus ex U.S.? And how much of that is driven by the expected indication expansion in 2028? That's my first question. And my second question is just on general medicines. It sounds like the Trelegy IRA negotiation was in line with your expectations. So how are you thinking about the development of general medicines over the midterm? Emma Walmsley: Yes. I mean, on GenMed, we're not going to change our '21 to '26 guidance, which we upgraded slightly because of the operating performance. So there's no more update on that. And I'm not sure, Luke, how much you want to itemize. I know Darzalex is about half x. Luke Miels: Yes, that's right, Emma. I mean, I think, look, the priority is to get to second line in the U.S. to match the rest of world label. The U.S. initially will be ahead of Europe because we're launching. But as markets like Germany and Japan come online, that should balance out over time. Emma Walmsley: Yes. And I think as Luke can tell you went through in great deal of detail on the calls. There is a material opportunity in third line, and we have a good pathway to getting to second line. And in fact, studies planned, as you all know, in first line, too. So I think this is definitely one to watch as part of our broader oncology portfolio, which continues to build. So look, I just want to say one last thing because I know that was our last question, and we went -- because we had a technical issue, I think, at the beginning, so apologies if you were made to wait. You do know this -- I know this is my last quarter to report as CEO. And I do want to just take a moment to thank everyone on this call for your time and engagement with me and most of all, with this tremendous team who over the last 9 years together have transformed our great company's performance, pipeline and prospects. And in doing so, we've set out a clear pathway for patient impact at serious scale, already 2 million -- 2 billion, sorry, people around the planet. And I firmly believe that GSK's value for shareholders will be fully recognized and sustained. And when you step back and reflect, it's really hard to think of a sector that matters more than ours, where innovation and trust really can change people's lives and drive sustained performance and value for shareholders. And all of us, whether it's those of us here in this room or everybody on the call, well, we're all part of a really extraordinary incredible industry, and it's a privilege to be part of it, and it is not a responsibility to leave lightly. I am so delighted and very proud to be passing the baton to Luke and to be leaving all that GSK has to offer in such fantastically good hands. So I just wanted to finish up the last time wishing everybody listening in just great good fortunes for the future. And I, of course, look forward to cheering Luke and all the wonderful people working at GSK to a lot of further success as they combine science, technology and their talent to get ahead of disease together. Thank you all very much. Luke Miels: Bye-bye.
Operator: Good day, and welcome to the Renasant Corporation 2025 Third Quarter Earnings Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I'd now like to the conference over to Kelly Hutcheson. Please go ahead. Kelly Hutcheson: Good morning, and thank you for joining us for Renasant Corporation's quarterly webcast and conference call. Participating in the call today are members of Renasant's executive management team. Before we begin, please note that many of our comments during this call will be forward-looking statements, which involve risk and uncertainty. There are many factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Such factors include, but are not limited to, changes in the mix and cost of our funding sources, interest rate fluctuation, regulatory changes, portfolio performance and other factors discussed in our recent filings with the Securities and Exchange Commission, including our recently filed earnings release, which has been posted to our corporate site, www.renasant.com at the Press Releases link under the News and Market Data tab. We undertake no obligation and we specifically disclaim any obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures. A reconciliation of the non-GAAP measures to the most comparable GAAP measures can be found in our earnings release. And now I will turn the call over to our President and Chief Executive Officer, Kevin Chapman. Kevin Chapman: Thank you, Kelly, and good morning. We appreciate you joining the call and look forward to sharing results for the quarter. Renasant's financial performance in the third quarter reflects good loan growth and profit improvement that keeps us on the path to meet the financial goals of the merger. The integration with The First continues to go well. Systems conversion took place in early August, and I believe we have made great strides in operating as one team. As you know, in July 2024, Renasant and The First announced a partnership that would maximize our strengths and create a high-performing Southeast bank. At that time, we established profitability goals related to return on assets, return on tangible common equity and our efficiency ratio. We knew that the third quarter of 2025 would be an important measuring stick for our progress against these expectations. Q3 results position us to achieve our goals. Additionally, it is very gratifying to see our team despite going through the largest conversion either company has gone through produced loan growth of almost 10% during the quarter. I want to thank all of our employees for their tremendous effort this quarter in completing systems conversion while continuing to understand and meet the needs of our customers. I will now highlight financial results for the quarter. The company's net income was $59.8 million or $0.63 per diluted share. Adjusted earnings, excluding merger charges, were $72.9 million or $0.77 per diluted share. Loans were up $462 million on a linked quarter basis or 9.9% annualized. Deposits were down $158 million from the second quarter, which was driven by a seasonal decrease in public funds of $169 million on a linked quarter basis. Reported net interest margin was flat at 3.85%, while adjusted margin was up 4 basis points to 3.62% on a linked-quarter basis. Our adjusted total cost of deposits increased by 4 basis points to 2.08%, while our adjusted loan yields increased 5 basis points to 6.23%. We look forward to seeing additional profitability improvements in upcoming quarters as efficiency savings are realized. I will now turn the call over to Jim. James Mabry: Thank you, Kevin, and good morning. As Kevin mentioned, we are encouraged by the integration efforts of our employees and the positive impact on results this quarter. Our adjusted return on average assets of 1.09% for the quarter is an improvement of 12 basis points from a year ago, and our adjusted return on tangible common equity of 14.22% for the quarter is an improvement of 296 basis points. From a capital standpoint, all regulatory capital ratios remain in excess of required minimums to be considered well capitalized. We recorded a credit loss provision on loans of $10.5 million, comprised of $9.7 million for funded loans and $800,000 for unfunded commitments. Net charge-offs were $4.3 million and the ACL as a percentage of total loans declined 1 basis point quarter-over-quarter to 1.56%. Turning to the income statement. Our adjusted pre-provision net revenue was $103.2 million. Net interest income growth was driven by the improvement in the net interest margin and loan growth. Noninterest income was $46 million in the third quarter, a linked quarter decrease of $841,000, excluding the gain on sale of MSR assets in Q2. Noninterest expense was $183.8 million for the third quarter. Excluding merger and conversion expenses of $17.5 million noninterest expense was $166.3 million for the quarter, a linked quarter increase of $3.6 million. With systems conversion now complete, we expect modeled synergies to be more evident in our results going forward. Regarding conversion-related expenses, we believe the majority have been recorded through the third quarter with a modest amount expected to come in the fourth quarter. There was a decline in our adjusted efficiency ratio of about 0.4 percentage points, and we expect to see additional improvements in the coming quarters. We are encouraged by the results of the third quarter and the positive momentum going into the fourth quarter. I will now turn the call back over to Kevin. Kevin Chapman: Thank you, Jim. We look forward to closing out a successful year for Renasant. We have come a long way on our goal of improving profitability. The combination of a strong balance sheet plus added profitability puts us in a position to capitalize on opportunities in our vibrant banking footprint. I will now turn the call over to the operator for questions. Operator: [Operator Instructions] And the first question comes from Stephen Scouten with Piper Sandler. Stephen Scouten: Everyone. Really nice quarter here. Loan growth was particularly encouraging. Can you give any color around what you're seeing from a pipeline perspective? And maybe also around specifically the legacy SBMS markets, maybe in and around the Gulf Coast potential strength you're seeing there that's helping fuel the strong growth? Kevin Chapman: It's Kevin. So yes, we -- looking at loan growth for the quarter, I know we've been guiding more towards, call it, the mid-single digits. We've been expecting payoffs to increase. Our production has been all year long. I think for Q1, Q2, we've been more in the 7% range if you look at the net loan growth. Again, this looming potential of payoffs -- can you -- it feels like it continues to be out there. But getting to the current quarter, what I'd tell you what we're excited about is the growth happened all throughout our footprint whether you look at as a breakdown from a geography, whether you look at it from, say, our credit channels, whether it's our small business lending units or our business banking lending units or even some of our larger units like corporate or commercial lending units. All categories, we saw good distributed growth in all of them. And even if you break it down by asset classes, we saw good growth. So going to where we were back in July of '24 when we contemplated merging with The First, one we thought we could do is unlock some potential in both companies. I think Q3 is... [Technical Difficulty] Specific to The First in the Gulf Coast. What we've seen is we've seen good growth there as well. And the opportunities that Renasant can provide to The First lenders with being able to expand relationships now that they have a little bit bigger balance sheet, we have a bigger balance sheet. We have more lending capabilities or the ability to do specialized lending with some of our secured lending lines. That team has immediately gravitated to it, has made referrals, and we've seen immediate successes as a result of, again, the combination. So again, as we look we're excited about what Q3 indicates, how we're positioned. And again, I think we've got the opportunity to continue growth in Q4 and beyond. Stephen Scouten: Great. Appreciate that color, Kevin. Maybe just curious about pace of expense saves from here kind of how much maybe you've been able to extract so far and kind of what we can think about in terms of further expense states from the deal and kind of the path as we maybe look at a good 1Q '26 run rate, that sort of thing? James Mabry: Stephen, it's Jim. So just to touch on Q3 for a second. So you saw in core NIE, we were up about $3 million ex the merger expenses. And our -- and I would say actually, let me comment on the increase and what we saw in Q3. There was -- there were 3 buckets where we saw the increase, and they were about equally weighted. You had an increase in health and life, you had increase in occupancy, and you saw an increase in health and life occupancy in the FAS 91. So 2 of those are sort of uncontrollable, so we'll see how those play out in future quarters. But as it relates more particularly to your question, our sense is that in Q4, we'll see about a $2 million or $3 million decrease in core NIE for Q4 and then another $2 million or $3 million decrease in core NIE in Q1. Stephen Scouten: Okay. Fantastic. That's really helpful, Jim. And then just lastly for me, I really appreciate how you guys broke out kind of accretion in your slide deck. What's kind of a good baseline assumption of the normal accretion expected? Is it around that, I guess, it was $12.4 million. Is that right? Or maybe the interest rate component of that was about $9.8 million, if I'm doing the math right. Is that a good way to think about forward accretion? James Mabry: Well, it obviously is going to vary the accelerated part is going to vary given loan prepayments. So it's a hard thing to predict. But I think that scheduled accretion is going to track pretty closely to what you saw in Q3. Operator: And the next question comes from Matt Olney with Stephens. Matt Olney: I want to ask more about that core margin in the third quarter, saw some good expansion with that. Any more color on the drivers of that expansion? And then I guess if we look forward, I think you mentioned on a previous call that you thought it could -- core margin would maybe flatten out as we got towards the fourth quarter. Is that still the view of the fourth quarter core margin. James Mabry: Matt, this is Jim. So yes, we were pleased to see a little expansion in Q3. Looking forward, I would say, in Q4, probably some modest contraction in the margin in Q4. And then for '26, I would say, modest expansion. So not a lot of change, but that would be a general outlook and that assumes 4 rate cuts. between now and year-end of '26. Matt Olney: Just to clarify, you said that assumes 4 rate cuts between -- including today, I assume, between now and the end of next year. Is that right? James Mabry: That's correct. Matt Olney: Okay. That's helpful. And then I guess switching over to credit quality. We did see criticized loans jump up in the third quarter. Any color on the driver of that jump up of criticized loans? David Meredith: This is David. So it was a broad-based increase for the quarter. There was a little bit of commercial real estate, a little bit of C&I. If we get into the weeds a little bit, we had a single multifamily transaction that does make up about 1/4 of it. that we feel very strong. This is a good asset, just was underperforming relative to our original budget. We expect that loan to pay off the ordinary course probably early '26. We had 2 C&I transactions that made up roughly 1/3 of that number. One of them is the Tricolor credit that we've talked about that made up a large percentage of that asset type. A little bit of migration in our self-storage portfolio and then a little bit of migration in one asset in our senior housing. So it was broad-based within our downgrades to criticized. We don't feel that we have any loss exposure in that increase, but it's broad-based. And Matt, I know you know we do a fairly aggressive job of looking at our loan portfolio from the health portfolio, risk-rating loans proactively to make sure we're identifying risk so we can find those loans and migrate them out of the bank as quick as possible. So I think that's just a testament to our early identification of problem loans so we can manage them proactively. Operator: And the next question comes from Michael Rose with Raymond James. Michael Rose: Just on the new buyback that you guys announced, -- good to see you guys are going to be building capital, but you haven't bought back really any stock since 2021. Just wanted to see where that currently plays in your thought process, particularly given the fact that you've just here recently completed a deal, there's probably other deals out there. It seems like the environment is good. Just wanted to kind of run down the thought process on capital as we move forward. James Mabry: Michael, it's Jim. So the third quarter was an important quarter for us because we obviously got the deal closed, and that was reflected in Q2. And then to go through systems conversion and just see Q3 come out like it did. And of course, Kevin's comments, I thought were spot on. I mean it was just really nice to see all that momentum that we've got and the fact that our teams remain focused. I say that because I think it's important to have that backdrop as we think about capital because we -- I think we feel like we've got pretty good visibility into Q4 and into '26 in terms of the prospects for us to continue to grow that capital. Our sense is that we could grow those capital ratios anywhere between 60 and 70 basis points between now and year-end '26. And so the capital levers, including buyback, are much more in focus for us. And we are putting a lot of thought into that. And I think are mindful of the fact that we're going to have a growing capital base. We've taken a couple of steps here recently. One, notably, right after the quarter, we redeemed $60 million of sub debt. You saw the dividend announcement, the common dividend announcement. So -- and we wanted to think about that authorization. And one of the things -- one of the reasons we increased it is just proportionate. I mean, we're 50% larger in terms of market cap and capital. But also, it's a lever that we're increasingly inclined to think about. So I think whether it's the buyback supporting organic growth, which, of course, has been strong, remains the #1 goal. But we're going to bear down on uses of capital. And I think buyback is certainly high on that list in terms of levers we might pull in the coming quarters. Michael Rose: Very helpful. And then maybe if I can just ask a question on deposits. You guys' loan to deposit ratio is now kind of approaching 90%. It's the highest it's been since basically the beginning of COVID. Can you just talk about some of the deposit growth strategy? I know there's always some seasonality with muni deposits, too, but the general trend has been upward over the past few years. And just wanted to get a better sense of your plans for deposit growth juxtaposed with the rate environment? James Mabry: I think we've been spoiled because I think out of the last 10 quarters, we've had deposit growth that's equal or better loan growth. And so to not have that in a quarter is certainly something that caught our attention. But as you point out, a lot of that was seasonal, had to do with public funds. And our goal is to grow deposits, core deposits in line with loan growth. And that remains a focus of ours and the way we incentivize our teams, what we motivate our teams and so as we go forward in '26, we want that core deposit growth to equal whatever loan growth we produce. As we look to Q4 some of the public outflows that we saw in Q3, there might be just given the seasonality of the way some of the municipalities behave, we could see some of that come back in the latter part of Q4, so we'll see how that plays out. But I would tell the funding loan growth remains a top priority here. And we know we can generate deposits. We've got a great record of doing that, and it's a focus of the company, whether it's this quarter or next quarter or for the next decade. That is a paramount focus at Renasant to grow the deposit base regardless of what loan growth is. Michael Rose: Really appreciate the color. Maybe if I could just sneak one last one in. I appreciate the near-term color on expenses. I know it's something we all struggle with in modeling as we go through a deal, especially at the size. But just as we think about kind of the combined franchise now that systems conversion has happened, are there other areas and levers that you guys can pull to kind of generate the positive operating leverage as we kind of move forward? I'm just trying to better appreciate some of the opportunities, maybe at legacy Renasant now that you have the cost saves from the deal and the accretion from the deal? Kevin Chapman: Yes. Michael, Kevin. So the short answer is yes. right? If we go back 16, 18 months ago, Renasant on a stand-alone basis, The First on a stand-alone basis, both of us were looking at either adding expenses for the assets where we were at or we needed scale for the expenses and infrastructure we have built. So combining both companies unlock potential. And I think we laid out some goals when we launched this of an ROA in the 120s, mid-teens ROE and a mid-50s efficiency ratio. And I think, again, you saw it in Q2, you see it in Q3, we are right on top on path to meet those goals. But as we've talked about or as we've tried to communicate, that's not where we're stopping. There's real momentum in the company, not only around expenses, but driving higher levels of profitability on our expenses. So that operating leverage that's there is going to continue to come in 2 places. It will come from discipline and management on the expense side, but it's also going to be getting the right return on the expenses we have. So we've had probably above average loan growth now for a couple of quarters. We want to have above-average loan growth. It doesn't have to be 20% loan growth. It just needs to be a couple of multiples above the average so that we can get the scale. So we can get the revenue that's generated off those expenses. And that's been an effort that's been ongoing. I know on the Renasant. And now I think you're seeing it on the combined company. But there's still going to be a continued effort to look at our expenses, create efficiencies. Accountability is prevalent all throughout the company and we hold each other accountable, but the expectations for the company internally have been raised, I would say, further than where expectations are for external estimates. And so we really -- the momentum we have around our financial performance and our focus and that leads with profitability that has been embraced by the company, and I think it's unleashed some pent-up excitement, pent-up demand within the company as we start -- as we're achieving the success that we felt we could achieve. So the operating leverages will be not only on the expense side, but it's also going to come on the revenue side. Our provision was elevated this quarter, not because of credit but because we had twice the loan growth we thought we were going to have. So that revenue that's going to come from that above average loan growth is going to be there in the future quarters. And that's what excites us about the past couple of quarters and some of the balance sheet growth that we've had is it's in line with our plan and really kind of reemphasizes what we thought could happen combining both Renasant and The First is unlocking some of that potential that was there. Unlocking it on a -- when we combined as opposed to us not being able to unlock it or struggle a little bit if we remained independent. Operator: And the next question comes from Dave Bishop of the Hovde Group. David Bishop: Kevin, quick question in the preamble. It sounded like maybe you were surprised in terms of the lack of payoffs this quarter? And maybe last, just curious if you have like line of sight into potential payoffs into the next quarter? And if they didn't occur, maybe what's delaying or are there borrowers sort of waiting for lower rates? Just curious if there's any way to ring-fence maybe potential headwinds into the coming quarter or next, if that's possible. Kevin Chapman: Yes. No, it is. To be honest with you, we are -- I am, and I think we are a little bit surprised that payoffs have been a little bit muted. But we've also been -- we've set an indicator that we've been looking at the 10-year. If the 10-year -- as it approached 4% or dropped below 4%, we think the risk of prepayments, payoffs for us increase. Q3, the -- I don't know the exact number on the 10-year, but it was probably in the [ 4% 10s or the 4% 20s ] and didn't really approach the 4% range until we got into October. So as we look at, say, fourth quarter, we are more focused on and ensuring that we have good line of sight into customers, our lenders getting updates as to where potential payoffs, prepayments could occur only because we had set towards the end of last year, beginning of this year, that 4% 10-year is an important benchmark for us that as we approached it or we got below it, that could elevate payoffs in our commercial real estate book. David Bishop: Got it. And then obviously, you're cognizant of the significant amount of M&A activity in your backyard or backyard, so to speak, Just curious how aggressive you think you're going to be in terms of recruiting some of that talent and commercial clients that could dislodge from those acquisitions. And is the opportunity set big enough to -- I know The First merger just closed, but is the opportunity there to sort of replace whole bank M&A with lift out of talent? Kevin Chapman: Yes. So David, I'm not sure it replaces it, but it provides an interesting and unique opportunity for us. And in some cases, there may be opportunity to hire with some of the overlap we may have the opportunity to pick up customers without any additional hires. So I think we find ourselves in a very unique position and we like where we sit with all the disruption. And again, I don't necessarily think this is going to be the last disruption. That's what we've seen, there's going to be further disruption in the Southeast. And I think we sit in a very unique position to potentially benefit from that. And again, it may come in the form of hiring in -- just for example, in Q3, I think we hired 10 new either market presidents or prominent lenders throughout the footprint. We've also been actively hiring in Q4. But again, in some cases, we have the opportunity to pick up potential business and we won't have to hire -- we don't feel like we'll have to hire to do that. So it's going to be -- again, we're excited that we're not in the middle of a conversion. We're not in the middle of approvals. We're not in the middle of anything that we're on the other side of our conversion, other side of our integration and really focus to what we want to do, which is get business and gain market share. And so we're excited about where we stand right now as it relates to that. Operator: And the next question comes from Catherine Mealor with KBW. Catherine Mealor: I want just to circle back on expenses, just to kind of be on maybe looking at the expense trajectory into '26. So if I lower expenses per what you're talking about, Jim, kind of somewhere around $2 million to $3 million each of the next 2 quarters. I'm kind of starting next year at a $161 million base. And if I just annualize that number, basically where consensus is for '26 in expenses, which is $645 million. And so as I'm thinking about that, I mean, do you feel like we're in a position where you're where you're lowering expenses in the next 2 quarters and then were flat? Or should we actually grow a little bit off of that base in the first quarter of '26, just kind of given better revenue growth and opportunities in your markets? James Mabry: Catherine, I would say -- I would guide you towards that consensus number or a touch better for '26. I think that's a reasonable outlook for us. And we sort of got the crosswinds of the efficiencies from the deal. And then the things that Kevin mentioned, we sit in a really good spot right now geographically and just as a company, having gotten the conversion behind us. The integration, still there's work to do, but it's gone really well. And so -- but I think what you laid out, I mean, we'll end up with a Q1 run rate, and I think it will be a pretty clean quarter overall in terms of expenses. There may be some a little noise in there, but I think it will be pretty clean. And then we'll have a merit that will impact our numbers a little bit towards the middle of the year. But I think that consensus number is probably a pretty good number, maybe a touch better. Catherine Mealor: Okay. That's awesome. Very helpful. And then on the deposit side, it was interesting to see deposits up a little bit this quarter. And I know that's the mix change, and now we'll have the benefit of 2 cuts. But we're hearing from a lot of other banks this quarter, the deposit costs are getting more and more competitive. And so just curious on how you're kind of thinking about deposit costs and betas over the next few cuts relative to what we've seen over the past 100 basis points of cuts? James Mabry: Well, certainly, on the deposit pricing side where we've seen the most pressures, I mean the loan side is always competitive, but I feel it's the -- any sort of improvement in the deposit side has been grudgingly so. I mean it just -- it feels really tough there. So I think our betas interest-bearing deposits and loans are probably roughly the same in the mid-30s for '26, between now and year-end '26. And the key variable there is just -- is what we see in the deposit side and people's thirst for that funding. So as you said, we had a little bit of increase in the cost in Q4. I don't think our CD special or 5-month special, I don't think that's changed in pricing in, I don't know, 4 or 5 quarters. And then there's -- and we hope to see that change. But right now, I wouldn't say there's the prospect of that near-term. So we'll just see what the -- we'll see what the market and the competition gives us, but it's been tough to eke out gains on the funding cost side. Operator: [Operator Instructions] And the next question comes from Janet Lee with TD Cowen. Sun Young Lee: Clearly, driving improved returns and increasing profitability, it looks like that is one of the key goals for you, Kevin. In terms of like expectations being raised further on your internally, I guess, for Renasant and leading with that increased profitability. Aside from the expense side on the revenue side, can you just give us like what you mean by that? And like what kind of examples are there that -- is it employees like the bankers bringing in more like low-cost deposits or bringing in more like fee income products? What does that mean? Kevin Chapman: Yes. So thank you. So great question. Let's break that down. So one thing that's weighed on our profitability maybe is really a little bit of a lack of scale. So we made investments, but we didn't quite get the scale that we needed, whether it's our average loan to lender, loan to relationship manager, our average deposit to branch. And so we've been focusing on looking at performance at the individual or the market level to improve that. And so when we see our growth happening all throughout our footprint, that's encouraging to us because we're actually doing it with less headcount right now. But if we look at what the full-time employees were of Renasant and The First before we announced the acquisition and where we are at 9/30, we're down over 300 employees. So we're doing it with less. We're having above-average growth, and we're dealing with less employees. Now some of that's part of cost saves, but some of it is not part of cost saves. It's been the ongoing accountability measures we've had. So when we talk about the need for improvement and improved profitability, it's absolutely on the expense side, but it's also on the revenue side and getting more scale where we should have it. And so whether that's at an individual market level, whether that's in Nashville or the coastal region and Atlanta, where those are good markets where there's opportunity to grow or whether it's at an individual lender level, we're holding everybody accountable for a higher level of expectations to support their cost. And we really focus on the return of the individual, the return of the market to determine our success. And we've increased our expectations and our teams are responding to that. So I don't know if that provides enough color, but that gives a little bit of a glimpse as to what we're talking about as it relates to improving the accountability and improving the revenue growth, the performance that comes along with the efforts to reduce expenses. Sun Young Lee: Got it. And in terms of your -- on the loan and deposit growth. So you mentioned mid-single-digit sort of growth for you guys on a normalized basis. I get that the payoffs were a little elevated -- I mean, not elevated the other way around, were smaller than expected. So do you still think that mid-single digits is sort of a good run rate for you? Or could we expect little bit higher in terms of both deposit and loan growth. Kevin Chapman: Yes. So I think right now, just given -- I'd like to get through Q4 before we set any new expectations just given where the tenure is and where we think that some payoff elevation could happen in Q4. But before we change that. So we're still looking at the mid-single digit which bakes in an uptick of payoffs, prepayments happening in Q4 just due to a lower rate environment, particularly on the 5- and the 10-year spot on the curve. So we're still targeting mid-single digit. But I can tell you, our focus is continue to find every good opportunity we can and find a banking relationship with that opportunity, whether it's on the loan or deposit side. But I think Q4 is going to be interesting, at least for us to see how prepayment speeds react to where we find ourselves in the current curvature of the interest rate curve, current slope of the interest rate curve. Operator: And this does conclude the question-and-answer session. I would like to turn the floor to Kevin Chapman for any closing comments. Kevin Chapman: Thank you. We appreciate your interest in Renasant this morning, and we look forward to continuing our conversations with you throughout the quarter. Thank you. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Operator: Ladies and gentlemen, a very warm welcome to the GSK Q3 2025 Results Call. I'm delighted to be joined today by Emma Walmsley, Luke Miels, Deborah Waterhouse, and Julie Brown, with Tony Wood, David Redfern, joining for Q&A. Today's call will last approximately 1 hour with a presentation taking around 30 minutes and the remaining time for your questions. Please ask only one to two questions so that everyone has a chance to participate. Before we start, please turn to Slide 3. This is the usual safe harbor statement. We will comment on our performance using Constant Exchange Rates, or CER, unless otherwise stated. I will now hand over to Emma on Slide 4. Emma Walmsley: Thank you, and welcome to everybody joining us today. Please turn to the next slide. Our third quarter results once again demonstrate GSK's continued strong performance with positive momentum driving an upgrade in our guidance for the year. They also further demonstrate the quality and strength of GSK's portfolio with sales driven by sustained growth across specialty medicines in RI&I, oncology and HIV. Total sales were up 8% for the quarter, with leverage delivering core operating profit up 11% and core earnings per share up 14% to 55p. Alongside this, we're continuing to make excellent progress in R&D, strengthening our late-stage portfolio and already securing four FDA approvals this year, including BLENREP last week and with the fifth, depemokimab before year-end. Cash generation also continues to be very positive at GBP 6.3 billion for the year so far. This supports investment in our growth priorities and returns to shareholders, including a dividend of 16p for the quarter. And finally, I'm very proud of the progress we continue to make with our trust priorities, in particular, this quarter with the positive Phase III data reported for our low-carbon version of Ventolin. This successful transition will reduce GSK's carbon footprint by up to 45%, and it's a meaningful development for the 35 million patients who rely on Ventolin worldwide, and we expect to launch in 2026. Next slide, please. Our #1 priority remains investing for growth, and I'm pleased with the progress we are making, both in the late-stage portfolio and in the work ongoing to build the next wave of innovation at GSK. With the addition of efimosfermin, the long-acting FGF21 for steatotic liver disease, we now have 15 scale opportunities with peak year sales potential of greater than GBP 2 billion, all with the potential to launch before 2031. By the end of the year, we expect new pivotal trials to have started for several of these 15 opportunities, depemokimab for COPD patients, efimosfermin in MASH, GSK'981 for second-line GIST and our GSK'227 ADC in extensive stage small cell lung cancer. It's worth noting that those last 3 assets have all come from focused, successful business development and BD remains a key driver of our pipeline expansion. And we continue to add high-value innovation at earlier stages of development. For example, I'm excited by GSK'261, a new monoclonal antibody for polycystic kidney disease, which received orphan drug designation by the FDA. Lastly, and very importantly, we continue to optimize our supply chain to scale up capacity for our new medicines and vaccines. Last month, we confirmed our intention to invest $30 billion in R&D and advanced manufacturing in the U.S. over the next 5 years, including the imminent construction of a new biologics flex factory in Pennsylvania. Next slide, please. Since 2021 and then GSK's successful launch as a new focused biopharma company, we've delivered 18 consecutive quarters of profitable sales growth, upgraded annual guidance each year, improved our medium-term outlooks and upgraded long-term outlooks twice from an initial GBP 33 billion by 2031 to now more than GBP 40 billion, all underpinned by a much stronger balance sheet. We've all been resolutely focused on this step change in sharper operational performance alongside accelerating investment in R&D and significantly improving the quality and scale of GSK's innovation. So today, GSK is a very different company in performance, pipeline and prospects. And this team is determined to sustain and improve upon this track record. As we look ahead, we are again upgrading our guidance for the year with meaningful improvement for 2025 sales and profits. And this momentum positions us well as we go into 2026 and to deliver on the long-term commitments for growth we've set out for shareholders. So let me now hand over to the team to take you through more of the detail on our performance, starting with Luke. Next slide, please. Luke Miels: Thanks, Emma. Please turn to the next slide. In Q3, we delivered growth across all our product areas and in the regions with GBP 8.5 billion of sales, up 8% versus last year. Growth in the quarter was driven by Specialty Medicines, up 16%. And and another quarter of strong Shingrix, Arexvy and meningitis demand in Europe. And in the U.S., we navigated the impact of the Medicare redesign from the IRA and the impact is now expected to be closer to the lower end of our GBP 400 million to GBP 500 million range. Next slide, please. Specialty Medicine continues to be the most important driver of our diversified business with double-digit growth once again in all therapy areas. Starting with RI&I, sales were up 15%, driven by strong demand. Benlysta, our treatment for lupus grew 17% with global guidelines supporting earlier use of biologics and recommending Benlysta as a preferred treatment option. 84% of bio-naive patients are now starting on Benlysta, and we continue to differentiate with strong organ damage prevention data and a well-characterized safety profile. Nucala, our anti-IL-5 biologic, grew 14% in the quarter, driven by COPD uptake and continued growth across all in-line indications. Moving to our growing oncology portfolio, which is up 39%. Jemperli sales were up for the 10th quarter in a row as our teams continue to differentiate Jemperli from the competition, as the only immuno-oncology medicine to demonstrate overall survival in endometrial cancer. Jemperli's global market share in endometrial cancer is now higher than the leading competitor in DMMR. And Ojjaara sales were up 51% in the quarter, driven by increasing first- and second-line patient demand in the U.S. and volume growth in Europe following EHA, where new data emphasized the importance of early intervention. And BLENREP is now in the early days of launch with approval in 8 markets and more on that in a minute. And with the strong momentum we're seeing across RI&I and oncology and the continued performance of ViiV, we are now increasing our full year specialty guidance from low teens to mid-teens percentage growth. Next slide, please. In Q3, we had a very strong start for Nucala and COPD with the latest NBRx data showing we are now getting close to 1 out of every 2 prescriptions. Our differentiated label is enabling us to reach a wide spectrum of COPD patients, including those with emphysemia and EOS counts down to 150. We've now reached 95% of our top ACP targets and have a broad formulary coverage. In this population, hospitalizations remain a critical unmet need with 1 in 2 patients dying within 5 years of their first admission, and there is plenty of room to grow in this market with less than 5% biologic penetration in the U.S. The success we have had with this launch gives us further confidence in the potential we have for depemokimab, our long-acting IL-5, which we expect to launch early next year. There are 4 compelling reasons underpinning why we believe depe will be a very material medicine. First, there's plenty of room to grow in the market, starting with bio-naive patients as only 27% of them currently receive a biologic. Second, patients discontinuing therapy is an issue with up to 65% of new patients on current biologics discontinuing therapy within the first 12 months. And unsurprisingly, less adherent patients have worse clinical outcomes, including around a 30% increased rate of inpatient and emergency department visits. The 72% reduction that depe has demonstrated in hospitalization with just 2 doses a year is material. And finally, we know ACPs want this medicine with 86% of pulmonologists surveyed believing it could become a standard of care. Next slide, please. Our oncology portfolio is progressing well. Starting with BLENREP, we now have approval in 8 markets, 7 in Europe and international regions in the second-line plus population and now the U.S., where just last week, we received approval in the third-line plus setting. This U.S. approval is a significant step forward for the U.S. patients and the indication granted reflects that BLENREP has demonstrated superior efficacy versus the standard of care daratumumab triplet and now gives us certainty and the ability to launch. Data from DREAMM-7 in this population is very compelling with a 51% reduction in the risk of death and a tripling of median progression-free survival versus the dara-based triplet. We see a significant opportunity here as of the 71,000 patients in the U.S. receiving treatment today, over 1/3 are treated in the third-line plus setting. And BLENREP is the only anti-BCMA option, which is practically able to be used in the community where 70% of patients are treated and could benefit from a much needed novel MOA. We also have a new and significantly simplified REMS program, including, importantly, the use of optometrists versus the original REMS, which required ophthalmologists only. This will make it much easier for patients and HCPs to manage eye care. And while we anticipate a slower ramp-up in the U.S. with the initial third-line plus label, as we said previously, we will take the time to ensure a positive patient and provider experience to achieve the long-term potential of this highly effective drug. Our clinical development and evidence generation plan continues. And again, working closely with the FDA, this will now be expanded in the U.S. and will support the use of BLENREP in earlier and all stages of multiple myeloma globally. In summary, we expect BLENREP to meaningfully advance treatment options for patients with multiple myeloma, and we continue to expect BLENREP to be a material growth driver for GSK in the next 3 to 4 years. Moving to future indications for Jemperli. We're looking forward to the opportunity we have to change the lives of patients with rectal cancer. And following the transformative data showing a 100% complete response rate in Phase II, we initiated the AZUR-1 pivotal trial and expect to see results in the second half of 2026. And additional trials are ongoing to understand the benefit Jemperli can bring patients with colon and head and neck cancer. Finally, we continue to progress our key oncology pipeline assets, starting with our B7-H3 antibody drug conjugate or GSK'227. We're now recruiting for our Phase III trial in second-line extensive stage small cell lung following a clear signal we saw in the early-stage clinical data from Hansoh, our partner. And our KIT inhibitor for GIST, GSK'981 acquired earlier this year, will start Phase III in second line by the end of the year and first line in 2026. And GSK'584, our B7-H4 antibody drug conjugate is expected to advance to Phase III in endometrial and ovarian cancer next year. And overall, this oncology portfolio offers significant future growth opportunity for GSK and is a clear priority for investment and resources alongside RI&I. And with that, I'll now hand over to Deborah to cover our great momentum in HIV. Deborah Waterhouse: Thank you, Luke. Our HIV portfolio continues to deliver double-digit growth, up 12% in the quarter, primarily driven by 10 points of strong patient demand growth for our long-acting injectables and Dovato. Demand continues to increase across all regions and major markets, particularly the U.S., which grew 17% and where we saw total share gain outpacing the competition. We are delighted with the continued transition we are seeing to long-acting injectables. More than 75% of our growth now comes from long-acting injectables. And in the U.S., they already represent around 1/3 of our sales. Cabenuva, the first and only long-acting injectable HIV treatment regimen grew 48%, driven by strong patient demand. Our competitive performance is reinforced by the acceleration of Cabenuva switches from competitors in the U.S., which this quarter reached 75%. As we anticipated, in long-acting prevention, we saw continued positive momentum of Apretude in the U.S. with competitive growth also of 75%. This quarter, we shared results from CLARITY, a Phase I study comparing acceptability and tolerability of single-dose CAB LA for PrEP marketed as Apretude and lenacapavir. We know patient experience is an important factor for injectables. Results showed 69% of participants found CAB LA to be totally or very acceptable with 90% of participants and 86% of HCPs preferring CAB LA over lenacapavir in terms of injection experience after a single dose. These data add to the growing body of clinical and real-world efficacy, safety and tolerability data we have for Apretude and will help inform expectations and decision-making when initiating long-acting injectables for HIV prevention. We expect continued growth momentum in Q4. And so today, we are upgrading our 2025 guidance from mid- to high single digit to grow around 10%. Next slide, please. Our industry-leading pipeline with best-in-class integrase inhibitors at the core continues to progress and have multiple long-acting options with strong profiles that deliver what we know patients want and need. This pipeline will further drive the transition we are making in our portfolio to ultra-long-acting regimens and will help us navigate the dolutegravir loss of exclusivity towards the end of the decade. Building on our established 2 monthly injectable regimens, we believe 4 monthly dosing in PrEP and treatment will be important options, delivering longer dosing intervals and ensuring continuity of care. We have a confirmed date from Janssen on rilpivirine Phase III clinical trial supply that leads to a delay to the start of Quattro, our Q4M treatment registrational study to H1 2026. Despite this, we remain on track to file in 2027, and we look forward to launching this next wave of innovation in 2028. building on continued strength and performance of our Q2M Cabenuva, the world's first and only LAI for HIV treatment. At the launch of Q4M treatment, we still expect to have the only long-acting injectable treatment regimens on the market for years to come. Looking ahead to our twice yearly injectables, we're on track to confirm the dosing regimen for Q6M treatment in 2026 and expect to file and launch both Q6M for treatment and PrEP between 2028 and 2030. For Q6M treatment, we remain excited about the potential of VH184, our third-generation INSTI, which has the best resistance profile seen to date and IP protection through to at least 2040. To partner with our selected INSTI, we are evaluating 2 assets, VH499, a capsid inhibitor and N6LS, one of the broadest and most potent bNAbs in development. Regarding N6LS, this quarter, we again showed more positive results from Part 2 of our Phase IIb study in BRACE and are pleased to confirm the next phase of this study is now fully recruited. As a reminder, Q6M for treatment in PrEP is not yet in GSK's outlook for 2031. Our long-acting injectable portfolio is backed by 3 years of real-world evidence and implementation science. As we look to the future, we expect our industry-leading long-acting pipeline powered by unparalleled patient insight to deliver 5 launches through 2030. We remain confident in our ability to drive sustained long-term performance and look forward to sharing more at meet the management investor event in Q2 2026. With that, I'll hand back to Luke. Luke Miels: Thanks, Deborah. Turning to Vaccines. Sales were up GBP 2.7 billion in the quarter, up 2%, driven by continued strong demand for Shingrix, Arexvy and Bexsero, particularly in Europe, which was up 35%. Shingrix sales grew 13% overall, largely due to the strong performance in Europe, up 48%, where we're driving across multiple markets and with significant new uptake in France, and a strong performance in Germany, the Netherlands and Poland. In international, sales in Japan continue to grow following the expanded public funding. Ex U.S. sales now account for around 70% of global Shingrix sales. And in the U.S., penetration is now 43% of the eligible older adult population with immunization rates slowing as expected as we access harder-to-reach patients. In meningitis, our portfolio was up 5%, driven by double-digit growth for Bexsero in Europe, where the updated recommendation and reimbursement in Germany continues to pull through and in France following a meningitis B outbreak and the implementation of mandatory newborn vaccination requirements, along with new reimbursed cohorts. Also in the quarter, even though the ACIP recommendation came slightly after the back-to-school season window, we booked the first sales of our pentavalent vaccine, Penmenvy in the U.S. with initial CDC purchases. We expect this vaccine to simplify immunization schedules and contribute to increased coverage and protection against a serious life-threatening illness. Turning to Arexvy. Growth was driven by Europe with good commercial progress in Germany, Spain and Belgium. International also grew driven by tender volumes in Canada. And in the U.S., we maintained our market-leading share in the older adults population. However, the U.S. declined due to lower preseason channel inventory build and slower market uptake in the 60-plus population. In Q3, our flu vaccines were down in part due to competitive pressure in the market where we compete for healthy younger cohort populations who are harder to activate in older adults for flu vaccines. And Established Vaccines were down primarily due to the prior year impact of our divested brands. So in summary, with the Vaccines business, we now expect to land towards the top of our vaccines guidance range of declining low single digit to stable. And as we look forward, although we continue to remain cautious in the near term on vaccines in the U.S., we are confident in the prospects pipeline and benefit this business offers over the long term. Next slide, please. Turning to General Medicines. Sales were up 4%, driven by the strong growth of Trelegy in all regions, up 25% in the quarter. And the SITT class remains very strong, up around 23%, driven by GOLD guidelines, new data and competitive share of voice. Within the SITT class, Trelegy continues to gain more share than any other brand and is the top-selling brand for both COPD and asthma globally. We also have completed IRA negotiations on Trelegy in line with expectations and our outlook. The remaining portion of the portfolio was stable, reflecting continued generic competition and expected adjustments in rebates and returns. We continue to expect sales to be broadly stable in 2025 and are looking forward to future opportunities in this portfolio, including launching low-carbon Ventolin and further establishing our anti-infective portfolio through building access in the U.S. for Blujepa in uncomplicated urinary tract infections and also filing tebipenem in complicated UTIs by the end of the year. All 3 of these represent practical innovation for important areas of medical need. I'll now hand over to Julie. Julie Brown: Thank you, Luke, and good afternoon, everyone. Next slide, please. Starting with the income statement for the quarter with growth rates stated at CER. As already highlighted, sales grew 8%, driven by the specialty portfolio across HIV, oncology and RI&I. Core operating profit grew 11%, reflecting a 5% increase in SG&A as we continue to invest to support key asset launches alongside driving productivity. R&D growth of 10% was driven by accelerated pipeline investment across key specialty medicines. Our royalty income benefited from the Kesimpta performance as well as new RSV and mRNA royalty streams. Core EPS grew 14%, aided by a tax rate of 16% in the quarter and benefits from the share buyback, partially offset by higher NCIs relating to ViiV's strong performance. Turning to our total results. The significant growth reflects the Zantac settlement charge taken in Q3 last year. Next slide, please. The operating margin improved 90 bps in the quarter, largely driven by SG&A margin improvement of 70 bps. This increase demonstrates the efficiency gains achieved through our returns-based approach as we invest in new product launches whilst continuing to generate productivity improvements in the promotion of the existing portfolio. Additionally, in the quarter, gross margin improved, reflecting mix benefits from the continued transition towards specialty and R&D expenditure increased as we reinvest additional royalty income into our pipeline, supporting the acceleration of the ADC programs and pivotal trial starts for efimosfermin and GSK'981 in second-line GIST. Year-to-date, our operating margin is now 33.9%, up 100 bps at constant exchange rates, driven by sales mix, productivity gains and growth in royalties. Next slide, please. Turning to the cash flow with commentary before the one-off impact of Zantac payments. Cash generated from operations year-to-date was GBP 6.9 billion, improving GBP 1.7 billion, benefiting from increased operating profit, favorable movements in return and rebate provisions and the CureVac IP settlement announced in August. This was partially offset by increased working capital, impacted by higher Arexvy and Shingrix collections in Q1 of last year. Free cash flow increased GBP 1.8 billion versus last year, driven by strong CGFO and favorable phasing of tax payments, partially offset by higher spend on in-licensing deals. Zantac payments year-to-date totaled nearly GBP 0.7 billion, and we expect the remaining GBP 0.5 billion to be paid by the end of the year, drawing a line under the settlement agreed and disclosed last October. Next slide, please. Turning to capital allocation. In line with our framework, we continue to deploy cash in a disciplined manner and underpinned by a strong balance sheet. Our net debt to core EBITDA ratio remains broadly aligned with the end of 2024 at 1.3x. Our priority is always to invest for growth as demonstrated by our sustained acceleration of late-stage R&D, the next wave of pipeline innovation and targeted BD. In 2025, we have signed multiple deals, including the acquisition of IDRX-42 and efimosfermin as well as the Hengrui licensing agreement and earlier-stage pipeline and platform technologies. We have also made GBP 3 billion in shareholder distributions so far this year through the dividend and the buyback program, of which GBP 1.1 billion has been executed so far with a cumulative total of GBP 1.4 billion expected to be completed by the end of the year. Next slide, please. As Emma shared, we are upgrading our guidance on the back of the continued strong performance this year. We are raising our full year sales expectations from 3% to 5%, to 6% to 7%, with underlying upgrades for Specialty, including HIV, and we now expect to be towards the top of the vaccines range. Alongside this, we're also raising our guidance ranges for operating profit to 9% to 11% and EPS to 10% to 12% -- looking through the P&L guidance, we maintain that gross margin will benefit from product mix, partially offset by supply chain charges of around GBP 100 million to be taken in Q4. SG&A will grow at low single digits for the year as committed, including Q4 charges of around GBP 150 million to fund further productivity initiatives. And R&D continues to increase ahead of sales as we reinvest incremental royalty income into our pipeline. We are upgrading our expectations for higher royalties to GBP 800 million to GBP 850 million, supported by income from the CureVac settlement announced in August and lower net interest costs than previously guided due to the strong cash generation and the later timing of Zantac payments. Finally, in line with previous guidance, we expect the tax rate to be around 17.5%. In summary, we look forward to delivering a fourth consecutive year of double-digit EPS growth, notwithstanding the Q4 charges of around GBP 250 million, demonstrating the successful execution of our strategy since we became a stand-alone biopharmaceutical business. As a reminder, our guidance is inclusive of tariffs enacted and indicated thus far. We are positioned to respond to these with mitigation actions identified. And looking beyond, we remain very confident in our medium and longer-term outlooks to 2026 and '31. Next slide, please. Moving to our road map, which illustrates our progress towards major milestones and upcoming value unlocks. We have made good progress through 2025, and we expect to continue to build momentum as we move towards 2026. Over the coming months, we will continue to focus on flawlessly executing the 5 key asset launches. The FDA regulatory decision for depemokimab is due this December. And we are looking forward to delivering multiple pivotal readouts across our 15 scale opportunities, including bepirovirsen, cabotegravir, camlipixant, depemokimab in EGPA and Jemperli in rectal cancer next year. And with that, I am pleased to hand back to Emma. Emma Walmsley: Thanks, Julie. So in summary, our Q3 results demonstrate the continued momentum in our business with strong financial performance reflected again in our increased guidance for 2025 and through meaningful R&D progress. Our portfolio continues to demonstrate strength and quality and we're excited by the prospects in our pipeline. All of this positions GSK strongly for the next phase in the company's development to deliver our long-term outlooks, outstanding impact for patients and sustained value for shareholders. So I'm now going to open up the call for Q&A with the team. But before I do so, of course, we know that alongside questions on our results, many of you will be eager to ask our new CEO designate for his views on the future. Well, Luke and I both respectfully ask that you don't. I am, of course, so delighted and very proud to be passing the baton to Luke, but that is in January. And today, we'd like to focus on our Q3 performance. So with that, let's please now open up the call for your questions with the team. Operator: Thank you very much, Emma. The first question comes from Peter Verdult from BNP Paribas. Peter Verdult: Pete Verdult here, BNP Exane. Two quick questions. Firstly, for Julie or Emma, there's a EUR 6 billion revenue gap between market expectations in 2031 and the GSK revenue target over EUR 40 billion. If we move BLENREP's obviously a major point of disconnect. But can you just remind us which other assets you believe are being materially underappreciated? And then secondly, I hear you about not asking questions about strategy, which I will -- won't go down, but just a factual question for Luke. Is it your intention to either reiterate or tweak the go-forward strategy at the full year results? Or do we have to wait for your unveil later in '26? Emma Walmsley: Thanks. Well, I'll ask Julie just to comment on the difference between our full team shared confidence in the short, medium and long-term outlooks and where the market is today. As we've said before, it is largely in oncology and RI&I. The only other point I would make is that as well as a gap between the top line, there is also quite a material difference, as we've said before, in our view of the continued leverage of SG&A and where the market currently sits. But Julie, do you want to comment just quickly on that? Julie Brown: Yes, sure. Thank you very much, Emma. Peter, for the question. So the major areas, as Emma mentioned, oncology and respiratory, immunology and inflammation. And we do think the data readouts and commercial execution will make the difference here. But clearly, the BLENREP launch is one of the areas. Within oncology, I think people are also waiting for the rectal readout in Jemperli. And then the other difference, of course, is the ADCs recently licensed in from Hansoh, which we're very optimistic about in terms of the future. Within respiratory, I have to say the gaps are closing. They've improved. So we've obviously got the depe PDUFA date in December this year. People are clearly waiting for that. And then the other one, of course, is camlipixant, where we've got the data readout from CALM this year and then CALM-2 next year. So we think these are going to be the key trigger points that will make a difference between ourselves and consensus. Emma Walmsley: Thanks, Julie. And as you pointed out before, it's always we know, going to be a combination of the launch execution delivery as well as the data that comes. And it is quite pleasing with our upgraded guidance this year as a reminder that our initial outlook of 33 billion to be delivered by 2031. We are well on track to be delivering this year, 6 years early. So Luke, the second part of the question was related to what's coming despite our shared request in what's coming for 2026. And as usual, we are not going to give a huge amount of detail now about what's coming in '26, but we do want to all as a team reiterate our very high confidence in those not only '26 outlooks, but also '31 outlooks, which are forecasted by this team and committed by this team, as you've heard us all do together again today. At the beginning of -- with the full year '25 results, you'll hear the outlook for '26. And then later on in the year, the building blocks to delivering that longer-term 31 outlook. But Luke, I know you don't want to say too much, but is there anything else you'd like to add to that? Luke Miels: Sure. Thanks, Emma. Thanks, Peter. Look, what I'll say is, look, the number 40 is doable, and I stand behind it. Look, the majority of the products in it were forecast by me. Emma Walmsley: Right. Well, that's clear. And you'll hear more next year. So next question, please. Operator: Next question comes from Matthew Weston, UBS. Matthew Weston: Two questions, please. The first for Luke on Shingrix. There was a great benefit ex U.S. from the rollout in France, both in Q2 and Q3. Can you give us some help for the pushes and pulls on Shingrix into '26? Should we assume that there's been a France bolus, which wanes next year? And then we need a geography to take up the baton. If so, which one? Or do you think there's just consistent rollouts, which mean Shingrix ex U.S. can keep growing? And then the second one for Julie, another quarter of great margin leverage. I know this -- I promise it's not really a '26 guidance question. But can you at least help us with pushes and pulls on OpEx? So obviously, a statement about R&D reinvestment in 4Q -- how much should we assume that carries on, but also depemokimab, Nucala COPD and BLENREP launches, should we think of needing more next year? Emma Walmsley: Right. So Luke, first on Shingrix and then Julie, on our continued drive for meaningful SG&A leverage, please? Luke Miels: Thanks, Matthew. I mean the short answer in Europe is yes. I mean if you step back, we've quietly pursued a 3-stage strategy, and I've mentioned this on multiple quarterly earnings calls when Shingrix has come up in line with the current label. The first step, of course, was max the U.S. and get to a point where we penetrated and where that starts to slow. So we've got an immunization rate of 43%, which is in line with the 3% to 5% increment that we've signaled. It's very much linked to flu though, and flu is softer. And then the plan, of course, was within the U.S., which we started to pivot on to focusing on the comorbid and high-risk subgroups. And that's just started now in June, and I think the results are encouraging. Maybe with hindsight, we could have gone there earlier. But again, we're getting traction there. So that's a good sign, but the U.S. will still be tough because of sort of macro factors around vaccines, which I doubt we'll get into later. In Europe, I mean, really, the strategy was to maintain pricing discipline and then build the evidence of the launch in Europe and Japan, and that's exactly where we are now. So the average immunization rate in the top 10 markets ex U.S. is around 10%, about 9.7% to be exact. So there's more opportunities, more work to do as we broaden those populations in those countries. And then the third part, which we're really not in yet, is a pivot to emerging markets in the midterm with more pricing flexibility. We did start there with China. We had a bit of a challenge there, but we've got a pathway, again, focusing on comorbid and that is resonating despite a tough backdrop. So it's very much a midterm story with China and emerging markets. But yes, net-net, I think we're in good shape with Europe, and we just need to keep that going. Emma Walmsley: Right. Thanks, Julie? Julie Brown: Thank you very much. Thanks for the question. In terms of -- first of all, we're confident in reaching '26 margin target that we laid out of more than 31%. To your point about investment in R&D, we have deliberately been putting more investment behind R&D now for a number of years, and we expect the same next year that R&D will grow ahead of sales. And then in terms of the investment in the launches, we are totally investing in the new launches. We're here to grow the business. So definitely investment gone already into BLENREP, depemokimab coming up, et cetera, Nucala COPD. These are big areas of investment. The thing that we're doing in parallel, as you've probably seen, is that we are driving productivity benefits also through SG&A and the gross margin. And basically, we're looking at operating model cost and tech to modify and simplify what we do. These are really important components. And we now have a track record of doing this. We've guided at more than a 31% margin by '26. This will be over 500 basis points of accretion for the company between '21 and '26, which is really a considerable achievement as well as funding those launches. Emma Walmsley: Yes. And as I said, I think we all expect that to continue. I mean just don't underestimate how much technology is changing the way you can effectively and efficiently do sales and marketing work very differently than it has been the history of this industry, and we're all seeing that change happen whilst allowing us to invest very competitively behind the launches that you're considering -- continuing to see us deliver competitively on. Next question please. Operator: Next question comes from Michael Leuchten from Jefferies. Michael Leuchten: Two questions for Luke, please. One for depemokimab with the pending approval. Luke, can you update us on your latest thinking on phasing of access, likely source of business for the product into 2026? And then BLENREP, there's been a lot of debate after the approval on label, scope, REMS and the like. Is there any learnings you can point to from the -- albeit early experience in Europe or small experience in Europe that helps us understand sort of how the shape of the curve could look like in the U.S. Emma Walmsley: Luke? Luke Miels: Thanks, Michael. I mean I'll start with BLENREP first. Yes, I think there's a number of lessons. I chair a task force every 2 weeks to look at this to ensure cross-functional learnings, and we're certainly incorporating those. I think the key, again, no surprise is that once people have experience with this product, they tend to be, how would I say, pleasantly surprised by the reputation leading into this versus the experience of using it. And that's why we've been very focused on supporting physicians with those first 5 patients to ensure that they understand the dosing and how to manage that and how to hold doses and integrate that into their practice. And that's everything that we will then take into the U.S. We also have close to 8,000 patients now who've been exposed to BLENREP globally. So we've got a lot of clinical and operational experience in those centers as well. On depe, look, it's obviously a competitive environment right now. So I'll be careful around some of the phasing around access and our strategy there. But what I will say is I think this is quite a fascinating opportunity. The basic facts when I try and look at that sort of simplify things is that you've got a lot of eligible refractory patients who, by definition, are at risk of exacerbation. And in the U.S., access is actually extremely good for all biologics. Yet the conundrum, the paradox is that only 27% of them actually get a biologic. And then I think a few physicians must scratch their heads on this one. Those that do get a biologic, we see this with our data, it's true with Dupixent, Fasenra, et cetera. After 12 months, you're losing around 2/3 of them. So -- and of course, if you're not adherent, you are put on a biologic for a reason. And if you're not adherent, then you have a higher risk of an exacerbation and subsequent ER visit, for example. So for us, there's a clear opportunity here for ATP-driven administration with long intervals between dosing and a strong efficacy that's associated with that. The market research is very, very consistent. This is probably the most market research product in GSK. And yes, 86% of pulmonologists say this could be a new standard of care when we show them the target label and 82% of pulmonologists said they would consider using this product ahead of other MOAs. So our strategy is very simple. We will be focusing on the naive new patients that are first going on to biologics. Emma Walmsley: I think this is just an extraordinary opportunity when you see the material difference in compliance the material reduction, 72% reduction in the kind of attacks that cause hospitalization and consequently, a very significant cost sparing benefit for health care systems in such a scale disease as asthma. And then, of course, we're very excited about taking depe into COPD and other indications, too. Operator: Next question comes from Luisa Hector from Berenberg. Luisa Hector: And maybe I could take this chance, Emma, end of an era. So thanks to you on behalf of all of us, many insightful conversations and I think many significant achievements whilst navigating some of the challenges. So thank you very much. And my questions would be on business development because we've seen a very neat series of small deals. So where are we now in terms of appetite capacity for the next round of deals and any changes in terms of size or area phasing, et cetera? And perhaps a quick check on the comments you made on J&J and rilpivirine. Should we assume that they can now supply everything you need and that this would not be any kind of constraint when you get closer to filing and launch? Emma Walmsley: Great. Yes. I mean I think we are really supremely confident in our long-acting portfolio, both because of the momentum in the business and the prospects in the pipeline. I'll ask Deborah to talk about that. And in terms of Look, and once again, Luke and Tony and David have been all been co-architects of some deals that we are extremely pleased with the progress on. It's great to see 3 out of the 4 Phase III or the pivotal trials that are due to start at the end of this year are from deals that we've been very pleased to sign. We're thrilled with the discipline we've put through in terms of value and returns when we look at these deals, whether it's in the -- what's become more fashionable FGF21 market or indeed our ADC plays or of course, we're very excited to see what's going on in terms of pipeline development in China and thrilled to see where that partnership with Hengrui will do. And then, of course, once again, we added a couple more deals just this week in our earlier stage pipeline because we're all very focused and you're all very focused on the models of what's happening with the [ Core ] 15, but I know how much the team are also thinking about that next wave of development through the 2030s when we come out the other side of successfully digesting dolutegravir. So I think you should expect that BD will continue to be a very -- it's about half of our pipeline, and it will continue to be a very material contributor to our pipeline with a focus on RI&1 and onc and the kind of scale and pace. But we're always going to be looking out at things and review it very, very regularly. And obviously, the market stays competitive, and we're right in the middle of that. So not much more, I think, to add on that. But let's get back to long-acting. Now 1/3 of our -- or 30% of our business in the U.S. already. So Deborah, do you want to talk about that and the pipeline question? Deborah Waterhouse: Yes. Thanks, Emma. So just to start, delighted with the Cabenuva performance, 75% growth in the quarter. And actually 75% of our Cabenuva switches now come from competitors. And our long-acting injectable performance is at the heart of why we've been able to upgrade our HIV guidance this quarter. So let's just talk a little bit about Q4M. So our Q4M QUATRO Phase III study start is going to be delayed into H1 2026, and that's due to a delay in the delivery of recovering clinical trial supply by Janssen. There is no ongoing issue, which would cause us anything but complete confidence from Janssen. They're a great partner. This is just a one-off. I think the key thing to communicate is that this is a clinical trial, supply delay is not related to efficacy or tolerability concerns at all, and we remain committed to 2027 file and 2028 launch of Q4. We've looked over the financials and there's no material impact on outlook from the delay because we've got Cabenuva in the market already, and that product is performing so well. Demand is high. We've got really fantastic momentum. And whilst we're disappointed, obviously, not to be able to launch Q4M at the end of 2027, as we originally said, actually, this is a marketplace where there's no competitor for a long, long period of time. So we are the only long-acting injectable in treatment, and we're going to remain that way for the foreseeable future. Cabenuva will power on, and we will do everything we can to get Q4M into the marketplace as soon as we can. And then obviously, we've got Q6M coming next year. We will be doing our regimen selection for Q6M, and then we will be launching that asset as the next phase of our long-acting injectable journey. Emma Walmsley: It's just so important to remember that we are the only one on the treatment market for a very long time ahead, and that is a business that continues to accelerate momentum. Deborah Waterhouse: And there are obviously, Emma, as we've seen ourselves, some sort of bumps in the road of long-acting injectables that we and our competitors experience. So I think it's just a complicated area, mainly around CMC. But in terms of the patient benefit, really significant and the demand from patients is also very material. Operator: Next question comes from Sachin Jain from Bank of America. Sachin Jain: Just a follow-on actually to the Q4M question. So thank you for that update, Deborah. I wonder if you could just talk about the commercial impact of delay relative to Gilead's weekly oral len plus islatravir, which is probably 6 to 12 months ahead. We hear mixed KOL feedback on weekly oral versus Q4. Secondly, I wonder if you could just update on U.S. policy. So any color you're willing to give on ability to do a deal with the administration given your high Medicaid exposure? And then how is dialogue around IRA going? And then just one quick clarification, if I can chance my arm for Luke as a follow-on to earlier question on BLENREP depe. Clearly bullish commentary, Luke, but just trying to triangulate versus '26 consensus for both, which is around GBP 200 million. I know it's a tough question, but any color directionally would be helpful. Emma Walmsley: Luke, do you want to say anything on that? Luke Miels: Look, I would just say these are big assets in the long term. I can't give any sort of color, but clearly we're going to approach both assets very aggressively. And I would just point to the performance in Nucala COPD, where in May, we had 0% market share, and we've now got 46% of those new patients in COPD against Dupixent. That's not a read across depemokimab. It just tells you that the team is very effective at executing, and we're going to be focused on that asset and BLENREP already in the field and receiving very good feedback. Again, it's going to be more of a stage process to give people experience and confidence to use the product more broadly. Emma Walmsley: Great. So on MFN, I'm not really going to give any more detail or get ahead of anything, except to say, as you would expect, we're engaging, as I've said, very constructively with the administration. Medicaid is 10% of our total U.S. business. I'm really confident in our ability to navigate this over the last 4 years through a variety of different environments. The strength and quality of our portfolio has continued to allow us to do repeated upgrades and navigate through these kinds of challenges. The U.S. is our #1 priority market. We've committed to very material investments there. And we fully agree that we should be partnering and working towards being in a place where step change innovation can be made affordably available and sustainably available for innovators to American patients. And we also fully agree that we'd like to see all countries recognize the value that innovation can bring -- to bring down the demand care on health care. So the demand, sorry, curve and therefore, the cost on health care. So continue to engage here and we'll keep you updated and very much bearing in mind and sits with a strong underpin to our confidence on our outlook overall. You mentioned IRA. I think Luke already said it. We're very pleased to have concluded the latest rounds of IRA negotiations and all fully factored into our outlook. So nothing more to report on that. And on islatravir, I think that is an important point to remind people of. Deborah Waterhouse: Yes. Thanks, Sachin. So there is an expectation that LEN plus islatravir will launch in 2027. All of the research that we have done indicates that the once weeklies will cannibalize other orals. And actually, there is on that particular asset, a bit of a mixed view, firstly, because of the history of islatravir and the CD4 depletion. But secondly, I mean, we absolutely believe that you need to have an integrase at the core of any 2-drug regimen, whether it is an oral weekly or a long-acting injectable because integrase have got incredible potency, tolerability, high barrier to resistance and 78% of those people who are on treatment today are on an integrase inhibitor because they are the cornerstone of HIV treatment. Now we know that obviously, the other once weekly from our competitor, which is the prodrug of LEN and an integrase inhibitor is on clinical hold. So again, you've just got the islatravir plus the lenacapavir option in '27, and we don't think that's going to be a challenge to our Q4M, one, because the long-acting injectables is a very unique value proposition; two, because we've got an entity at the core of that particular regimen. So we're feeling very confident about our ability to keep driving our HIV business forward and growing strongly and helping GSK navigate through the loss of exclusivity of dolutegravir. Operator: Next question comes from Simon Baker from Redburn. Simon Baker: Two, if I may, please. Luke, going back to something I asked you on the BLENREP call on Friday around the 2031 target. Back in '21, you gave a number of peak sales estimates for products in RSV, BLENREP, Juluca and Jemperli. You've reiterated the EUR 40 billion target. I just wonder if you could give us thoughts on the pushes and pulls. You always said that there were a lot of factors going towards the aggregate figure, but just a check on where you see the pushes and pulls there would be very helpful. And then for Deborah on HIV and the Q4 slight delay, that pushes it a little bit closer to the Q6 launch, but not materially so. So I'm guessing you've always thought that it's not one duration fits all. I just wonder if you could give us some thoughts on how the long-acting market will pan out with the various injection duration options that you will be offering? Emma Walmsley: So I'm going to come to Deborah first on this. But also -- and I will turn back to Luke. But just to be clear, as we've already said, it will be beginning of next year when Luke will give an outlook for '26 and more likely much later in the year when he will talk about the building blocks to deliver on more than 40 and his more than 40 in 31. So I just want to give Luke the permission not to get into detail of the ups and downs as the portfolio continues to mature. But Deborah, let's come to you first. And Luke, if you want to add anything to that, then I'll let you. Deborah Waterhouse: Thanks for the question, Simon. So with Q2M, 15% of patients would be willing to take that regimen to treat their HIV. When you get up to Q4M, it doubles to 30%. And then when you get to Q6M, half of the people who are living with HIV and all of our research say that they would be willing and keen to take a 6-month long-acting injectable. Within the research, though, and with physicians, too, you are right. Some people say, actually, I would like to give Q4M to my patients on an ongoing basis because I like to pull them back into the doctor's office 3 times a year to have viral load testing, sexually transmitted disease testing and all the things that they do to care for their patients. Others are very keen to see that their patients go to Q6M. So there will not be one size fits all, but what there would be is a market expansion that is significant as we extend the duration between administration from 2 to 4 to 6. And obviously, when we get to Q6M, it's a brand-new set of medicines because you've got the third-generation integrase inhibitor, VH184, which has a unique resistance profile and is a third-generation integrase inhibitor. And then you have a capsid inhibitor or N6LS depending on which regimen we select for our Q6M, and it's great to have options. So feeling very bullish about the future of Q6M, but also see a place for Q4M as patient choice remains critical. Emma Walmsley: Thanks, Deborah. Luke, any comments you want to add? Luke Miels: Thanks, Simon. I mean I would just say, again, confident overall in the late-stage assets. And yes, we look forward to updating everyone with the team next year. In terms of BLENREP, I mean, look, it's going to be material. I said that over the next couple of years. And the key is obviously the initial launch and then the pathway to second line, which Tony is very much in hand and the usual pushes and pulls with competitive data sets. Operator: Next question comes from Sarita Kapila from Morgan Stanley. Sarita Kapila: Thanks for the color on Nucala. I was just wondering if we could have a little bit more on the rollout in COPD, how the launch is going versus your initial expectations and where you're seeing the most use? Is it in the 150 to 300 eosinophil group? Or is it in the over 300 where it would be more head-to-head with Dupixent? And then the second one on Jemperli, please. It seems to be a very strong rollout in the U.S. or momentum in the U.S. How penetrated are you now in endometrial cancer? And is this momentum sustainable into 2026? And should we think about Jemperli being able to get to your guide of over $2 billion in the existing indications? Or would you definitely need the pipeline to hit that? Emma Walmsley: So we'll come to Luke on both Nucala and Jemperli, but I think it would be good as well when we've heard on the Nucala launch, just to hear a little bit from Tony because I think we are all want to know, we're all getting more and more ambitious on the portfolio for COPD, whether that's depe or the other assets that we're bringing forward. I know when we announced the deal we just did, the statements that it's going to be the leading cause of hospitalization in coming years. And we're talking about hundreds of millions of people. So this is really a scale disease where we have a lot of expertise for the pipeline coming forward. But in terms of what's in hand right now, do you want to comment on Nucala and? Luke Miels: Yes. I mean -- thanks, Sarita. It's broad. I mean when I was talking to the BU head in the U.S. about this, he said broad several times, broad label, broad uptake, broad resonance. And I mean, another market research point that's interesting is 9 out of 10 U.S. pulmonologists strongly agree that preventing severe exacerbations is essential to COPD management. I'm not sure about the 1 in 10. I don't suggest you go and visit them. Yes, clearly, it's landed well. But as I've said on other calls, this is a population of prescribers that only use it in 1 in 3 patients for many reasons. So that is just a balancing caution, but how we're going against Dupixent is very encouraging. Yes, it's across the label, both bronchiotetic emphysemia and different EOS levels. Tony Wood: Just moving on and on Jemperli. In terms of endometrial, obviously, we're pleased that we have the only and first label with dual primary endpoints of PFS and OS and endometrial cancer. We're following that up with a study called DOMENICA, which is looking at evaluating gemperirdine a chemo-free regimen. Importantly, as well, obviously, the rectal studies continue to progress well, where we have fantastic complete responses. Just a quick reminder on some of those programs for you, AZUR-1, which is the locally advanced MSI-H rectal results, which we're expecting to read out in the second half of '26. AZUR-2, which is colon cancer, and there's an interim for that in '28 and the JADE study, which is in the unresectable head and neck setting for which we're also expecting readouts in '28. So lots of momentum going around Jemperli to continue to support the growth of that medicine. Emma Walmsley: Anything you want to say on COPD? Tony Wood: On COPD, just look, I'm delighted with where our COPD portfolio is currently sitting. You may have noticed we have now 3 Phase III studies starting in COPD. There are the ENDURA-1 and 2 studies in the more typical COPD population and a study called VIGILANT, which is looking at earlier COPD patients. These are individuals who are not treated typically with bios, but for which they have secondary factors. that predispose them to rapid progression. Coming along behind all of that solidly is the long-acting TSLP and IL-33 options. And as Emma has mentioned, the ongoing option in PD3/4 and the latest deal that we have with Empirical that was announced this week with an entirely new novel mechanism, which is [ oligo-based ]. Luke Miels: Yes. And Sarita, back on your question on Jemperli and endometrial. And I think the good news overall, if you just look just in the last 12 months, you've gone from 80% of ONK using IO typically in endometrial to now 96%, which is great. 90% of these patients are now on some form of IO. For us, there are clear opportunities if a physician can accurately cite the RUBY overall survival figure, then the likelihood of using the drug is double that versus someone who can't. So that's our focus is the DMMR population. We do have the broad label, of course. MMRP tends to be more dominated by pembro. But globally, there's about a 5% difference in market share in our favor against pembrolizumab, which is very encouraging. Emma Walmsley: Yes, lots coming on. Operator: Next question comes from Zain Ebrahim from JPMorgan. Zain Ebrahim: This is Zain Ebrahim from JPMorgan. So my first question is on BLENREP. You talked about it, but you mentioned that you expect to see a material growth driver over the next 3 to 4 years. So how much of that growth do you expect to come from the U.S. based on the current label versus ex U.S.? And how much of that is driven by the expected indication expansion in 2028? That's my first question. And my second question is just on general medicines. It sounds like the Trelegy IRA negotiation was in line with your expectations. So how are you thinking about the development of general medicines over the midterm? Emma Walmsley: Yes. I mean, on GenMed, we're not going to change our '21 to '26 guidance, which we upgraded slightly because of the operating performance. So there's no more update on that. And I'm not sure, Luke, how much you want to itemize. I know Darzalex is about half x. Luke Miels: Yes, that's right, Emma. I mean, I think, look, the priority is to get to second line in the U.S. to match the rest of world label. The U.S. initially will be ahead of Europe because we're launching. But as markets like Germany and Japan come online, that should balance out over time. Emma Walmsley: Yes. And I think as Luke can tell you went through in great deal of detail on the calls. There is a material opportunity in third line, and we have a good pathway to getting to second line. And in fact, studies planned, as you all know, in first line, too. So I think this is definitely one to watch as part of our broader oncology portfolio, which continues to build. So look, I just want to say one last thing because I know that was our last question, and we went -- because we had a technical issue, I think, at the beginning, so apologies if you were made to wait. You do know this -- I know this is my last quarter to report as CEO. And I do want to just take a moment to thank everyone on this call for your time and engagement with me and most of all, with this tremendous team who over the last 9 years together have transformed our great company's performance, pipeline and prospects. And in doing so, we've set out a clear pathway for patient impact at serious scale, already 2 million -- 2 billion, sorry, people around the planet. And I firmly believe that GSK's value for shareholders will be fully recognized and sustained. And when you step back and reflect, it's really hard to think of a sector that matters more than ours, where innovation and trust really can change people's lives and drive sustained performance and value for shareholders. And all of us, whether it's those of us here in this room or everybody on the call, well, we're all part of a really extraordinary incredible industry, and it's a privilege to be part of it, and it is not a responsibility to leave lightly. I am so delighted and very proud to be passing the baton to Luke and to be leaving all that GSK has to offer in such fantastically good hands. So I just wanted to finish up the last time wishing everybody listening in just great good fortunes for the future. And I, of course, look forward to cheering Luke and all the wonderful people working at GSK to a lot of further success as they combine science, technology and their talent to get ahead of disease together. Thank you all very much. Luke Miels: Bye-bye.
Operator: Hello, and thank you for standing by. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the Aena Third Quarter 2025 Results Presentation. [Operator Instructions] I would now like to turn the conference over to Carlos Gallego, Head of Investor Relations. Please go ahead. Carlos Gallego: Good afternoon, everyone, and welcome to our 9 months 2025 results presentation. This is Carlos Gallego speaking, Head of IR. It's a real pleasure being with all of you today. Our Chairman and CEO, Maurici Lucena, will host the call together with Ignacio Castejón, CFO; and myself. As usual, we are going to cover the main topics explained in the results presentation, and we will finish with a Q&A session. [Operator Instructions] without further ado, I give the floor to Maurici Lucena. Thank you. Maurici Betriu: Thank you very much, Carlos. Good afternoon, everybody, and thank you for joining us to our 9 months 2025 results presentation. As usual, I will try to go through the key highlights of the period. Then I will give the floor to our CFO, Ignacio Castejón. And as always, we will conclude the conference call with a Q&A session. I will start with traffic as usual. As you can see in the information we have conveyed this morning to the market, traffic volume across the Aena Group grew by 4.1% year-on-year. In Spain, the increase was 3.9%. And I would like to stress clearly that we do confirm our 2025 traffic guidance of 3.4% year-on-year. So this increase in the first 9 months of the current year have confirmed our guidance, in other words. And if I jump to our international activity, in Luton, the increase in the 9 first year -- first months of the year, excuse me, was 4.8%. In Brazil, in the -- or BOAB, as we call it in Spanish, concession, the increase was 5.5%. And in Aena's ANB, the increase was 5.3% in traffic volume. If I move to our financial performance, total revenue in the first 9 months of 2025 reached almost EUR 4.8 billion, EBITDA EUR 2.9 billion, and the EBITDA margin stood at 60.2%. If we exclude the impact of the IFRIC 12, the EBITDA margin would be 61.9%. And net profit reached almost EUR 1.6 billion. And in this sense, I would like to highlight that the commercial activity really performed very well. Sales grew by 8.7%. And I would like to remind you that the tenders awarded in the first 9 months of the current year in specialty shops, they guaranteed minimum annual guaranteed rents in 2025 and 2026 that are 33% and 40% higher than in 2024. And in the case of food and beverage, the growth rates are 19% and 20%, respectively. You know as well that Aena has launched the tender for 98% of the food and beverage business in Barcelona. And I would like to say that we are very optimistic on the results -- on the eventual results of this tender. And I now move to the real estate business. Total revenue grew by 13.7%. And as you well know, we have launched simultaneously the tender process for the first hotel developments in Madrid and Barcelona airports, and we are also optimistic on the results. And finally, the contribution of the international EBITDA to the consolidated figure was in this first 9 months, EUR 307 million, which represents an increase of 23.3%. However, you know that I don't usually join you for the financial results presentation of the first 9 months of the year. And actually, the reason why I have joined you today is because I wanted to be crystal clear on 3 elements that are very important for Aena and for our financial results presentation and are important messages that I would like to convey to our shareholders, to analysts and in general, to investors. So I would like to make a few comments. Firstly, on the ownership of Aena's assets of Aena's Airports. Secondly, on DORA III and what we expect in principle of DORA III. And thirdly, on dividends and the way forward, let's say. So I will start with ownership. And you know that in the last months, there have been too many, I would say, statements made by some political representatives from some regions in Spain regarding airports owned by Aena. We were convinced a few weeks ago that the moment had come to issue -- I think it was a very clear communication to the market through De la Comisión Nacional del Mercado de Valores, the CNMV. And within this communication, we stated that Aena has been undertaking a very intense advocacy activity, at least since the summer of 2024. I'm completely convinced that the current legal and constitutional framework, and because this is also very important, Aena's shareholder structure, the combination of private and state-owned shareholder structure, both this constitutional framework and our shareholder structure provide a very strong protection to the airport system and specifically to Aena, to our company. And I think that this preservation of the current model is especially important when we have announced, as you know, a very strong volume or very high volume of investment in the coming years. You know that we are going to embark on a period of major investments contained within DORA III. And you know that this investment that we announced a few weeks ago will culminate in the modernization and the expansion of many Spanish airports, which aside from Aena are essential to Spain's economic development in the coming decades. So that's why we are so convinced that this investment is good, both for Aena and both for our country or the country where Aena was born and where Aena has its main activity. So in other words, I would like to paraphrase a very well-known central banker. And I would like to state that the Aena is ready to do whatever it takes to preserve its model and its net asset value. And believe me, the combination of the constitutional framework, our shareholder structure and our determination will be enough. This is my conviction, and I would like to convey it very clearly to the market. Now I move to the second important point, DORA III. You know that on September 18, we announced our CapEx proposal for the third DORA -- for DORA III with a total amount of almost EUR 13 billion, of which almost EUR 10 billion corresponds to the regulated activity. You know that the aim of the investment related to DORA III in Spain is to add significant capacity, deliver better service and comply with regulatory requirements in Spain. And again, I would like to say very clearly that the top management team of Aena that I lead since 2018, I think, that deserves very much credit when I say clearly that we expect a technically reasonable WACC for DORA III. In other words, I think that the investment proposed by Aena will be technically very well -- or not very well, reasonably remunerated. This is what I would like to stress in this message because I've read many things. And at present, I'm completely convinced that the WACC will be reasonable. We don't ask for anything else than reasonability in the building of the WACC for DORA III investment by Aena. And thirdly, and finally, concerning dividends, you know that our current payout is 80% of the net profit. And again, I would like to be crystal clear. At this moment, when I look to the future at this moment in time and with the information that I have in front of me, I don't see reasons to change our current dividend policy. This is the end of my brief presentation. I now will give the floor to our CFO, Ignacio Castejón. And of course, I am at your disposal to answer any questions at the Q&A session. Thank you very much. Ignacio Hernandez: Thank you very much, Maurici. Hello, everyone. Good afternoon. This is Ignacio speaking. I'll try to be brief so that we have time afterwards for our Q&A session. On traffic, I would like just to share and highlight the important growth -- strong growth of the international traffic in our Spanish platform. International traffic grew by circa 6%, 5.7%, in particular, while the domestic traffic remained flat, as all of you know. In this regard, I would like to also to remark the important and the positive performance of the long-haul markets. You know that this is a market that is still smaller than our European and our Spanish market. But looking at the growth rates that we are delivering for Africa, Middle East, Far East and LatAm, I'm convinced that this is an important trend and a market that we will keep working on them. The company recently confirmed the capacity that we are seeing as of today for the winter schedule that happened last week with the information that we have now. And this is around 3.5% growth compared to the latest information that we have for the real seats delivered in 2024. I'm going to move directly for the purpose of being conscious of time to cost because I have read some comments on cost this morning. When I look -- and I'm referring to Slide 7, total operating expenses of the group grew at around 10%. And basically, this has been affected because the accounting rules that are applicable in Brazil, IFRIC 12. If we were excluding the increase in our cost related to IFRIC 12, that 10% would be around 5%, 5.5%, if I am accurate. And when we look at the Spanish network that I also read some comments this morning, the total operating expenses are growing at 6.6%, reaching EUR 1.5 billion. Let's have a short discussion on this item. Mainly the increase is explained by a couple of things, 10.9% rise in personnel costs, basically is the result of higher payrolls, additional headcounts, the improvement of the variable retribution schemes in the company and a number of other things. This is something that is just the result of our collective agreement, our collective scheme and also adding more people so that we are prepare for DORA III and also reacting to the increase in activity that we have seen in the last 24 months of the company. When we look at other operating expenses that are amounting EUR 996.7 million, I would like to share with all of you 3 things. This is for the first 9 months of the year. And I was also having a look at some of your views about the third quarter, and I think it's important that we address your comments. As you know, the third quarter of the year is the most active and the most intense quarter that this company had from a traffic standpoint. Secondly, as we have been sharing with all of you, we are seeing a trend in many of the contracts that we are awarding to our suppliers and providers. That is a trend that is confirming that the most of our costs related to security, maintenance, cleaning, PRM services are going up. They are not going down. And this is basically as a consequence of inflation trends, as a consequence of new salary rules applicable in Spain being impacting many of these costs, also new regulations applicable to Aena and also to our subcontractors. So there is a trend there that is basically impacting us and is impacting the whole sector and many activities in the country. And finally, there are a couple of things that are affecting the comparison of this quarter with the performance of the other operating costs that we saw in the first 6 months of this year. Many of you were stating this morning -- or some of you, sorry, that the increase in cost in this third quarter was higher than the trend in the first 6 months. Well, there have been a couple of things explaining why -- or there are a couple of things explaining why that has happened. In the first 6 months of 2024, we recorded a significant provision because of the Chapter 11 of one of the real estate company that we have operations with. And therefore, the cost increases that we have that year, so in 2024 was material in the first 6 months of 2024. So when we compare the first 6 months of 2025, the comparison was a very light increase. The provision, if I remember well, that we marked at that moment in time was circa EUR 15 million. On top of that, there have been some costs that in the past we incurred in the first 6 months of the year -- in the first part of the year that in 2023 -- 2025, sorry, are happening on the second part of this year. For example, advertising, that's something that we will incur in the last 6 months of the current year. Let's move to commercial that I think is where we have a very good news, I think as usual in the last quarters that we are sharing with you. And I would like -- the Chairman and CEO have already highlighted the significant growth in sales. I would like to share with all of you more than data that you already have in the presentation. The reasons why we think we are delivering this performance, there are a number of reasons. I think, first of all, the progress in the remodeling works, refurbishment works in most of the units awarded to our tenants. Secondly, we are adding commercial surface. We are adding more and more space, for example, in duty-free. When we awarded the last contract -- the current contract of duty-free, we said that we were going to increase the space for this activity, and that's happening. We have added around 10,000 square meters to this business line. The works are progressing. Madrid and Barcelona, we are almost done. We are introducing new business concepts. So as we discussed in the results presentation back in July, we have more and more hybrid concepts where in the duty-free areas, you can have F&B experiences and you can buy other products. We are introducing new brands that are fitting more and more with the passenger profile. We are, of course, taking into account and enjoying the consequences of having better conditions in our contracts that the Chairman was referring to the awards of the first 9 months of the year. So MAGs are going up, and that's resulting into better performance. And let me finish just with the strong performance that we are seeing in the mobility-related services. So car rental activities. We have the new contract, but also we are seeing more and more transactions at a higher average transaction value in the car rental business. And finally, the VIP activities that the company has been devoting a lot of work and activity is performing extremely well with a delivery of around 30% of growth, mainly explained by the increase in prices. We are adding services. And of course, we are attracting more and more passengers. The growth rate in passengers -- in users, sorry, is much higher than the growth rate that we are seeing in the traffic through our facilities. And let me finish on the international front. The Chairman has referred to the growth in the international EBITDA contributed to the whole group. I would like to basically highlight on Luton. I would like to share with all of you that in the third week of September, the Luton team successfully delivered the parking lot -- the construction for the parking that had a fire a couple of years ago was properly delivered and that facility is already up and running, and therefore, we are collecting revenues. And secondly, the insurance related to this fire, we managed to deliver a settlement -- we managed to reach a settlement with the insurance provider. And therefore, we shouldn't expect any kind of claim or litigation in this matter. That has been settled, and we have received what we were expecting to receive. And on Brazil, I would like to highlight the strong operational improvement that we are seeing in local currency. When we look at the growth in EBITDA in our Brazilian assets, the Recife portfolio and the Congonhas portfolio, we are seeing growth in Brazilian reais of around 20% of our EBITDA in those 2 assets, which are very good news and confirm our views that we would be able to attract traffic growth, but also perform positively on the OpEx front and increase the commercial performance in these 2 assets. On Congonhas, I would like to highlight with all of you that the construction activities have already -- are progressing materially. That's why you are seeing in the slide that you have in front of you that CapEx for the first 9 months is around EUR 150 million. The goal and our obligation according to the contract signed in that country is that by mid of 2028, we should have done all the CapEx activities in that airport. And without further delay, I would like to stop there so that we have all the necessary time for your Q&A. Operator: [Operator Instructions] Our first question comes from the line of Cristian Nedelcu with UBS. Cristian Nedelcu: It's a 2-part question, if you allow me. A lot of investors are trying to understand a little bit better this incremental CapEx of EUR 3 billion to EUR 4 billion that you've announced a couple of months ago, but trying to understand if it's good or not so you're spending that, what type of returns you can get on the nonregulated side. Could you give us a bit more granularity? There are some information on Slide 11. Can you tell us a bit more how much of this CapEx is for growth? How much is for maintenance, security or other? Could you talk about any metrics incremental retail space or any other metrics that will allow us to better judge the return on capital employed you'll get in this asset? And the second part, if you allow me, you've shown in your slides a lot of the projects in this CapEx plan -- are in planning mode. So from the perspective of the time line, how much CapEx do you think you'll spend in '27, '28? Is it fair to assume that CapEx is more back-end loaded? Maurici Betriu: This is Maurici Lucena. I would just like to make a very brief introduction to your first question. And then I will give the floor to Ignacio Castejon to our CFO. I was honestly very surprised when the day we announced our CapEx proposal, which, of course, is a proposal because we have -- you know that we have a period which is defined by law in which we have to discuss our proposal with airlines. We need also reports from the CNMC, we can marginally modify specific aspects of our proposal, then there's the profile of the airport charges and so on. So -- and eventually, it is the government, which in its role as a regulator decides what the final DORA III investment will be, but I was a little bit surprised or very surprised by the market reaction by the decrease of our share price, the day we announced this because as a professional economist, when I think about what is Aena's business from the regulatory perspective, it is almost everything about the wrap, and of course, if we were another company, I could understand some of the, I don't know, of the doubts, but I think that our track record, our delivery, it has been very good in the last decade. I say the last decade because it is in -- it was in 2015 when we went public, and we became a listed company. And I think that we are a reliable company. So I think that, of course, there are risks when I know, when you project such a high amount of CapEx, but this will be good for the company. This will increase our RAP, will improve our airports, will improve our -- the quality of the services we offer to our customers, to our clients. And in the end, this will be -- how would you say that -- it will -- sorry, because the words came in Spanish, and I wanted to be very precise. This, in the end, the increase of the RAP with such a hike volume of investment will generate value for the company without doubt. So this would be my first, but I would say, important reflection. And I now give the floor to Ignacio. Ignacio Hernandez: Thank you very much, Maurici. And thank you very much for your don't know, super question or 100 questions in one question, Cristian. I think as the Chairman was explaining, we are at a very early stage of the consultation process. It has just started. I think this is the second or the third week of the consolidation process. The teams internally have been working very hard in order to have this proposal. And of course, we have a massive amount of internal information that is being discussed. The nature of the consultation process in Spain, as all of you know, is confidential. And therefore, we cannot go now publicly, assuming that we were interested in doing so and start setting all that information. Having said all that, because I will not be able to address all your queries, unfortunately, Cristian. But what I can say with you, trying to react to some of your points on the schedule, I think, this is going to be partially back ended. It's difficult for any company launching so many projects for that value being able to deliver from day 1, proportionally that amount of CapEx. So please assume that in the first years of DORA #3, the CapEx that we'll be able to execute will be lower than the CapEx that hopefully we'll be able to deliver in the second part of DORA #3. That's basically -- is a result of the of physical preparation, design, permits, et cetera, and also being up and running in a number of those projects that are in some regards, are not 100% controllable by the company. You were also raising the point on nonregulated investments, that is basically around circa EUR 3 billion. I would like to highlight a couple of things, Cristian, in this regard. I think the first one is around 2/3 of this amount is just the result of the mechanical cost allocation, in this case, CapEx allocation that is applicable to this company when we execute CapEx. So if this company is executing CapEx related to a terminal, part of that building will be allocated to regulated CapEx and part of that building will be allocated to nonregulated CapEx. So it's not that we can entertain a discussion about, are we investing in exotic extraordinary nonregulated activities that are not growth or will not deliver revenue. It's not -- it's our scope, it's our day-to-day activities, but every time that this company invests one penny in a building that is providing regulated activities given that, that building will also be providing partially some nonregulated activities, we have to allocate part of that investment to nonregulated assets. And rounding up, that is around 2/3. If we look at the other 1/3, that is 100% nonregulated activities, Cristian, I would say that no surprises here. This is going to be mainly new car park buildings, that are given that we are expanding the terminals and hopefully, there will be more traffic based on our numbers in our facilities in the next decade, there will be a need for new car park. And that's basically explaining a significant part of the 100% nonregulated investments. And this is what is behind the EUR 3 billion figure that we sell with the market in mid-September. You were also asking on a breakdown about what is behind the EUR 13 billion. I think the company has been disclosing figures related to the main projects that we are willing to start in the next DORA III. I'm referring to Madrid, I'm referring to Barcelona, I'm referring to some airports of the Canary Islands, and also other ones in the Mediterranean Coast. So I would say that around 50% of the total number of the EUR 13 billion refers to these big initiatives, transformational initiatives. The other 50% refers more to infrastructure, technology, safety and security, sustainability, innovation, planning, recurring maintenance, et cetera. So that's the kind of breakdown that I'm happy to share with all of you at this moment in time. I hope that I have been able to address your question. And I would like to finish just with another comment following up on the statements from the Chairman and also other statements related to DORA III that I have heard, and I think you were alluding as well in your question, Cristian. This company this year, next year, the very first year of DORA III, from a cash flow standpoint, is not materially changing. I think we are going to have a need to raise debt in order to invest in all this CapEx mainly in the last years of DORA III. So I would like to share this message with you in order to reduce the level that I have seen in some of you about the uncertainty or materially changing in the company, in the credit profile of the company or in the cash flow quality of the company. 2025, you are seeing the figures today as of September. I don't -- we should expect that 2026, very similar to 2025. I'm not giving you guidance. We are not providing guidance today of 2026, but it's the last year of the current DORA and you have all the information on DORA II in front of you. And as I was saying at the beginning of my answer, DORA #3, the CapEx is a bit back-ended. And if you look at our debt maturity profile, there are no material debt repayments coming in the next year and especially in the first years of DORA III. So the questions related to, can the company afford these CapEx investments, the Chairman has already confirmed the point on capital allocation with respect to dividends. And I also would like to share with all of you as CFO, that we see that this company will remain having a strong credit rating in the next years despite this proposal of DORA III, that is on the table, and we are willing to deliver. And sorry for my long answer, Cristian, but given your total and big question, I thought that was necessarily a long answer. Operator: Your next question comes from the line of Tobias Prohme with Bernstein. Tobias Prohme: I also have a question regarding CapEx. I guess some investors and the staff had also worried that CapEx will be higher for longer spilling into DORA IV as well given that not all of the projects can be finalized in DORA III. When you look at Slide 12 and the projects in planning stage and the pre-project stage, and then combine that with comments of the Spanish Minister of Transport, that construction for Barcelona won't start before 2032. Can you maybe comment or give us a little bit more color on your capital expectation for DORA IV. Maybe some comments on: a, what do you think for Barcelona and the Barcelona comment? And then b, sort of which other projects are likely to require CapEx beyond DORA III that is not captured in your current proposed CapEx? Ignacio Hernandez: Thank you very much for your question, Tobias. This is Ignacio speaking. I'll be very straightforward Tobias. We have just started the consultation process for DORA #3. So start talking today in the results presentation for the 9 months of 2025, about DORA #4, I think would be a wrong approach from the company. And that's message #1. And with respect to my message, the other message that I wanted to share with all of you, some of our projects in our DORA III, of course, are longer from a construction standpoint than the 5-year period of DORA #3. So there will be some of our projects that will be totally completed in DORA #4. That's a consequence of the size and the importance of these projects that will allow the company to provide capacity for the next 20 to 25 years of traffic growth in Spain. Thank you, Tobias. Operator: Your next question comes from the line of Elodie Rall with JPMorgan. Elodie Rall: We talked a lot about the CapEx and that you think they are good CapEx, and you've mentioned that the WACC will be reasonable. Could you give us maybe a bit of color about what kind of tariff increase this will all translate into in the next door. I think you said in the past that you would aim to get something around low single-digit tariff increase that you view that as a good outcome. Is that something that you are still comfortable into pushing forward to? And for next year, tariffs was obviously already announced -- how secure is that? And when will we have the final confirmation? Ignacio Hernandez: Thank you very much, Elodie. This is Ignacio speaking. I think as you know, the process, we will not have our proposal being discuss and hopefully approved by our Board until March of next year and will be subject to further approvals coming from the cabinet and regulators after summer of next year. So any indication from my side could be premature. Having said all that, I think we see reasons why there might be a tariff increase in the next years. If we look at the CapEx investments that we were discussing in the -- previously, this is a significant investment. Two, if we look at OpEx, OpEx of the company is likely to go up. There are many reasons for that in the context of a significant construction activity, expanding our terminals, bigger footprint of our terminals, more activity coming on the commercial front. So all that, I think this company will get bigger. And therefore, the OpEx of this company as a consequence of that, is likely to go up. And finally, from the remuneration standpoint, as the Chairman was referring, we think that we'll get an adequate and attractive, a reasonable WACC. And if I look at many of the inputs that are taken into account in order to estimate WACCs, what I see now is a scenario in which risk-free rates are higher, cost of debt for Aena will be higher than the one used for DORA II. So there are reasons there to defend a higher remuneration for this company in the context of DORA III than the ones that we had through the consultation process of DORA II, and that would be my answer, Elodie. Operator: Your next question comes from the line of Nicolo Pessina with Mediobanca. Nicolò Pessina: About the governance rights that many local authorities had has in the last couple of months, I understand Aena's view to preserve the current model. However, I wanted to understand better what the objective of the local authorities in asking these governance rights is. What would they like to do differently? And is it technically possible to give them a role in the decision or process of a single assets, maybe giving them voting rights for a single asset while retaining the economic rights? Maurici Betriu: This is Maurici Lucena speaking. Well, I think that for the reasons why local authorities or certain local authorities ask for more involvement in the management or regulation of airports. I think that you should ask them the reasons because I don't know. I mean I cannot be abstractly in their place to think why they ask it. You know that the political world is complex. And I think that the best approach is to ask them directly. On the second issue, you mentioned again, I want to be crystal clear. We think that it's stronger than we think. We are convinced that the constitutional framework and the part of the Spanish constitution that refers to airports along with, and this is very important, along with the shareholders structure of Aena, which is a hybrid state-owned and private and listed, provides a very strong protection of the model. And in other words, Aena will and can only decide things that -- to put it simply, that are in harmony with a business case with this profitable for the company. So why the company would be interested in sharing the management of the company being the most efficient company in the airport sector, probably in relative terms in the world. Why? So this is why I say that we consider our model, which is, by the way, the model defined by law in Spain of airports and of the company of Aena very solid. And at present, I consider it impossible to modify anything in the line that has been mentioned by some political actors. Operator: The next question comes from the line of Andrew Lobbenberg with Barclays. Andrew Lobbenberg: Can I ask about external activities. And I know you're always limited on what you can say about where you're looking and what you're doing. But as we are focused on the scale of CapEx. And as Maurici spoke about how you recognize the importance of shareholder returns to investors, and you reiterated your expectation of sustaining the 80% dividend payout. I mean, how are you thinking in terms of the flexibility to participate in further external opportunities given that potentially Luton is on the table and then press reports have you looking at the CCR and assets and indeed Catania as well. How are you balancing this? Maurici Betriu: Thank you, Andrew. I will be very sincere because your question is a question that -- on which I have been reflecting, I would say, a very long period of time because, yes, I will be very clear. I think that to the extent that the current information allows us to, let's say, reflect on this, I think that it is comparable so far for Aena to invest enormous volumes of money in the coming years to defend a very high payout of our net profit. And that's why I say, I said that I don't see at present any reason to change our payout policy in the coming years at present. And thirdly, the potential of M&A projects. I think that these 3 elements, investment, a very generous dividend policy and potential M&A projects are comparable. And this is why I wanted to be clear when I said what I said on the dividend policy. And specifically, in M&A, I've said this many times, we look at everything. We look at everything because this is a sort of not very wide market. I refer the one that offers new international opportunities. So we look at everything, but actually, we are interested in very few projects because the combination of the quality of the asset price, regulatory risk, the country, culture, culture, I mean, culture proximity to express it clearly. The combination must be a very specific one. And when this combination takes place, so we can then be very concrete in being interested in a specific project. But this happens very few times. Operator: Your next question comes from the line of Dario Maglione with BNP Paribas. Dario Maglione: I agree with the Chairman. The group CapEx makes sense. I think the regulated WACC should be reasonable for the next quarter. I'm more concerned about the execution. So Aena, how will Aena manage the construction risk? If I think about the construction, Aena has not done a lot of CapEx over the past 15 years. And of course, EUR 13 billion is a large number. So if there are delays, cost overruns in 1 project, what happens? Can Aena transfer some of these risks to subcontractors how would the regulator look at this for the next order? Maurici Betriu: This is Maurici Lucena, again. Well, all that I can say at present before I give the floor to Ignacio Castejon is that as CEO of the company, I consider the company very well prepared for this very -- it's true, stressful period of an enormous amount of investment, but if it was otherwise, I would not have proposed this volume of investment to the Board and then convey it to the government for each analysis. And it's a final decision in the coming year in next year. So I think that we will be prepared. You are right when you say that it's not the same when in Spain, you invest, well, this year, we will be investing in Spain from a regulatory perspective, EUR 750 million. And this is very different from the volume that we will face in DORA III, but I consider the company very well prepared. And if there are any doubts, I would kindly ask you that you analyze what we have just done in Brazil. In Brazil, it's first time ever, and this has been said by the Brazilian authorities that an airport company complies with everything related to all the construction that was associated to the concession. And I'm very optimistic as well on the success of the construction in Congonhas, which is very challenging, of course. So -- but I think that this is a very good precedent to assess the, let's say, the probability that Aena in Spain will complete successfully the new DORA III. So again, I'm very confident that we'll do it. And now we'll give the floor to Ignacio Castejon. Ignacio Hernandez: Thank you, Maurici, and thank you for the question, Dario. The 2027 to 2031 investment plan, of course, will be a challenge. I think one of our main aims, Dario, is maintaining and that's why it's an important challenge. It's maintaining airport capacity during the construction activity. So while the works are underway. The most significant works will begin in DORA III, and our plan in order to have them being executed and delivered, is that they will be gradually put into service. So it will be a phasing -- a phased approach, sorry. I would also like to highlight or to underline that we will tender out the projects, the construction projects when they are already designed, already completed. So when they are tender out by us, there won't be very little, I would say, very limited room for potential deviations or changes that mitigates -- that materially mitigates risk, at least from our perspective. I think the Chairman referred to Congonhas, to Recife. We also have in front of us, the example in Palma, where we are delivering the project one year ahead of schedule in 2027. Also, thank you to the investment approved by the regulator that we -- that gave us more room to finish this project next year. So I think it's a transformational phase for the company, but we think we have the right resources, tools, processes and our approach to tender contracts will help us to mitigate the risk that you were pointing out. Operator: Your next question comes from the line of Marcin Wojtal with Bank of America. Marcin Wojtal: I just wanted to ask about the regulatory process and the time line. So you mentioned that you have until 15th of March 2026 to submit your DORA plan to the regulator. Are you going to make it public? Are you going to perhaps organize some sort of presentation, explain your assumptions and giving us more detail? And then what happens later? Are you expecting the regulator to issue maybe like a draft determination, preliminary determination before the summer? Or we have to wait literally until September 2026 to get further visibility. Ignacio Hernandez: Thank you for your question, Marcin. I think with respect to what the company may communicate in -- after March of next year. We haven't made an internal decision about it. So we will make that decision at that moment or in the following months if we think it's the best for the company, the shareholders and the process. If I understand well, during process -- during the process of DORA #2, there was some privileged information being disclosed by the company with some with a summary or the main elements of the proposal of the company being shared with the market. That happened in DORA #2. I think let's make a decision, let's make the call about DORA III at that moment in time, if we finish the best course of action, always taking into account our regulation and the Securities Exchange Commission regulation. With respect to your question #2, I think it's unlikely that they publicly revert to us before summer, but I don't have -- that's a question for them, not for us how they will make progress before summer with all our information. Operator: Next question comes from the line of Harishankar with Deutsche Bank. Harishankar Ramamoorthy: Maybe one around the tariff increase that you're talking about for DORA III, what would be a reasonable WACC behind your assumptions for a slight increase in tariffs? And on the tangent, if you do land a tariff increase under DORA III, what's the risk that airlines start pulling out more capacity. Are you worried about that? Ignacio Hernandez: Thank you for your question, Hari. We -- of course, we are working with numbers internally and we have been working for a while. We haven't even presented to our Board those final numbers. And in the consultation process, discussions about WACC will happen later on. So it would be, I would say, it wouldn't be the right approach from our end, setting that information with you at this moment in time. Apologies for that, Hari. I'm sure that in the future, we'll be able to have this conversation, but not now. Harishankar Ramamoorthy: No, I completely understand that. And any thoughts around what might happen to airline capacities and whether you would be worried about that, in the event of a tariff increase, I mean. Maurici Betriu: I didn't get your question, Hari, sorry. Harishankar Ramamoorthy: Sorry. So you've seen some reports on how certain airlines have been looking at taking capacity on the back of tariff increases. So given your projection for slight tariff increases, are you worried about any capacity changes from airlines? Ignacio Hernandez: Sorry, I didn't understand your question initially. Apologies for that, now I got it. I think that those have been comments from one specific airline with respect to a specific season, prior to DORA #3. So what we see is a market that is one of the largest touristic markets in the world that according to ACI is going to be a top 5 market in aviation, a very important activity sector like tourism accounting for around 15% of the Spanish GDP. So we believe that there will be appetite and demand from airlines to be present sorry in this kind of market, Hari. Operator: And the last question for today comes from the line of Jose Arroyas with Santander. José Arroyas: Yes. Thank you for the clarifications. They were very helpful. I wanted to ask you on the Barcelona food and beverage contract. What are, in your opinion, reasonable expectations for the market increase in that contract? I can see that there is a 30% more square meters than in the previous contract, and I can see that in Madrid, a similar contract was awarded in 2023 with more than 40% increase in MAG. So I wanted to make sure my expectations that we might see the MAG rising by more than 50% in that individual contract is not out of kilter. And whilst we are on that topic, I wanted to check with you if there is any other large tender outside Barcelona food and beverage that we should have in mind during 2026. Ignacio Hernandez: Thank you, Jose Manuel. This is Ignacio speaking. I think we are very excited about the F&B tender in Barcelona. The commercial team has been working really hard in that matter and the feedback that we are receiving from the market is that I would say it's very strong. And we are adding a space. We are trying to have a very attractive and appealing approach to this contract in terms of tenure, in terms of layout, in terms of concepts, with respect to expectations... [Technical Difficulty] Operator: And that is the end of our Q&A session. Ladies and gentlemen, that concludes today's conference call. You may now disconnect your lines. We thank you for your participation.
Operator: Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the ASM International Third Quarter 2025 Earnings Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Victor Bareño, Head of Investor Relations. Please go ahead, sir. Victor Bareño: Thank you, operator. Good afternoon, and welcome, everyone, to our 2025 Q3 earnings call. I'm joined here today by our CEO, Hichem M'Saad; and our CFO, Paul Verhagen. ASM issued its third quarter 2025 results yesterday at 6:00 p.m. Central European Time. The press release is available on our website. With our latest investor presentation, we remind you, as always, that this earnings call may contain information related to ASM's future business and results in addition to historical information. For more information on the risk factors related to such forward-looking statements, please refer to our company's press releases and financial statements, which are available on our website. Please note that the profitability measures mentioned in this call today will be primarily based on adjusted non-IFRS figures. For the reported results as well as the reconciliation between reported and adjusted results, please refer to the quarterly results press release. And with that, I'll now hand the call over to Hichem M'Saad, CEO of ASM. Hichem M'Saad: Thank you, Victor, and thanks to everyone for attending our third quarter 2025 conference call. First off, I'd like to thank all our investors and stakeholders who joined us for Investor Day last month. It was great to see so many of you. For today's call, we'll be following the usual agenda. Paul will begin with an overview of our second quarter financial results. Next, I'll discuss the market trends and outlook, followed by the Q&A session. I will now turn it over to you, Paul. Paul Verhagen: Thanks, Hichem, and thanks, everybody, for joining our call today. Let me start with revenue. The revenue in the third quarter of '25 amounted to EUR 800 million, up 8% year-on-year at constant currency. And compared to the second quarter, sales were flat at constant currency. This was at the high end of a guided range of flat to down 5%. Equipment sales increased 10% year-on-year at constant currency and were led by ALD followed by Epi. Spares and service sales were up 2% at constant currency. Year-on-year growth in spares and services was lower than in the past few quarters, and this is explained by the accelerated above trend demand in China in the second half of last year. Growth in our outcome-based services continues to be healthy. In terms of customer segments, revenue was led by logic/foundry, followed by memory and then power/analog/wafer. Logic/foundry continued to account for the majority of sales. Advanced logic/foundry sales for the largest part 2-nanometer related were up substantially compared to the third quarter of last year and approximately similar to Q2. Mature logic/foundry sales mostly in China, were up year-on-year and down from the second quarter. Memory sales decreased compared to Q3 of last year and were roughly similar to Q2. of this year. ALD sales for advanced HBM-related DRAM applications represent a larger part of our memory sales. The year-on-year decrease was mainly explained by some lumpy and relatively high sales and orders from memory customers in China in Q2 and Q3 of last year, as we also discussed in previous quarters. Sales in the power/analog/wafer segments were up slightly but still at relatively low levels, reflecting the continued downturn in these markets. Gross margin in the third quarter remained strong at 51.9%, roughly similar to Q2 and up from 49.4% in the third quarter of last year and again supported by a positive mix. As mentioned in the press release, we expect a less stable mix in the fourth quarter, which should bring the gross margin to around 51% for the full year. One of the mix factors was revenue from China, which decreased both year-on-year and compared to Q2 but still represented a solid level in Q3. We still expect China sales in the second half to be lower than in the first half with a more substantial drop in Q4. As discussed in the last quarter, our forecast for the gross margin excludes the impact from potential new U.S. tariffs. Our industry is currently still exempted, but it remains unclear what any new tariffs will be. We have several contingency scenarios in place to help mitigate potential direct impacts including the option of expanding localized manufacturing in the U.S. SG&A expenses were 10% lower year-on-year. This reflects lower variable spend and our continued cost focus. For the full year, SG&A is still expected to be somewhat below prior year. Gross R&D was up 10% in Q3, reflecting ongoing increases in our R&D programs. This increase plus the inclusion of a EUR 4 million impairment was partially offset by a relatively higher increase in capitalized development expenses, leading to an increase of 3% in net R&D expense. At 30.9%, the operating margin continues to be strong, supported by the solid gross margin and the year-on-year decrease in SG&A. Below the operating line, financial results included a currency translation gain of EUR 11 million, and this compares to a currency loss of EUR 60 million in the second quarter and a loss of EUR 48 million in the third quarter of last year. As a reminder, we hold the largest part of our cash in U.S. dollars. Let's quickly switch to ASMPT. Our share in income from investments, reflecting our stake of approximately 25% in ASMPT amounted to a loss of EUR 7 million in the third quarter, which is explained by one-off restructuring costs taken by ASMPT in the quarter. Our net results in Q3 also includes an impairment reversal of EUR 181 million, driven by a recovery in the market valuation, our stake in ASMPT in the quarter. With that, the impairment charge of EUR 250 million that was recognized in Q1 of this year has now been fully reserved. Let's go back to ASM now. Order intake. Our new orders amounted to EUR 637 million, a decrease of 7% compared to the second quarter and a decrease of 7% compared to the third quarter of last year at constant currency. With the Q2 results, we already indicated that book-to-bill would be below one in Q3. As an expected rebound in advanced logic/foundry orders will be offset by a sharp drop in China orders following a very strong first half of the year. In our update last month, we indicated advanced logic/foundry orders would still be up, but not as strongly as previously expected due to very mixed trends per customer and also that power/analog/wafer orders came in somewhat lower than expected. Looking at the breakdown by customer segments, logic/foundry was the larger segments, followed by memory and then power/analog/wafer. Logic/foundry orders decreased slightly year-on-year and compared to Q2. As just mentioned, a solid increase in advanced logic/foundry compared to Q2 was offset by a sharp drop in mature logic/foundry orders mostly in China. Memory orders dropped compared to last year and were relatively steady compared to Q2. And the largest part of memory orders was for advanced DRAM applications. Let's turn now to the balance sheet. ASM's financial position remains in good shape. We ended the quarter with EUR 1.1 billion in cash, up from EUR 1 billion at the end of June. Days of working capital dropped to 37 days at the end of September, down from 43 days end of June. This level is relatively low and also below the longer-term target range. As previously explained, this is due to a relatively high level of contract liabilities for a large part in China, which is expected to gradually normalize over time. CapEx amounted to EUR 38 million in the third quarter due to phasing of investments for our new Arizona facility, CapEx in the fourth quarter will be higher. And for the full year, we still expect CapEx of EUR 200 million to EUR 250 million. During the quarter, we also paid EUR 100 million in earn-outs related to the acquisition of LP in 2022. In total, free cash flow amounted to EUR 139 million in Q3. Excluding the earn-outs, the free cash flow amounts to a stronger level of EUR 239 million in Q3 and EUR 628 million in the first 9 months. During the third quarter, we spent EUR 109 million on share buybacks as part of our EUR 150 million program that was completed on July 25. And lastly, let me recap the 2030 financial targets we shared during the last month's Investor Day. Growth prospects for ASM remains strong on the back of rising ALD and Epi intensity in the logic/foundry and DRAM markets and new opportunities in, for instance, PECVD and advanced packaging and continued double-digit growth in spares and services. We expect the revenue to grow to more than EUR 5.7 billion by 2030, and this represents a CAGR of at least 12% from 2024 through 2030, twice the rate expected for the wafer fab equipment market. We raised our gross margin target to a range of 47% to 51%. And as part of this, we discussed a number of initiatives that will drive efficiency and productivity improvements. One of the key initiatives I'd like to highlight again is the successful launch of a new ERP and PLM systems. We went live 3 months ago and the transition was executed smoothly without any disruption to operations. This milestone lays a solid foundation for future efficiency improvements, including the rollout of real-time analytics and other digital transformation efforts. We will remain disciplined regarding operating expenses. Combined with the operating leverage effects, we expect SG&A to drop to less than 7% of revenue by 2030. We intend to increase R&D investments. This is our lifeline as the opportunities continue expanding in the next nodes. The target is to keep net R&D in a low double-digit percentage range of revenue. This will all lead to solid operating margin of 28% to 32% in the coming years and from 2030 onwards of more than 30%. In terms of CapEx, we expect an annual level of EUR 150 million to EUR 200 million during years of infrastructure expansion and EUR 100 million to EUR 200 million in years without such an investment. Combined with improving profitability, we project free cash flow to increase to more than EUR 1 billion by 2030. During Investor Day, we also reiterated our capital allocation policy. #1 priority remains investing in the growth of our company. That includes R&D and infrastructure investments and also M&A in case of attractive opportunities. In addition, a strong financial position remains important with at least EUR 800 million in cash as we remain committed to our dividend policy and to return excess cash in the form of share buybacks. And with that, I'll turn the call back over to Hichem. Hichem M'Saad: Thank you, Paul. Let's now continue with a review of the market and business trends. Starting with the end market conditions. The overall picture continued to be mixed, similar to the previous quarters. In various parts of the semiconductor market, the recovery continues to be held back by uncertainties around the economic outlook and geopolitics. It's clear that AI remains the bright spot across multiple sectors and markets, adoption of AI is being accelerated as a key driver of innovation and productivity gains. The surging demand has been highlighted by recent strategic partnerships and announcements from industry leaders aimed at expanding AI data center capacity. In terms of wafer fab equipment, the growth in AI is expected to drive significant and structural growth in the advanced logic/foundry and DRAM markets. These strengths play to ASM's strength. If we first look at our advanced logic/foundry business, overall demand continues to be healthy even though trends by customer has been very mixed. As already mentioned, these mix trends had some impact on Q3 bookings and will also impact sales in the second half. For the full year, we still expect a very strong increase in our gate-all-around related sales. The 2-nanometer transition continues to be a strong driver for our company. In the Investor Day last month, we reconfirmed the $400 million SAM increase in the move from FinFET to first-generation gate-all-around. We also reconfirmed that in this transition, we at least maintain our ALD market share and expanded our share of Epi layer accounts from 22% to 33%. Our customers continue to report strong demand for 2-nanometer for both AI and smartphones. We expect this to support continued investment in 2-nanometer capacity expansions in 2026, including new sub nodes, such as the backside power distribution. At the same time, customers continue to progress steadily in the development of the upcoming 1.4-nanometer node. In the second half of 2026, we expect the first 1.4-nanometer pilot line investments, followed by the start of volume production in 2027 and 2028. As also shared in our Investor Day, we expect a SAM increase of $450 million to $500 million in the 1.4-nanometer transition. Based on the intensity and breadth of our R&D engagement, we expect again to at least maintain our market share in the transitions to the next 1.4-nanometer node. We expect new ALD layers in [ backside ] power in NIMCAP and metal ALD layers in the middle-end-of-line. However, the biggest area of increasing ALD intensity continues to be in the transistor area, the front end of line. This is the heart of the chip where the overall device performance is defined by functional materials such as the high-k and electric dipole layers for multi-DC and work function layers. As a percentage of total ALD layers, we expect the number of layers in front end of line to increase from 50% in the 2-nanometer node to 60% in the 1.4 nanometer node. This is an area where our company holds strong market share position. Let's now review the memory business. High-bandwidth memory, HDM-related DRAM continues to be the main driver. Fueled by strong demand for AI data centers, customers are expanding manufacturing capacity for the most advanced DRAM devices for HBM applications. These devices require ALD High-K Metal Gate technology in which ASM has a leading position. Looking at the year-on-year performance, despite the good momentum in high-end DRAM, it's important to note that our memory sales last year included elevated sales from Chinese customers, which are not repeated this year. As a result, we still expect our memory sales to be lower than last year at less than 20% of overall equipment. The outlook for CD NAND, which is the smaller part of our memory business, has been improving somewhat, and we continue to be well placed with our ALD death field solutions with key customers. We expect DRAM investment to further increase in 2026. In the next couple of years, we expect a further gradual increase in the number of ALD layers in advanced DRAM. In the press release, we highlighted new wins in Epi and ALD dipole and work function-related layers in DRAM HBM for most expected to ramp in 2026 and 2027. Starting in 2028, we anticipate a significant increase in our SAM in DRAM driven by 2 major technology transitions. The move to 4Fsquare architecture and the adoption of FinFET in the periphery. In 4Fsquare, the channel structure becomes vertical, and producing a more complex 3D architecture. This shift will require additional ALD layers for gap-fill, oxides and metals and we'll also increase the role of Epi as an enabling technology. Shortly thereafter, the transition from planar to FinFET in the periphery will further increase demand for logic like ALD and Epi layers. At our Investor Day, we quantified the SAM expansion in DRAM at $400 million to $450 million as a result of this multi-node transition. In addition, this presents a compelling opportunity for ASM to grow our ALD shares in the DRAM market and to accelerate the expansion of our memory business. Next, the power/analog/wafer segment continued to experience weak market conditions. While there were early signs of end market recovery at the end of Q2, it became evident over the past 3 months that investment level in this segment will not rebound in the second half of the year. Assuming no adverse economic development, we expect spending in these markets, starting from a low base to gradually improve over the course of 2026. Thanks to innovative products that we launched in recent years, we are well positioned to benefit from this recovery. One example is our Epi Intrepid ESA tool which has helped us secure several new customers and position in 300-millimeter power and wafer applications. It's important to note that our outlook for gradual recovery excludes the silicon carbide market, where market conditions remain more challenging. Looking at China. Revenue was still at a solid level in Q3, but bookings dropped significantly. And as Paul already mentioned, this was the main reason for the sequential drop in our overall bookings. China bookings were still strong and very much concentrated in the first half of the year. On top of this, we incurred some additional impact from the export restrictions that were announced earlier this month. The impact on a total annualized sales is expected to be around 1% to 2% negative. With a stronger drop in Q4 sales, we project sales from China to be lower in the second half compared to the first half. Equipment sales from China will also be lower in the full year of 2025 and expected to account for approximately 30% as a percentage of total ASM revenue. Looking forward, we expect a gradual normalization in China demand in 2026 and subsequent years, in line with our previous view. This follows on a number of years of very strong spending, particularly in the mature logic/foundry segment. For 2026, the contribution from China is projected to remain meaningful, although sales are to decline by double digits. Before moving to the guidance, I'd like to repeat a few more of the takeaways and strategic priorities we shared in our Investor Day. ALD and Epi remains key growth markets for our company. We project a CAGR of 9% to 13% for both markets in the period of 2024 through 2030, which is clearly ahead of the 6% growth expected for the WFE market. This growth is driven by increasing complexity and increasing ALD and Epi layers to address challenges related to more 3D structures and new materials in these nodes, both in logic/foundry and DRAM. Advanced packaging is emerging as a key midterm growth driver for ASM, with the market projected to grow at an attractive CAGR of 15% through 2030. Although it currently represents a smaller portion of our business, upcoming generations of advanced packaging featuring finer pitches will demand more sophisticated solutions were aligned with our strength in chemistry, innovation and surface preparations. We've recently secured new ALD wins for TSV liner applications, and we are currently pursuing initiatives aimed at doubling our served available market by 2030. At the Investor Day, we also introduced growth targets for our spares and services business. For the period of 2024 to 2030, we expect a continued strong CAGR of more than 12%. The main engine of this growth is our outcome-based services, which we target to account for more than 50% of our sales and service sales by 2030. These innovative services deliver guaranteed outcomes to our customers, such as improved tool performance and availability. One example is our new dry cleaning solutions for refurbishing critical tool parts. Compared to conventional cleaning technologies, this approach improves defectivity performance and extended parts lifetimes, thereby reducing costs for our customers. It also contributes significantly to sustainability with a 67% reduction in CO2 emissions versus traditional wet cleaning methods. Another example is the use of automation in services by developing robots to place replacement parts in reactors, we achieved far greater precision than manual placements. This enables customers to operate our tools with action level precision, essentials as geometries shrink and nodes become more complex. Last but not least, we remain focused on driving operational excellence, maintaining a flexible footprint and as Paul also emphasized delivering improved financial performance. Let's now have a look at the guidance as outlined in our press release. For Q4 2025, we expect revenue to be in the range of EUR 630 million to EUR 660 million. For the full year 2025, we continue to expect revenue growth at close to 10% at constant currencies. Despite the projected slow start in 2026, we expect ASM revenues to grow in 2026. In terms of orders, we expect the trend to bottom out in Q4 at a slightly higher level than Q3. And looking at next year, we project quarterly orders to pick up again as 2026 progresses. With that, we have finished our introduction. Let's now move on to the Q&A. Victor Bareño: We'd like to ask you to please limit your questions to not more than 2 at a time so that as many participants as possible have a chance to ask a question. Operator, we are ready for the first question. Operator: Thank you. This is the Chorus Call conference operator. [Operator Instructions] The first question is from Didier Scemama, Bank of America. Didier Scemama: Maybe a first question for Hichem. Can you maybe give us a little bit more color as to what's already in your backlog? Because we've seen, of course, over the course of the last few weeks, a significant improvement in the picture for AI CapEx or logic chips, but also HBM, but also commodity DRAM. We've seen, of course, one of your customers this morning talking about a substantial increase in CapEx next year. So is that already in your backlog? Or is that yet to come and sort of give us confidence that your bookings have to materially improve from here? I've got a follow-up. Hichem M'Saad: Yes, Didier, I'm going to have Paul answer your -- this question, okay? Paul Verhagen: Yes, Didier, thanks for the question. You've seen our backlog, which came down further on the back of book-to-bill below of one, to be precise 0.8. So what's in the backlog, as you know, we have a relatively short-term backlog, if you compare it to let's say, one of our companies here in the southern part of the Netherlands, 3 to 6 months, typically. We also said that we expect a relative soft start of 2026. So not everything that you are referring to is already in our backlog. Of course, some elements are -- I'm not going in detail what is precisely in or out. But given the relative low bookings that we have, which we also guided for after the -- or at the Investor Day, you can imagine that not all of that is in the backlog at this stage. Didier Scemama: Okay. Got it. And I think in the last 12 months or so, commodity DRAM and commodity NAND, which historically are reasonably small part of your revenues, have been very, very low in terms of capital investments. If we were to see greenfield capacity addition for 3D NAND, but also investments in DDR5. Do you think that could become a meaningful driver in '26? Or is your participation in those markets fairly de minimis? Hichem M'Saad: Yes, I can take this question. I think that as DRAM devices will -- will improve, increase, there is more and more ALD layers. And with that, we expect an increase in our business from that point of view. Didier Scemama: I think you said 25% is memory? Is it like a really small sliver of your revenues today that's basically ex-HBM? Hichem M'Saad: So most of the revenue right now is actually in HBM, Didier, okay? That's what... Operator: The next question is from Tammy Qiu, Berenberg. Tammy Qiu: So the first question is on GAA. I remember earlier this year, you were saying that GAA order would be up quarter-on-quarter in 2025. So now we have a little bit of timing-related issues. So going to 2026, would you say that GAA would be still grow year-on-year versus 2025 level? And how should we be thinking about this pattern on the -- from an order perspective? Hichem M'Saad: So we see that 2026 is going to grow in GAA versus 2025. I think in 2026, there's going to be 2 things happening. First 2-nanometer production will continue in gate-all-around. But also, you see the 1.4-nanometer node will also start in pilot production in the second half of the year. The other thing that we see happening is that also there is going to be more customers in a 2-nanometer technology node in 2026 versus 2025, which is also driving some new business, especially in the U.S.A. Tammy Qiu: Okay. And was 1.5 -- sorry, 1.4-nanometer, you mentioned, the first batch of order for pilot line should be starting to be seen in next year. So is that coming from all the customers? Or this is only from one customer? And also, when would you expect the volume kind of ramp-up phase for 1.4 nanometer start to be seen? Hichem M'Saad: So to answer your question. So right now, for the 1.4 nanometer in our numbers, what we looked at is one customer in 1.4 nanometer in the second half of 2026. I think the -- we hope that there's going to be another customer in 2026, then that would be also a better business for us in 2026. Tammy Qiu: And -- sorry, the volume ramp-up time frame? Hichem M'Saad: So the volume ramp-up is going to be very small. It's the pilot production in the second half of 2026. That's what we put in. And we -- the 2-nanometer node that we mentioned is a very long node. So 2-nanometer is going to continue in 2026 and also 2027, it's a very long growth. As you know also the 2-nanometer node has sub-nodes and with different structure -- like different structure like a midcap that backside power distribution and so on and so forth. So for 1.4 nanometer, I think the big production start will be 2027 and 2028. Operator: The next question is from Robert Sanders, Deutsche Bank. Robert Sanders: Maybe a question on the gross margin. You're looking for a double-digit decline year-on-year in 2026. When I plug in a kind of estimate for China gross margin, that means that the consensus gross margin looks too high by quite a big margin. So is there anything that could mean that the gross margin is not well down next year as I think about next year? Paul Verhagen: I'm not sure I understand the question. What you say, a double-digit decline in gross margin? Hichem M'Saad: In China sales. Robert Sanders: You put in your release a double-digit decline in China sales. I look at the consensus. And the consensus is pretty optimistic on gross margin for next year despite the China mix being a headwind. So I was just wondering if there's any reason why the gross margin ex China would improve? Paul Verhagen: Improve compared to what? Robert Sanders: Calendar '25. Paul Verhagen: Yes. Then I think I have to disappoint you because I don't see it improve compared to '25, to be very honest. We have -- I mean, in '25, we have a few things that are very important. One, we have a pretty still strong level of China sales over the full year, with H2 below H1, Q4 below Q3, et cetera. But still, if you look at full year, a pretty strong level of China sales, and we expect to meet a double-digit decline next year, which everything else equal will have impact. Two, we have a very strong product mix, especially with, of course, 2-nanometer ramping to have a lot of leading-edge products and relatively spoken, lower, let's call mature products, power/wafer/analog, et cetera. So next year, when we also expect, of course, still continued growth in leading edge as Hichem just explained, but we also expect growth in, let's say, the power/wafer/analogs are relatively spoken, the rate of that segment will increase a little bit. That doesn't mean that every product in that segment has a lower margin and leading-edge product. But on average, I think it's fair to say that leading edge, we can demand higher margins than in that segment. So if you add it all together, lower China sales and a slightly different mix relatively spoken, you very likely get to a lower margin than in 2025. How much lower? I'm not going to tell you. Hichem M'Saad: But that's also at the end of the day, really, it all depends on customer mixture, and product mixture. And I think that as Paul has mentioned, okay, we have made some efficiency in our business and also our cost structure in such a way that we fundamentally improved our gross margin from previous years. So it's still well -- we're going to see what's going to happen in 2026. But we are very happy with really what we achieved this year. For us, 51% for 2025, this is a record for ASM, really a record. And that's an indication of the -- first, our position in the market, our competitiveness, but also in our cost control and better operational efficiency. And we will continue to really drive that in the future. We're not stopping right now. Paul Verhagen: And maybe to add, Rob, that was also the reason why we have increased our margin guidance during the Investor Day from 46% to 50% to 47% to 51%. So overall, indeed, we see improvements based on everything that Hichem also just once more emphasized. Operator: The next question is from Francois Bouvignies, UBS. Francois-Xavier Bouvignies: So my first question, Hichem, on your new wins in Epi and ALD dipole and what function that you talked about in the DRAM HBM. So can you just provide more details on that design wins? Did it happen in the quarter? Was it competitive? And I mean you said in your remarks that it was for '26, '27 time frame, which I thought it would be more like '27. So is it like earlier than you expected? Maybe these wins and how many layers are we talking about? So I know it's many questions within that, but basically, giving more color on this Epi and ALD dipole design wins you had this quarter? Paul Verhagen: Yes. And we're very excited about the wins that we have made in both Epi and ALD in the last quarter. So this is really work we've been doing with our customer for the past couple of years, and we've been able to become POR for this business. And with starting HVM high-volume manufacturing in 2026 and beyond. As I mentioned, we're really working with many customers and on more and more layers and products. I think what we have seen right now in the industry is really pull-in in a way in some of the high-performance. I think the AI market is becoming super-hot on that point of view. And we see that the customer really want to have a higher performance. So with a higher performance, we see some of these things have been a little bit pulled in. But I think the majority of the business, the bigger business for us really would happen when the move of DLM to FinFET, I think that would be great. But also we see many of the memory customers also very much using advanced packaging. And we're working with many of those right now on some of advanced packaging applications. But I think we see that 2027 and 2028 where things will become much more positive from that point of view. So 2036 will be the start and '27, '28... Francois-Xavier Bouvignies: How many layers did you win specifically for that this quarter? Paul Verhagen: [indiscernible] how many layers, but to be honest with you, we have many customers right now. We're actually working with all the DRAM customers. And you will hear in the next few quarters, more and more wins as those materialize. Francois-Xavier Bouvignies: That's great. And maybe China. I mean China, you forecast double-digit percentage growth. It seems that everybody is seeing the same thing, the double-digit decline, sorry, percentage next year for China business, LAM is seeing the same. [ ASML ] is seeing the same. So how do you build your forecast, I mean, out of interest? Because I mean, my understanding is China is quite low in terms of visibility right now. You had some restrictions that only impact 1% to 2% of your sales, obviously, it's more bigger of your China business. But how do you build this forecast out of interest? Because it's very difficult to know where China is going to be next year. And when I look at the retail imports are increasing significantly in the second half of the year versus H1 this year. I would think that you should see decent year from a deposition and etching point of view. So just wanted to understand how you forecast China? Paul Verhagen: Yes. Let me take that question, Francois. Actually, the very short answer is customer intel. So we have people on the ground. We get, of course, we try to get, of course, as much as we can insights into the plans various customers have into new fabs that are being built or not being built. So every year, we have an idea, but you're correct, there is limited visibility. That's also true for next year. So there's no change from that point of view, but still based on the number of new fabs that you think might start based on inputs in that respect that we get from customers. We had one year, it's maybe higher than the other year. That's an important input for us. Also last year, we had that input for this year. We're actually at the beginning of the year, we were -- I mean we were maybe a little bit prudent. Looking back now, China did a little bit better than what we anticipated but not to the extent that it was better than the year before. So also for next year, I mean, it could be slightly higher, slightly lower than what we currently think. But in any case, what we see based on all the intel that we have is what we guided and what we said in the press release. So that is, let's say, the best guidance we can give you based indeed on the limited visibility we have, but it's still supported by as much as possible customer intel that we can get. Operator: You next question is from Jakob Bluestone of BNP Paribas Exane. Jakob Bluestone: I had a slightly similar question actually. I mean, you say that you expect the order trend to bottom out in Q4 at a slightly high level than in Q3 and then sort of gradual recovery through '26. And I guess, just interested in the sort of broader business, where do you get the confidence from that? Is that what you're starting to hear from your customers? Or was that just sort of more from the various announcements that have been made? So just to get a sense of how concrete is your confidence on that trajectory that you've laid out for the improvement in orders? Hichem M'Saad: So I'd like to -- what Paul has mentioned earlier, we are very close to our customers, especially we are extremely close to our logic customers. Since we're working with all the top larger company, leading edge -- in leading edge logic and foundry. And then so that's the information really we're getting it from them. I think they have their investment plan for 2026. And based on that, okay, we are talking to them, and we know what kind of business we're going to achieve from them. So we feel confident from that point of view, okay? Jakob Bluestone: Understood. And if I can just ask a quick follow-up as well. Just on lead times. Can you comment on whether the lead times, particularly for advanced logic are changing or have they stayed the same? Hichem M'Saad: Lead time for us as a company, we always said that our lead times like used to be 6 months. But as I mentioned during the Investor Day, actually we have made a significant improvement, whereby we can reduce our lead time to about 3 months right now. So we took -- like we mentioned, we have made significant efficiency in our business processes, in our manufacturing and operations in such a way that we can be very fast in really being able to meet customer expectations. Operator: The next question is from Nigel van Putten, Morgan Stanley. Nigel van Putten: I guess another question on your sense of growth into '26. So what are the areas you are seeing the biggest certainty and uncertainty in terms of materiality both on positive and negative. Now my guess is that the advanced foundry is pretty predictable and a strong positive into next year. And it seems to be that maybe more advanced logic and also power/wafer/analog are maybe a little bit more uncertain. Am I in the right ballpark here? And also, do you think that you could still grow if these 2 areas do not show growth next year? That's my first question. Paul Verhagen: Yes. So I think you're directionally correct, Nigel. So I think where we -- as Hichem also said, where we have, let's say, the most reliable -- maybe too strong, but we work the forecast with customers and especially the large customers and especially with the leading edge logic/foundry, the quality of the forecast that we get is better, I would say, than with quite a few other customers. So that's one. So there, we have, I think most confidence. That does not necessarily mean that things cannot change. Things will always change. For sure, pull-ins, pull-outs, et cetera, will always happen. But will also happen next year. But -- and that's the area where we have most confidence. Two, I think in DRAM, given everything that is happening there, if you read all the market intel, I mean there is capacity shortage, I would say, demand is higher than supply. I think we're relatively confident on what we can achieve there. So there, we have quite some visibility. We just talked about China. We do believe China will come down, as we said, there is limited visibility, but it's not that we steer completely in the dark. We have still reasonable customer intel, but not as good as what we have from the logic/foundry customers. And then for the power/wafer/analog, I would say it's maybe most uncertain. That market is now 7 quarters and by the end of the year, 8 quarters in a cyclical downturn. So it is more based on the fact that at a certain moment in time, that market should also start to see a turning point. But there, we do not yet see that in orders coming in, but we do expect that to come in and partially also based on, I guess, on customer intel, but that, I would say, is maybe the most uncertain one, but we would expect that to happen somewhere in the course of next year. Nigel van Putten: Got it. I'm going to use my follow-up then to still maybe press a little bit on sort of the dynamics you've also pointed out this quarter that there is still quite a bit of difference between one and the other. So maybe just for your forecast, are you sort of assuming multiple customers to grow next year in a material way? Or is that not your base assumption at the moment? Paul Verhagen: Yes. Basically if you talk leading edge for customers at this moment. I think 2 of them, and I'll leave it up to you to guess which one. We are reasonably confident that they will grow. One of that is still uncertain, and it's not an important one. But yes, we'll see what will happen there. We have, of course, a certain view baked into these projections that we have given, but at least 2 and maybe 3. Hichem M'Saad: Yes. But I think if I add something to what Paul has mentioned, I mean we see customer concentration has increased in the recent quarter for advanced logic and foundry and we think it will continue in 2026. Operator: The next question is from Stephane Houri, ODDO BHF. Stephane Houri: Yes. Actually, I have a question about 2027. I know you gave -- just gave sense of guidance for 2026, with a very low point apparently and so it means that there is a need for an acceleration in the second half. Overall, we should expect probably a growth kind of low growth next year or mid-single-digit growth, I don't know. But it means that you reach your 2027 target, you need to have a double-digit growth in '27 at least. So what are the pieces of the puzzle we should look at to understand if you're in the good trajectory or not? Paul Verhagen: Fair to say, Stephane, I think firing on all cylinders is the right description here. So one, as I think Hichem already said at the beginning of the call, end of this year or middle of the second half of this year, we expect pilot -- investments in pilot for 1.4 and then going into HVM in '27. That's of course, a big driver. You've seen the SAM increase that goes with it. Two, of course, we would expect memory to continue to be good on the back of, in particular, AI, which now, by the way, is driving both HBM also, let's say, conventional more high performance in DRAM, in particular, which should be good by '27. I mean, if power/wafer/analog by then is still not recovering then, okay, I don't know what is happening there, but we would expect logically that's also there. By that moment in time, you would see a turning point. So -- and also spares and service business will continue to grow as we -- based on outcome-based services, as we said, during the Investor Day. So firing on all cylinders would be, I think, the right description here. Hichem M'Saad: Yes. One thing I would add to what Paul has mentioned is also what we see in 2027 is in logic, you're going to have 2-nanometer continued investment in capacity, but also the capacity increase in 2027 for the 1.4 nanometer node, okay? So you're going to have really leading edge 2-nanometer and 1.4-nanometer significant investment in those 2 technology at the same time. Because 2-nanometer is actually a very strong -- it's a very strong node, it's a very long node. That's what our customers are telling us. And as you know, there's many sub-nodes in 2-nanometer. So investment in 2-nanometer is still going to continue at a very healthy level in 2027. At the same time, you have the 1.4 nanometer expansion in that same year. Stephane Houri: Okay. Okay. And I just wanted to come back on China where you see double-digit decline next year. Are you sure that this is only the market and that you are not facing an increased level of local competition. There is more and more noise about the efforts they are making and the quality they are obtaining. So can you maybe describe the situation there and the sustainability of your market share? Paul Verhagen: That's a good point. I think it's a combination of both things. One, China, we've seen everybody actually also appears to have seen a very high level of investment in the last 2 years or so, 2.5 years. So we've already communicated, I think, end of last year that we would expect this to gradually normalize, whatever that means. Two, with recent, let's say, announced export controls, that also has impacted us to a certain extent, but also our peers, although it's maybe not materialized 1% to 2% of our annual revenue globally, but it's still a few percent, of course, of our China revenue, which again leaves a vacuum for local competition to step in. So yes, local competition will for sure, benefit from this, will get on a quicker learning curve because, yes, the unfortunate reality is that because of all these restrictions, yes, there is a playing field -- an unleveled playing field where local competitors can step in with what we would say inferior products compared to our products, but at the same time, learn at an accelerated pace compared to the situation if they would not have been able to get their products into customer fabs. So it's a combination of these 2 things, I would say. Hichem M'Saad: And one thing I would add to what Paul has mentioned, okay? We think that we are very competitive in China vis-a-vis the Chinese competitor. We don't see our position to be really worse than what it was before. I think our products are very good, and we continue innovation unabated which really gives us an edge from that point of view. In China, what really -- what 2026 shows for us right now, we have really very low visibility on how some of the part of the market is going to materialize. I talked today in my prepared remarks that we have won some significant business in Epi Intrepid ESA in the power/wafer/analog and some of those actually businesses is happening in China. So depending on what that -- so that shows really our competitiveness in that market. And I think if the market -- if the power/wafer market analog recovers, that's going to be also very positive for us in the future. And as you know, in the power/wafer/analog, visibility is very -- it's not very long. That market can go down immediately and go up at the last minute. So that's really a question we're going to find out in 2026, but we are very competitive. We think we can compete very well in that market. And it's an important market which we're going to continue to address. Operator: The next question is from Adithya Metuku, HSBC. Adithya Metuku: I had 2. Firstly, look, when I look at your growth, you've always tended to outperform WFE given the company-specific growth drivers. As I look out to 2026, is there any reason why you will not outperform WFE next year? I just wanted any -- is there any headwind that we should keep in mind? Any color there would be helpful. And then I've got a follow-up. Paul Verhagen: I think on the outperforming the wafer fab equipment, we have mentioned that in our Investor Day that we will outperform the wafer fab equipment when going from '24 to 2030 -- from 2024 to 2030. It doesn't mean, okay, we're going to outperform every year. So still I'm sure about that. I mean we already announced saying that the 2026 for us is actually a growth year, which we are very confident about it. But to answer the -- whether we're going to outperform it in 2026, that's too early to say. But what we can tell you that from 2024 to 2030, we will outperform the WFE market. Adithya Metuku: Got it. Maybe just on that, I mean, if you were to underperform given where you sit today and your visibility into the different end markets that you talked about on this call before, if you were to underperform what would be the reason? I struggle to see what -- I don't see any reasons, but I'm just trying to see if I'm missing something here. Hichem M'Saad: It depends really on the WFE mix. What's the mix of products, memory versus logic versus power/wafer/analog. It's really mix dependent. Adithya Metuku: Okay. Got it. And just as a follow-up. Paul, I just wondered if you could give us some color on OpEx in 4Q. I know you commented on SG&A, but I don't think you commented on R&D. And also if you could give any color on how we should think about OpEx into 2026? That would be super helpful. Paul Verhagen: Yes. So R&D for Q4, I think, there will be similar to Q3 gross R&D and most likely also net R&D. SG&A, Q3, we mentioned that there was relatively low variable expenses, where we made an adjustment based on certain accruals that were made. So I think the Q2 is more of an indication than Q3 going forward and into '26, and we've given guidance in the Investor Day. We will continue to invest in R&D, which is a lifeline. So there, you will see gradual increases compared to this year. And SG&A, we will keep very tight. And as a percentage of revenue, with revenue growth, we would expect that to come down a little bit further. Victor Bareño: Can we have the next caller, please? Operator? Operator: The next question is from Timm Schulze-Melander, Rothschild & Co Redburn. Timm Schulze-Melander: My first one just very big picture, maybe a question for Paul. 2026, do you -- should we expect the aftermarket side of your revenues to outgrow system sales? And then I had a follow-up. Paul Verhagen: I have a view, I'm not going to tell you because it's too early to tell. But what I can say is that we do expect a healthy growth in our spares and service business in '26 compared to '25. It's too early to already say it will be higher or lower. But we do see what we believe will happen is that we will continue to see a very healthy growth in spares and service business. Timm Schulze-Melander: Okay. That's helpful. Maybe just one other one. If we just -- you talked a lot about how important mix is to the outlook in 2026. Could we just when we think about your ALD business, I know you've talked about it being more than half of your system sales, but could you give us a kind of 5% to 10% range kind of what that ballpark looks like for 2025? Paul Verhagen: No, we were not going to give very specific guidance other than what we've given. We've obviously had ALD is more than half of our equipment business, which indeed it still is and maybe this year more so given the ramp-up 2-nanometer. It's also one of the reasons why the margin is where it is. Also given that, again, the more power/wafer/analog market is down. So relatively spoken, a lower percentage of the overall mix. And of course, still China is strong, although below last year, was still strong. So adding that all up, that's what you get, what we have, but we're not going to give specific guidance within a few percentages, what -- where we stand with ALD. Timm Schulze-Melander: Okay. But given your prior comment about power/analog and some of the other mix, then as a percentage of sales, ALD might be flat or down as a percentage of your equipment sales in '26? Paul Verhagen: Depending on what we assume and depending on how much the relative markets grow, there might be indeed relatively spoken, a -- but now we're really talking scenarios, there might be relatively spoken, slightly lower share of ALD compared to power/wafer/analog if -- and it's a big if, if power/wafer/analog will grow more fast or faster than ALD, but that's still to be seen as well. So it's really too early tell. I really don't know. We have, of course, certain scenarios and assumptions, but it's too early to give external guidance on that. Operator: And the last question is from Marc Hesselink, ING. Marc Hesselink: Yes. I have 2. Actually, on 2 bit smaller categories. Firstly, advanced packaging that you also now point out again in the press release, also at the Capital Markets Day spent some time of it. The fact that you're really focusing on it, does it show that this is something that can be material as well over the coming years? And how do you expect that then to ramp into your revenue numbers? Hichem M'Saad: So I think we mentioned -- thank you for the question. I think we mentioned that we have made some wins in advanced packaging the past quarter, which we are really very excited about. We really think that advanced packaging is very enabling. We think that as a company, we can provide meaningful innovation and disruption to the market in the area of new materials and in the area of surface preparations and based on our experience in both ALD and also chemistry. We have a significant engagement in the past actually a few quarters with some key customers in both memory and logic, high-end logic to develop some of those films. We're very excited about this part of the business. And hopefully, we see more and more wins in the next few quarters, and we'll keep you updated of those when time comes. Marc Hesselink: But maybe to add, is it then material? Or is just the first start of something that can be material in the future? Hichem M'Saad: It's really the first start. It's really the start right now. And that's why we're excited about the future of the company, and I think that would be something that, let me say, very excited about it, to be honest with you. I think there's -- we see customers putting in very hard. I think the -- as you know, in both memory and logic, heat generation is a big problem. So we're developing some films that really would reduce the hotspots with higher conductivity capability. We see films in actually the microphotonics area team developing films that can reduce light dispersion. So it's really one area that becomes very important for both the logic and the memory customers. And that's an area that, hopefully, is going to be very accretive to us in the future. Marc Hesselink: Great. And the second question is on -- actually on LPE. So you paid the earn-out in the quarter. So you did hit the milestone for that one. I mean I think in the press release, you can still read that it is very, very weak at the moment and also no recovery into next year. So can you then still talk about the building blocks, why did you still reach the milestones? And when do you -- are you still confident on this one to pick up maybe in the longer term? Paul Verhagen: Simple answer. The milestones are based on 2024. And 2024 was a star year for us with almost, I would say, explosive growth in silicon carbide. So if it would have been -- if the milestones would have been based in 2025, they would not have been met. But yes, the reality is that they were based on '24 and '24 is a very strong year for silicon carbide. Marc Hesselink: Okay. And no visibility on that improving in the beyond '26 period? Paul Verhagen: We, of course, expect that markets to come back at a certain moment in time, not yet for next year, at least we see no evidence for that to start to happen next year. But we still believe that there is a market for us, a good market for silicon carbide that we will start seeing come back, hopefully, also in 2027, but that's as again, it's too early to tell. Operator: Gentlemen, there are no more questions registered at this time. I turn the conference back to the management for any closing remarks. Hichem M'Saad: Thank you all for attending our call today and also on behalf of Paul and Victor. We hope to meet many of you again in the upcoming investor conference and other events. Thanks again, and goodbye. Operator: Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.
Dominik Prokop: Good morning. My name is Dominik Prokop. I am the Head of Investor Relations. Welcome to this conference presenting Alior Bank's Q3 2025 results. In the first part, the results and the trends will be presented by Alior Board members, Piotr Zabski, CEO, who will present the main trends and discuss the business performance; VP Marcin Ciszewski, who will speak about risk; and VP Zdzislaw Wojtera, speaking about financial results. Right after the presentations, we will move right into your questions. Before I hand over to our CEO, Piotr, I urge and encourage all of you to ask your questions even during the presentations. Just like every quarter, this will allow us to smoothly segue into the Q&A. Thank you, and over to Piotr. Piotr Zabski: Good morning, and welcome to yet another presentation of our quarterly results. Yesterday, the Supervisory Board approved our results and it is our pleasure to present them today, to present our Q3 performance and the results year-to-date. Before I move to the highlights, I'd like to first talk about our strategy that we announced and published in March. In the third quarter, we continued to pursue our strategy, and in summary, we came close to saying that we are well on track implementing the strategy. The strategy is based on 3 pillars: growth, scale, stabilization of results and operational excellence, which you will see in our numbers. Operations, just a few highlights and facts I'd like to draw your attention to. This year, year-to-date, our revenues reached PLN 4.5 -- more than PLN 4.5 billion, including NII at PLN 3.87 billion year-on-year, stable with lower rates, of course. Our net fee and commission income grew. That's the other leg of stabilizing our results. So that has materialized. In Q3 alone, we have a drop in NII due to the lower rates, but we have made up for it by growing our net fee and commission income, which is our strategic objective. Hence, the net profit in Q3 amounted to PLN 563 million and year-to-date PLN 1.679 billion. And we have achieved all that with a very good return on equity, close to 19%, well in line with our strategy. My comment over that period of time, we also recognized 50% of last year's profit in our equity, and so we are even more proud of our ROE as equity is growing. Speaking of risk, we have very good readings, PLN 124 million cost of risk and the ratio is 0.72, less than 0.8 that is our target, down 0.2 percentage points year-on-year. NPL stood at 6.29%, down 0.81 percentage points in the past 12 months. So we are well on track, in line with the trajectory of eliminating the problems that burdened us over the past few years. I've mentioned equity. Our capital position is solid with a big surplus. Our ratios, Tier 1 and TCR, remain very strong, well above the regulatory minimums. And that surplus allows us to continue with our strategy of growth. Speaking of growth, just a few highlights, a few facts. As you may recall, our strategy relies on relationships, growing the number of relationship customers who are the future of this bank. That number grew by 100,000 year-on-year, the number of relationship customers, the biggest growth we have seen in this regard over the years. 1.68 million -- sorry, we have 1.68 million customers, 98,000 more than at the end of Q3 2024. And the number of mobile app users was 1.59 million, 15% up year-on-year. Our deposit portfolio grew 8% year-on-year to more than PLN 80 billion and our assets grew, especially mortgages. We are proud to say this, the increase was 111% year-on-year to PLN 1.3 billion of new mortgages in Q3. The share of our portfolio of mortgage loans in the portfolio is now more than 30%, which ensures some stability in our portfolio. This is a long-term, well-secured portfolio at good margins, so it is a stable factor working for us in the coming periods. Another success we are proud of regarding liquidity, we issued MRL bonds that Marcin will discuss in more detail at a very good margin, 1.5%, with a lot of demand. So something -- that's something we are also very proud of. The next slide presents more details of our activity across the bank. Assets grew 7% year-on-year, and we are very close to a special mark, PLN 97.7 billion -- very close to the mark of PLN 100 billion. We'd like to get there next quarter. The volume of deposits was growing faster than loans, specifically up 8%. That's more than PLN 80 billion. Performing loans grew 6% to PLN 63 billion. At the bottom of the screen, you can see 2 lines with some readings for Q3. The top - there's the top line and then year-to-date in the bottom line. Cost-to-income ratio was very strong. Our costs increased affecting the portfolio due to inflation. And I think Zdzislaw will focus on that later on. But as you can see, the growth of this indicator is lower than the growth in costs. NIM and net interest margin. The interest rate cuts are materialized here. ROE, very high, as I said, both in Q3 and year-to-date. Cost of risk, very low as well in both terms, in Q3 and year-to-date, better than we expected, in line with our strategy. And the NPL and capital ratios are very strong. Most importantly, in a downtrend this continues. Let me now move on to our main 2 business lines. First, retail. That's the top left-hand side of the slide. These are the assets of our retail customers that grew 12% year-on-year. We are very happy to see that growth. Basically, every line has improved year-on-year. On the right-hand side, you can see the gross loans to retail customers by real estate loans in yellow and other mainly consumer loans up 6% overall. In the bottom part of the screen, you can see the breakdown of that figure. We are happy with the growth of non-mortgage consumer loans, up 21% year-on-year. The sales have stabilized over the past few quarters, but we have maintained the dynamic growth. So growing scale is part of our strategy, and we are very much doing that. Last but not least, in the bottom right-hand corner, you can see the efforts we've made to sell mortgages, which grew by more than 200%, 2.1x bigger. That is our production and sales year-on-year. The sales grew to PLN 1.3 billion in Q3. So our market share is much bigger than our overall share in the banking industry. Customer relationships and relationship customers, part of our strategy. The number of relationship customers grew by more than 100,000 or close to 100,000, 1.68 million, the best numbers we've seen ever in this regard. Relationships are very important for us to stabilize our performance and the other -- to prop up the second pillar of our strategy. Our customers are using the mobile app more and more, the number of mobile app users has been growing. More of that later. But I'm happy to say that customers who do not hold accounts with us but only have installment loans or cash loans, they have a reason to use our mobile app. That number grew by more than 200,000 customers year-on-year. The relationship customers, about 50% of them are using the app. That's 5% more than last year. And we also see a 5 percentage point increase in the number of end-to-end customers, that is people who start their relationship with us in the mobile app and they only use mobile banking. Now very briefly about our mobile app. That's one of the key factors of our performance. Mobility is a key focus for us. We want the bank to be available, the entire bank and only bank in the app. We have improved that. We have improved our ratings and we have a very good NPS, very good customer ratings, even before what you can see in the bottom of the screen. In Q4, we will present a new version of our app, which we are building on the new technology provided by Kotlin, a multi-platform with new processes which rely on state-of-the-art technologies. We are working with Xiaomi and that's supported by the latest CRM. As a result, we have launched a number of new functionalities, BLIK prepayments for installment customers, for instance, those customers who do not have an account but have an installment loan are now actively banking over the mobile app, and they are using a number of other functionalities as well. And that's even before we have presented our new app. This is happening in Q4. Now let me move on to our business customers. We see stabilization in the performance and in the portfolio. The portfolio is stable, even though new sales would suggest that the portfolio should be now growing. At the bottom of the screen, the yellow bars, you can see the total credit limit granted, up 34% year-on-year, which has not yet fully produced complete results. On the right, at the top, you can see that we are phasing out the loans in the nonperforming portfolio. So this works both ways. But we are very happy to see that new sales are growing, and these will soon outweigh the termination of bad loans. So the portfolio should start to grow. What we see in some of the segments, maybe not in micro because this segment has been stagnant over the year and is now only starting to bounce back. But I'm speaking of the small and medium enterprise segment. The new sales there are growing by a double-digit number year-on-year, so a solid growth in new sales. Not across all segments yet, but in the segments where we want to be a bigger player. That's where we are being very, very active. So the portfolio mix that we are -- that we have now and our target portfolio mix are very different. So the results are not really comparable year-on-year. As far as business customers are concerned, obviously, deposit assets, there's an increase of 5% there. They keep banking online even though there's been a very recent launch of a business app. We've now been having a campaign about that for the past few days. I'll talk about it later. What we are very happy about is the activity in the leasing sector, lease and loans portfolio. That's a good start for our business customers. The portfolio grew by 8%, by 3% in the last quarter. The lease and loans market has seen some stagnation this year. So the 8% growth is really very satisfying. On the right-hand side, you see the growth in the new business. There's been a growth of 21% year-on-year. We are very strong in a few areas, especially vehicles up to 3.5 tonnes or machines and equipment. So we have a considerable share in those market segments. A few words about this part of the strategy. We want to leverage our brand. We want to refresh it. And we, therefore, continue further activities in that area. There is a new look in our cards. There is an [ e- Kantor ] business. As you can see, a slightly reversed banking model for business customers where we give them the possibility to conduct the company in the mobile app with our banking in the background. Obviously, there's a new model of functioning. I invite everyone to visit it. You can manage both your warehouse and your invoices directly from the app, and it is all combined with the actual account. We also want to follow the route of trying to reach new segments of customers. That is why in the last column on the right, you can see that we have joined the Inside Seaside festival as the main partner. We want to be visible there at the events of that particular festival. And another aspect of our strategy, we want to refresh our target group. We want to expand into younger people. That is why we have a dedicated offer to that group. We've started collaborating with Anita Lipnicka and the PRO8L3M music band. We have issued a new video with a piece of music dedicated to that group. And there's been a good pickup in that target audience, a growing interest in Alior Bank. So we find this direction of development to be a good fit, and we will be reaching into new segments in that particular way. So that is all as far as business results are concerned. I will hand over to Marcin to tell you more about credit risk. Marcin Ciszewski: Good afternoon, everyone. I will begin with the capital ratios. Our position is very secure. As has been mentioned by Piotr, there's a big margin quite above regulatory requirement, PLN 4.9 billion is the amount. The Finance Committee has given access. And at the end of September, there was an introduction of a new buffer, the capital buffer. Nevertheless, at the end of the quarter, the liquidity ratio is 17.5%. We also grow our liquidity, MREL. In the fourth quarter, we have placed another position of our bonds to the tune of PLN 450 million, senior preferred it's called, and the margin of those bonds goes down. It is 1.5 percentage points above the 6-month WIBOR. With considerable oversubscription at the end of the quarter, the ratio was 20.75%. The liquidity ratios are above the regulatory minimums. As regards LCR, it was 214% and NSFR at the level of 146%. Moving on to the credit risk. Let me start with the nonperforming loans ratio, which at the end of the quarter was 6.29%. In that particular quarter, we did not really sell any new loan NPL packages, but we did identify a default at a big customer in the mining and steel works industry. But that is a one-off event, which had an impact on the NPL and CoR level. But we have managed to bring that into order, and we still maintain the strategy where the cost of risk should not go above 0.8%. And after clearing the field from these negative events, it would be at the level of 0.7%. We maintain our strategic assumption, where by the end of next year the NPL ratio should go down below 5%. Moving on to the next slide. We can see some important information at the business slide, there's a growth there. There was that one-off negative event. But in case of the retail customers, it is quite flat, but a slight increase compared to the previous quarter. At the end of the second quarter, we sold an important package of loans, which did not happen in the third quarter. In the fourth quarter, there will be another package sold and a revenue will be credited, which will impact both NPL and the cost of risk ratios. Thank you very much. I now hand over to Zdzislaw. Zdzislaw Wojtera: Good afternoon. Let me tell you about the financial results. Let us begin with our income. The objective was to stabilize the revenues this year, especially in the environment of decreasing interest rates, 125 points dropped in 1 half of the year. Comparing year-on-year results, we are at the same level of revenue. Also, in quarter-on-quarter terms, they are very similar results. If we look at the net profit, there are a few one-offs that need to be taken into account and which represent the differences between the quarters. Let us look at the second quarter or the first half compared to the third quarter. As Marcin mentioned, in the second quarter, we had a one-off, which was the sale of the NPL loan package, which increased our profit for the second quarter. If we compare the years, the third quarter of '24 and the third quarter in this year, we were still before the principle of spreading out the cost over the quarter. So the cost in the third quarter were very low. And then in the fourth quarter, we had to report more costs, considerably higher costs, which resulted in the result of the third quarter of last year to be quite high. So these are the ones which explain the difference. In other conditions, we still deliver considerable result above PLN 500 million in each quarter. In the next slide, we see the breakdown of our income statement. The first yellow column is the quarter, then the second yellow column is the cumulative result, one through third quarter. And the first position, we will discuss them in the subsequent slides because we dedicated additional slides to these specific positions. If we look at the costs of activities, which we keep to control very well -- and there is a dedicated slide to that, so I will discuss those in detail later. Two important bits of information for you is the fact that when we use the conservative approach, we have created PLN 47 million of additional reserves for mortgages in currencies and additional PLN 19 million for the so-called pre-credit cost. We keep observing a growing increase of new cases in the third quarter, and so we had to react. But this is our very conservative approach. Nothing that could raise any concern is happening in terms of currency loans. This is a margin of our activities really. And so the currency loans is a very small part of our activities. So there are 2 events which we included in the third quarter which impacted the net result, PLN 563 million, which translated into a very good profit of 19% in quarterly terms and over 19% in cumulative terms. Cost-to-income ratio is also very good considering the scale of our activities. 36.9% in quarterly terms is a very good result. The next slide is addressed to the interest income. I talked in the part about revenues. This is obviously a very important part of it. Especially at the lower part, you can see that between the second and third quarters, we had a slight increase. Looking at 3 quarters of this year, there's been a stabilization of the result. And we expect that in subsequent quarters, we will observe a gradual improvement in the result according to our strategy. So on the one hand, there will be a low interest rate environment and potential further decreases of the interest rates, but the volume of our income, profits and commission and margin will help us improve the interest result and the profit. If we look at the commissions, the interest margin, we started with 6.20% and ended up at 5.61% for this current quarter. Two important constituent parts are important, the drop in interest rates, of course, but also the change in the structure of sale, where the important part of our balance sheet are the mortgage loans, which have a lower margin and income but can allow us to plan a stable income stream for the subsequent years. And these 2 elements impact the result, where you can see the drop in interest margin. What can we expect in the next quarter? Well, there will be further drop, about 10 basis points. So that is what we can expect as far as the next quarter is concerned. However, the interest result should be at a comparable level and will subsequently improve. And one final point on the loan-to-deposit ratio. You can see that our lending picks up, steps up, and so the curve is now turning north from 78% up to 80%, which shows that our loans are simply growing faster ever than before. NFC, the net fee and commission income. As we said when presenting our strategy, this item is of special importance for us. We want to grow it. And we cannot grow it unless we work over time. This cannot be done overnight. We have to offer better quality to our customers. And step by step, we can see results. NFC grew 5% quarter-on-quarter and 10% year-on-year, with a significant increase in Q3 alone. In FX transactions of our customers, the summer, the holidays, travels helped to boost FX income. And then we have another important line, sales of insurance in the group. That's good news. What are we anticipating in the next quarter? It may be difficult to copy the Q3 numbers one-to-one, but I think we will balance somewhere between Q2 and Q3 numbers with positive growth over the year. And my final slide talks about our operating expenses. I've already mentioned that if you look at the numbers starting in Q1, net of the BFG contribution, our operating costs or management costs, general expenses would be PLN 540 million, then PLN 550 million, PLN 565 million. And we expect that the total operating expenses net of the BFG charge should be up 6%, 7% year-on-year in 2025, which proves that we keep costs well under control and our cost/income ratio remains strong at 37.9% on a normalized basis net of the credit holidays. And that's a very good and solid result looking at the scale of our activity. In Q3, we saw a very positive contribution to the net profit -- in Q3 2024 to be specific. This is when our costs were still relatively low. Then in Q4, we booked very high costs with a significant increase. This is why that line is not straight. Now we expect to keep the costs stable quarter-on-quarter in a transparent way, and we are well on track. So it will be much easier to anticipate Alior Bank's costs quarter after quarter. Thank you, and over to Piotr. Piotr Zabski: Well, to summarize, let me go back to the strategy once again. As I said, our 3 pillars to grow scale. And you can see that we are growing. Our assets are growing and so are our liabilities. Our lending and new sales are growing. The portfolios are improving. So we are growing scale. Especially proud to say that our number of customers has been growing. We attract new customers. They recognize our efforts. We are refreshing our target group. It's going to be younger. We get results. Our customers are banking with us using mobile and digital solutions. The second pillar, stabilize our revenue. We are very proud with the increase in the share of NFC in our income mix. We are growing sales of insurance, for instance, that stabilizes our figures. And that's quite an impressive result I'm sure. Third pillar is operational excellence, and it's also bringing results. The cost-to-income ratio is very strong. The increase in costs is well below the market average. We have fully implemented the agile model -- business model, and we work in tribes to provide even better solutions and better performance for our customers, especially digital solutions, as we said in our strategy. After Q3, our bank is thriving, we are well on track with the strategy. And that's all for me. Thank you very much for listening to this presentation, and we open the floor for your questions. Dominik Prokop: Excellent. Moving on to your questions. What provisions for the CHF portfolio are you expecting in Q4 2025 and in 2026? Unknown Executive: Well, as you know, it all depends on how fast new cases are opened. I'm sure in Q4, we can expect a slightly higher number, maybe similar to what we reported in Q3. But we expect that in the coming quarters, these numbers will definitely be lower. If I may comment. Our CHF portfolio is disproportionately lower than those of other banks. So this is a fractional number really. Dominik Prokop: Another question. What were the reasons for the positive impact at PLN 14.8 million in your CIT in Q3 2025 in other items of the income tax? Unknown Executive: Well, as you remember, in the last year, we said we were closing down our activity, our branches in Romania. And this year, we started to clear the losses from the windup of that branch. So that is the positive impact. Dominik Prokop: Next question. What is the scale of the impact of the proposed CIT adjustments that are expected in Q4 in deferred assets? Unknown Executive: Yes. This is perhaps not that intuitive to some of the market participants. A higher tax rate expected next year means that the banks will be disclosing some additional impact on the net profit this year. I don't want to speculate. At Alior Bank and in all other banks subject to the new tax, the impact will be positive this year, which is paradoxical I know. But we've heard very different comments on this draft law. There may be an alternative draft proposed. So we don't want to disclose any numbers, but that would be the impact of the new tax strategy. We would have to look into it and present a positive result this year, which will be relatively high. Dominik Prokop: The next question. What is the WFD, the long-term ratio at the end of Q3? Unknown Executive: It's fairly stable at the bank, 40.54%. Dominik Prokop: Thank you very much long-term financing ratio. Next question, the increase in the corporate loans portfolio in Q3, was it affected by any one-offs? Unknown Executive: I think we are well on track of growth. As you may recall, our strategy says we want to shift the focus, and we are interested in micro -- in the micro segment. This year, the micro segment has been stagnant with no growth at all, very little growth in small enterprises and double-digit growth year-on-year in large customers. Well, I must say that Alior Bank is playing in this market in proportion to its size. We are not a leader or a trendsetter, but we are focusing on different segments than we used to. And so the growth you have seen may not be very impressive. But the segments we want to be a strong player in are now producing double-digit growth. Dominik Prokop: Next question. Why did your bancassurance income grow quarter-on-quarter in Q3 2025? Unknown Executive: That was partly due to a higher cost of provisions against insurance repayments that we set up in Q2 and partly due to better penetration of insurance that is bundled with products we sell. Dominik Prokop: What NIM are you expecting in Q4 2025? How will NIM perform in the next quarters? Unknown Executive: As I said, we are expecting a drop of 10 basis points or a dozen basis points in Q4. The annual average NIM next year is expected to reach 30, 40 -- sorry, to drop 30, 40 basis points. Dominik Prokop: Why was -- were your NPLs growing so slow in Q3? Unknown Executive: As I said during the presentation, one customer, a large customer was defaulted. They defaulted in Q3 as a one-off. But we maintain our expectation for the NPLs to go down for the entire loan portfolio by the end of next year to less than 5%. Dominik Prokop: Next question. Why did the number of relationship customers grow year-on-year, 40,000? Was it new mortgage customers or customers using installment loans? What products can you offer to the new 40,000 customers? Unknown Executive: Well, our definition of a relationship customer is quite broad, customer who banks with us day after day. An installment customer has a single relationship with us, an installment loan. So that's not covered by the definition and not covered by the growth. So we are looking at the number of customers who are actually banking with us. And there is no good answer to that question really. We are playing a number of different instruments like an orchestra, and all these instruments play together. We are refreshing our brand. We are entering new segments, launching new products, launching new campaigns, reaching out to new customers, communicating with them in new ways, improving our mobile app. We are now working differently with distribution, production. So all of that is now starting to contribute to the performance. Of course, we are continuously working to develop new products, simplify our processes, improve the time period, time to cash, and many other ratios. So it's a set of many different factors which we started to develop as we joined the bank and that we have addressed in the strategy. Dominik Prokop: Next question. Any of your strategic objectives to grow the loan portfolio, grow your NFC or your net profit, is any of those more difficult for you to achieve 6 months after you presented your strategy? Unknown Executive: Yes. I think after 3 quarters, we are in a different place and depending on the segment. So the situation differs segment to segment. We have great achievements in selling mortgages, better than expected really. In other segments, we are growing less fast than expected. But again, in most of them above the market average. So it depends. And as I said before, our loans may not be growing as fast as we would like them to. Our mortgages are growing faster than we expected. Installment loans are well on track. Business customers, we are changing our trajectory and reaching out to new segments. So in those segments where we want to grow, we can see sales grow by double-digit figures. It will definitely be difficult to improve the net fee and commission income now that interest income is falling, NIM is falling. It will be difficult to grow the margins. We need to regroup. We need to reorganize our processes and products and build up the customer base of relationship clients who are not only producing NIM, NII, but also NFC. In all these segments, we can see some challenges. As of now, I think we have addressed challenges across many different strategic initiatives, that we have defined now a tactical plan. We have aligned the bank with the objective of delivering solutions very fast. The agile business model we applied in Q3 was implemented. 100 teams in several tribes are working to develop even better solution for our customers. So we have seen some deviation from plan, but I think we are managing them quite well. Let me also mention leasing, which is also delivering double-digit growth year-on-year. Dominik Prokop: Thank you very much. This is all the questions asked. I want to thank everyone for your participation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Ladies and gentlemen, thank you for standing by, and welcome to Gildan Activewear's 2025 Q3 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Jessy Hayem, Senior Vice President, Head of Investor Relations and Global Communications. Please go ahead. Jessy Hayem: Thank you, Jeannie. Good morning, everyone, and thank you for joining us. Earlier today, we issued a press release announcing our results for the third quarter while updating our full year guidance for 2025. We also issued our interim shareholder report containing management's discussion and analysis and consolidated financial statements. These documents are expected to be filed with the Canadian Securities and Regulatory Authorities and the U.S. Securities Commission today, and they'll also be available on our corporate website. Now joining me on the call today are Glenn Chamandy, our President and CEO; Luca Barile, Executive Vice President, CFO; and Chuck Ward, Executive Vice President, Chief Operating Officer. This morning, we'll take you through the results for the quarter, and then a question-and-answer session will follow. Before we begin, please take note that certain statements included in this conference call may constitute forward-looking statements, which involve unknown and known risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. We refer you to the company's filings with the U.S. Securities and Exchange Commission, and Canadian securities regulatory authorities. During this call, we will also discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable IFRS measures are provided in today's earnings release as well as our MD&A. And now I'll turn it over to Glenn. Glenn Chamandy: Thank you, Jessy, and good morning, everyone. We're pleased with our third quarter results as we continue to drive profitable growth, especially in a macroeconomic backdrop, which remains fluid. We saw strong net sales growth of 5.4% in Activewear and adjusted operating margins of 23.2%, which allowed us to deliver record adjusted diluted EPS of $1 this quarter, an increase of 17.6% versus the same period last year. These are record-setting third quarter results, which once again showcased the effectiveness of our Gildan sustainable growth strategy in driving strong financial performance. Our sales in the distributor channel remain healthy, and we're seeing sustained momentum in our national account customers, which is supported by strong overall competitive positioning. We continue to drive growth in key categories. We're very pleased that our innovation pipeline continues to create excitement, and we have now introduced new brand offerings such as ALLPRO and Champion. Furthermore, our Comfort Colors brand continues to perform very well. This year, the brand is actually celebrating its 50th anniversary. A great milestone for Comfort Colors whose pigment dyed shirts are redefining comfort and style. They're crafted from 100% rings spun cotton, grown and harvested in the U.S. using a pigment pure technology, which helps to reduce water and energy and shortens processing time. So as we turn the page to another successful quarter of execution, we are narrowing our adjusted diluted EPS guidance to a range of $3.45 to $3.51, and also updating our full year adjusted operating margins, CapEx, free cash flow guidance. Luca will detail this in a moment. We believe that this is an exciting pivotal moment for Gildan, and we're enthusiastic about the next phase of our growth journey. We're delivering constant execution of our strategic priorities. We're capitalizing on the largest innovation pipeline in the company's history. And now we're focused on planning the integration of the proposed acquisition of HanesBrands, which will broaden our portfolio of retail presence as we look to drive meaningful run rate synergies of at least $200 million by leveraging our best-in-class large-scale, low-cost vertically integrated manufacturing network. We continue to expect the transaction to close late this year or early 2026. As you can expect, we have put in place an integration team that have begun planning for this combination. At this point, there is no further commentary that we'll be positioned to provide for the proposed transaction. In conclusion, we continue to execute from a position of strength. We have a solid foundation. We're focusing on our GSG strategy with our strong competitive positioning, all of which is putting us in a great position to execute on the eventual combination with HanesBrands and ultimately drive long-term shareholder value. I look forward to answering your questions after our formal remarks, and now I'll turn it over to Luca for a financial review. Luca Barile: Thank you, Glenn. Good morning, everyone, and thank you for joining us today to discuss our third quarter results. Let me start with the specifics of the quarter, then turn to our 2025 outlook and guidance. First, the quarterly results. We reported third quarter sales of $911 million, up 2.2% year-over-year, in line with previously provided guidance of low single-digit growth. The 5.4% increase in Activewear sales was driven by favorable product mix and higher net prices. As Glenn mentioned, we continue to drive growth in key categories and are experiencing robust demand for Comfort Colors while supplementing our portfolio with the addition of ALLPRO and Champion. Sales to North American distributors were solid, complemented by sustained momentum at our national account customers, driven by our strong overall competitive positioning. Sales in the hosiery and underwear category were down 22% versus last year, which reflect, as expected, a timing shift of shipments into the fourth quarter and to a lesser extent, unfavorable mix as the category experienced continued broader market weakness during the quarter. Turning to international markets. Sales were down by $4 million or down 6.1% year-over-year, primarily reflecting ongoing demand softness across markets. We don't typically spend time on our year-to-date results, but just a brief comment that on a year-to-date basis, our consolidated revenue growth is at mid-single digits, excluding the impact of the exit of the Under Armour business in 2024, setting us up well for the full year. Shifting to margins for the quarter. Our gross margin was 33.7%, a 250 basis point improvement over the prior year, primarily due to lower manufacturing costs and favorable pricing, which reflect price increases implemented to offset the initial impact from tariffs. To a lesser extent, we also benefited from lower raw material costs. SG&A expenses were $95 million versus $84 million last year. Excluding charges related to the proxy contest and leadership changes and related matters, which were almost entirely incurred in the prior year, adjusted SG&A were still $95 million or 10.4% of sales compared to $78 million or 8.8% of sales in the same quarter last year, reflecting higher variable compensation and IT-related general and administrative expenses. As we bring these elements together and adjusting for restructuring and acquisition-related costs primarily related to the proposed HanesBrands acquisition as well as the costs related to the proxy contest and leadership changes and related matters, which were almost all entirely incurred in the prior year. We generated adjusted operating income of $212 million, up $12 million, representing a record 23.2% of net sales. This reflects an 80 basis point improvement year-over-year, which came in ahead of guidance we provided. Net financial expenses of $44 million were up $13 million over the prior year due primarily to fees related to the committed financing that we obtained for the proposed HanesBrands acquisition and due to generally higher borrowing levels. Furthermore, in connection with the proposed acquisition, as you may have seen, we announced on September 23, a private placement offering of USD 1.2 billion aggregate principal amount of senior unsecured notes across 2 series. The proceeds from this offering will be used to fund the proposed acquisition of HanesBrands, refinance its debt and cover related transaction costs. Taking into account all these factors and adjusting for restructuring and other costs and the financing fees in connection with the proposed HanesBrands acquisition, we generated record adjusted diluted EPS of $1, up 17.6% compared to $0.85 in the comparable period. Now turning to cash flow and balance sheet items for the first 9 months of 2025. Operating cash flow was $270 million compared to $291 million last year, primarily reflecting higher working capital investments. After accounting for CapEx of $82 million, we generated approximately $189 million in free cash flow in the first 9 months of 2025, of which $200 million was generated in the third quarter. During the first 9 months of the year, we returned $286 million in capital to shareholders, including $102 million in dividends and repurchased about 3.8 million shares under our NCIB program. Finally, we ended this quarter with net debt of about $1.7 billion and at a leverage ratio of 2x net debt to trailing 12 months adjusted EBITDA, at the midpoint of our targeted range of 1.5x to 2.5x. Now turning to our strategy and outlook. As Glenn highlighted earlier, we are pleased with the team's continued execution as we approach the end of a very solid year. We continue to tap into the largest innovation pipeline in the company's history with more product launches to come in 2025 and into 2026. Now turning to the outlook. We remain focused on operational agility and committed to executing on our GSG strategy in order to drive strong financial performance as we navigate a fluid macroeconomic environment. We are updating our 2025 guidance as follows and expect revenue growth for the full year to be up mid-single digits, in line with previous guidance. Full year adjusted operating margin to increase approximately 70 basis points compared to previous guidance of up approximately 50 basis points. Our CapEx to come in at approximately 4% of sales compared to previous guidance of 5% of sales. Adjusted diluted EPS to be in the range of $3.45 to $3.51, which is up approximately 15% and 17% year-over-year compared to our previous guidance of $3.40 to $3.56; and free cash flow to now approximately $400 million compared to our previous guidance of above $450 million. The assumptions underpinning this outlook are the following: Firstly, we continue to reflect the impact of tariffs currently in place in conjunction with mitigation initiatives available to us, including pricing and our ability to leverage our flexible business model as a low-cost, vertically integrated manufacturer. The higher tariffs are also embedded in our inventory costs. Furthermore, the outlook continues to reflect growth in key product categories, driven by recently introduced innovation, the favorable impact from new program launches and market share gains and the various incentives from jurisdictions where we operate. We've assumed no share repurchases for the remainder of 2025, as indicated at the time of the announcement of the proposed HanesBrands acquisition. We've taken into account acquisition-related costs incurred thus far, and we anticipate that our adjusted effective tax rate for 2025 will remain at a similar level to what we saw for the full year in 2024. Finally, we've assumed no meaningful deterioration from the current market conditions, including the pricing and inflationary environment and the absence of a significant shift in labor conditions or the competitive environment. So in summary, we are pleased with the quarter, and we remain confident in our ability to deliver continued strong financial performance as we look ahead and get ready to welcome HanesBrands. Thank you. And now I'll turn it over to Jessy. Jessy Hayem: Thank you, Luca. This concludes our prepared remarks, and now we'll begin taking your questions. [Operator Instructions] Jeannie, can you please begin the Q&A session? Operator: Thank you. [Operator Instructions] And your first question comes from Paul Lejuez with Citigroup. Paul Lejuez: A couple of questions. One, can you just talk a little bit more about the weakness in the underwear business, where you think that market share might be going? Maybe you can quantify how much was the shift versus overall market weakness? And what's your view on when that business stabilizes? And then second, just curious what you're seeing at point of sale overall. Maybe if you could talk to pockets of strength and weakness at point of sale. Chuck Ward: Paul, it's Chuck. Thank you for the questions. A couple of quick things, I guess, first on the underwear and innerwear business. What we're seeing, the innerwear business was impacted by a few things for the quarter. There continues to be some delays in some floor sets by a large retailer. So we're continuing to face that a bit. Also, some of it is retailers managing inventory investments and balances due to the impacts if you think of what they now have impacts of tariffs in their inventory and some cautiousness overall, we did see during Q3, the retailers starting to manage inventory a little tighter. And also, we had talked previously about some ongoing product and program resets that are happening within the space with some customers. So all those things kind of drove the quarter results that you see here. I think as we think about it going forward, we expect to see a return in the innerwear of growth in Q4. So we expect Q4 to be back to a growth perspective. Overall, on POS and what we're seeing in the market, I mean, what we're seeing is a stable market. We have seen it stabilized over the year. We think that we'll continue to see that through Q4 as well. And so -- and I think if you think about categories and how they're performing, I mean, we're seeing strong performance, obviously, with our Comfort Colors brand. We're continuing to see very large growth and net fleece has performed well. Glenn mentioned in his comments some about some new Activewear programs and national account growth that we're seeing as well. So we're capitalizing on those things as we go. And then obviously, we feel good about our brand portfolio and where we are to address the market going forward. Paul Lejuez: When you say stable market, are you saying stable to last year, like POS is flat to last year or stable at a low single-digit or mid-single-digit rate? Chuck Ward: Yes. More in line with Q2, what we were talking about in Q2, the market has kind of been stable at that same rate going forward. Operator: Your next question comes from the line of Chris Li with Desjardins. Christopher Li: Just maybe a first question on your guidance update. On your free cash flow guidance, you are guiding a little bit lower despite lower CapEx. It looks like it's mostly coming from higher working capital investment. Can you please elaborate a little bit of what's driving the change in the guidance for this year? Luca Barile: Yes, sure. Thank you, Chris, for your question. So look, from a free cash flow perspective, we're actually -- so a few things. One, very good free cash flow performance in the quarter. We generated $200 million, which is right in line with our own internal expectations. And the revision to the guidance from a free cash flow perspective, there's a few things that drive that. One is the, just taking into account the transaction costs incurred to date with the proposed HanesBrands acquisition. The second is there's a bit of timing with respect to working capital. I'd reiterate that our view on working capital as a percentage of sales is really to be around 37% to 38%. We'll get there as we move into 2026. And right now, there's also some tariff costs that are incurred in our inventory. So that's really the main drivers. From a cash flow generation perspective that we're still generating healthy elements of free cash flow. That's really driven by the fact that we have really strong margin performance coming through, and that's expected to continue into next year. Christopher Li: Great. Okay. That's very helpful. And then maybe just another one on the guidance update. The operating margin expected to increase by 70 basis points this year. As you look out into next year, what are some of the key puts and takes? And maybe directionally speaking, do you think 70 basis point improvement again next year is achievable? Luca Barile: Well, starting with the guidance for this year, the one thing that we're very pleased with, and that is -- it starts with the performance that we've seen sort of quarter-over-quarter and specifically in the third quarter is strong margin performance. And the strong margin performance comes from -- is twofold. One, from strong gross margin performance, but also really good cost control around SG&A. And the reason why we've upped the guidance there in terms of up to 70 basis points improvement year-over-year versus the 50 that we previously guided to is because the elements that we control that have been driving the margin expansion are things that are foundational to the way the company is running today and will continue to run. Those things are really embedded in the ramp-up of Bangladesh, right? Our investment in Bangladesh and the cost differential that that's bringing us is contributing to that margin. That's expected to continue. The investments we made into our yarn operations, optimization of our yarn footprint and those costs are coming through. Those will continue. The optimization of our Central American capacity and quite frankly, overall, our network overall, that's coming through. So there are elements that when you take a look at the gross margin in the third quarter, we do have some impact from favorable pricing. There's a little bit of timing versus Q4. But the way to think about the margin, it's strong and it's sustained, and it's driven by things that we control and that are foundational to the business model. So that's what I would -- how I would think about heading into next year. Operator: Your next question comes from the line of Jay Sole with UBS. Jay Sole: Two-part question for me. First is just on the fleece business. Glenn, if you can just talk about how the fleece business trended maybe in September, if the weather is a little bit warmer and maybe what you've seen in October as the weather has gotten a little cooler and just how inventory in that business is looking overall and how demand is looking? And then secondly, with all the tariffs now, it's been a couple of quarters since April 2. What kind of conversations are you having with companies? What kind of opportunity do you see maybe to capture some new business from companies maybe looking to move some of their production out of Asia, maybe to your factories with your company, whether it's in Bangladesh or Central America? Glenn Chamandy: Okay. Well, I would say, look, fleece is still performing well for us. We're in a good position with fleece this year. It's really early. I mean the season really only starts kicking off, like we ship a lot of our fleece in the end of Q2, Q3 basically. And then the season really sell-through period is -- starts now and moves into the fall and winter really. So I think we're -- it's early days in terms of weather. But so far, the sales are meeting our expectations, I would say, in terms of fleece so far for this year. Regarding tariffs, I would say to you that, look, there's a lot of uncertainty in the market today. And I think that we're seeing a lot of people looking to reorient their supply chain. But at the same time, there's a little bit of I would say, hesitation because people don't understand are tariffs off, the tariffs are on. They're making a deal, they're not making a deal. They're going to court, they're not going to court. So shifting your supply chain is never something you want to do in a knee-jerk type of reaction. So -- and even ourselves, to be honest with you, there's ways for us in our own manufacturing to further optimize, I would say, our supply chain relative to the way we're set up, but we're sort of waiting to see how all of these things materialize. So overall, I would say that there's definitely going to be a rethink in terms of how people are trying to reorient into their supply chain. And there's also going to be specific areas where I think the opportunity is going to allow us to look at other product categories. So for example, if you look at the 100% polyester product category, that's an area where the tariffs are the highest and duties are the highest. So -- and that's an area that we have -- our Rio Nance 6 facility, for example, has got a lot of capabilities of producing polyester. So -- and there's been trade legislation changes in that category. So we think that, that's something that we can capitalize on, and that's probably one of the areas where we have actually the lowest market penetration. So we're working quickly now on building product innovation, things that we're doing to look at that category. And one of our brands, which is ALLPRO, I mean it's really focusing on all polyester type products and as well as a lot of the big brands that are looking maybe potentially nearshore, those are -- that's a category which is really important to them. So overall, look, we think there's going to be an opportunity. I think it still has to come to fruition, I would say, as we move into the future. But I think we're well positioned with our manufacturing footprint to take advantage of any type of opportunity. Operator: Your next question comes from the line of Vishal Shreedhar with National Bank. Vishal Shreedhar: Luca, when you mentioned that the market was stable, my understanding was that the market was -- I'm talking about the wholesale market was under pressure, at least for the last several quarters. So were you talking on a volume basis or on a sales basis? And are you including national accounts in that as well when you're saying it's stable? Glenn Chamandy: When we look at the market, we look at the whole market in styrene, and I would say to you that the Q3 was similar to Q2. And what we said in Q2, it was down low single digits basically. So we're seeing the same type of comps as we move into Q3. So it hasn't really improved and hasn't gotten any worse. So it's more stable relative to Q2, but still negative year-over-year. Obviously, we're doing well in the market because of our soft cotton technology, our Comfort Colors, our AA basically is continuing to grow, our launch of our ALLPRO and Champion, and remember that 3/4 of our sales growth this year in 2025 was projected coming from new programs. Our fleece is in retail, a big major program we had is doing very well. So all those things are driving the sales growth for us to have our mid-single-digit growth for the full year, which we're on track for. But I would say that the market, it was down probably low to mid in Q1. We said low in Q2, and it's probably in the same level Q3, and we're expecting that type of scenario in Q4 in our assumption. Vishal Shreedhar: Okay. And that's on a sales basis, right, not on a unit basis? Glenn Chamandy: Yes. Yes. Vishal Shreedhar: Okay. Okay. And with respect to the gross margin, and I know you chatted to this a little bit earlier, but it improved quite a bit sequentially. Is that mainly related to the manufacturing initiatives? Or was there pricing in there as well? Luca Barile: Yes, Vishal. So again, the gross margin was strong in the quarter. It's a combination of things. But really what's driving the foundation of the margin at the end of the day is the contribution of the lower manufacturing costs. There is some impact from pricing, but really the lower manufacturing cost is what's foundational. And that is what's going to carry forward not only into the fourth quarter, but that's foundational to the business as we move into next year. Glenn Chamandy: Yes. And then, maybe just add one thing to that, I would say is that, look at the fundamentals of our strategy of optimizing our manufacturing and scaling and generating scale in our operations is going to continue as we move into 2026 because we've expanded in Central America, like we said this year, which we've added another 10% capacity in our facilities in our 4 walls at a limited CapEx and the CapEx is coming even below our expectations. So as we leverage that CapEx as we move into 2026, obviously, that's going to continue to help us with additional cost reductions and margin expansion as we continue to optimize our facilities. And we're actually in the process now of looking to expand within our Bangladesh facility within the 4 walls of that as well. And we believe that we actually can expand that facility by probably another 50% as we look at the 4 walls of that building by utilizing some space that we have within our park and allowing us to drive additional capacity. So these are all the things that's built into Gildan DNA is looking at ways really to optimize our manufacturing, particularly as we look at our overall planning as we move into 2026 and bringing on Hanes and as far as we continue to plan our integration strategy. So scale is going to be a key driver of continued margin expansion, and we think we're well positioned to continue to grow our margins as we move forward and lower our costs. Operator: Your next question comes from the line of Brian Morrison with TD Cowen. Brian Morrison: Glenn, I wanted to follow up with that what you just talked about. So how much capacity you talked about the increase in Bangladesh and in Honduras throughput. How much available capacity in dollars is within your existing infrastructure? It sounds like there's another $200 million to $250 million in Bangladesh 1, and what is your view for a go-ahead for a second facility at Bangladesh? I know you already have some of the pieces already in place there. Glenn Chamandy: Well, I think -- 2 things. One, look, we'll articulate some of our plans as we move into Q1 and report because we'll have good visibility on our total integration plan with HBI. So I think that will sort of give you a little bit of context. But the increased capacity that we can get out of Bangladesh right now doesn't preclude us from putting up the second facility. So we still have that optionality. What we're going to do is we have space available to us in Bangladesh, where we can add additional knitting equipment, and we're putting in some more dyeing and finishing equipment in the facility and the existing facility will allow us to get the first level of expansion. And then we'll also, obviously, as we move forward, evaluate Phase 2. Phase 2 would be a much bigger, longer project. It's going to take 12 to 18 months to develop. So that's something that will be down the road. But trying to get incremental capacity and also looking to optimize our cost structure and reduce the amount of capital we've got to spend. That's our first priority as we bring on HBI. So with all of that and looking at the ecosystem of what they're doing, the products, the mix and all the different things, we're building, I think, a cohesive integration plan that ultimately is going to continue to lower our costs and bring us scale, which is what we called out before. But more importantly, we think that there's a lot of room in terms of the margin improvement and operating margin improvement on the other side because we don't -- we believe that Hanes should be operating in the same type of operating margins as Gildan does today. So that's our long-term goal, let's say, for example, as we drive into the future. So everything being equal, I think we're in a very good position. We're very comfortable with our positioning, and we're going to continue to leverage our best-in-class vertically integrated large-scale manufacturing as we build our plans into '26, '27 and '28. Brian Morrison: And Glenn, to follow up, how long would it take you to expand Bangladesh 1? And have tariffs on Bangladesh made you alter any of your logistics or supply chain in order to optimize your cost structure? Glenn Chamandy: I would say, look at the -- even with tariffs, Bangladesh is very competitive. And what we said before is that it had a 25% cost advantage relative to what we're doing in Central America and the products that we're producing. So the tariff impact with U.S. cotton obviously is a lot lower than that. And then as we continue to scale the thing up and lower our cost, therefore, they will be offsetting some of that tariff cost even further. So that's all part of the strategy, how we're going to continue to drive efficiencies in our system. So look, we think that we're in a good place. We're going to continue -- we feel comfortable, and you can see it's flowing through in our operating margin expansion this year. And all we're saying to you is that, look, we've got further room to continue to expand our manufacturing footprint, reduce our costs and make us more competitive and continue to innovate our products. And don't forget, one of the things that you could take into account is that even though that we've seen margin expansion, don't preclude us that the fact that we've reinvested significantly in our product and innovation because the things that we're doing in our soft cotton technology, for example, have -- we're putting more value into these garments, so more cost in terms of a like-for-like type thing. But the fact is, is because we're optimizing, we're offsetting those costs with lower manufacturing costs, which is improving our operating margin. So it's a win-win scenario in our ecosystem. And by bringing in, I think, as we move forward into '26 and taking in the big volume that we have from Hanes, that's only going to continue to allow us to scale up even further, and we're really excited about the opportunity. Operator: Your next question comes from the line of Stephen MacLeod with BMO Capital Markets. Stephen MacLeod: Just a couple of questions. Just looking at the imprintables channel in Q3, and you sort of called it out as being similar to Q2. Can you talk a little bit about sort of what you're seeing within each segment of that market, fashion basics, basics and fleece? Glenn Chamandy: Well, I would say to you that, look, our soft cotton technology continues to drive our basic strategy. Comfort Colors is doing really well again, similar to last year. AA is actually coming back. We're seeing good growth in AA. And we have our new brands, ALLPRO, Champion and all the new programs we have. So it's -- we're doing well in a bad market, I mean that's the truth of the situation. The market conditions, like we said, are down low single digits, and we're doing well. So I think that we're well positioned and good -- hopefully, we'll see a big improvement in market conditions in 2026. And with the momentum we have, I think we'll be -- we'll see a good strong 2026. Stephen MacLeod: Okay. That's great. And then just turning to the cotton cost environment. Obviously, it's been very benign over the last sort of year or so. And I'm just curious, how much does that play into your gross margin outlook? And do you see incremental upside from this sort of more benign cotton cost environment? Glenn Chamandy: No, I would say that, look, it's sort of going sideways right now. So there'll be no impact one way or the other on margins. Luca Barile: Yes. And I would say -- just to complement that, I would say that, look, if you look at the -- starting with the Q3, the strong margin performance, it really was driven by lower manufacturing costs. There was a little bit of lower raw material costs that did come through. And we do have visibility of that as we move forward. But the real driver of the sustained margin moving forward is from the manufacturing cost. Operator: Your next question comes from the line of Martin Landry with Stifel. Martin Landry: Glenn, I want to come back on the market dynamic. You're saying that the market has been weak in Q1, Q2 and Q3, and you also expect the market to be down in Q4. I'm just trying to understand why is the importable market down? The economy is doing well. GDP is growing nicely. So what explains the fact that the industry is in decline? Glenn Chamandy: Well, I would say that there's different things overall when we look at the market. Our GLB customers are basically -- you can follow them. I mean, they're not performing as they were in previous years. So that's one. We're seeing large retailers managing inventory a little bit on maybe the national account side. You have corporate promotional products, companies worried about tariffs and spending money basically in -- which is affecting potentially some of the printwear market. The travel, the tourism sort of it, I think that part is still going good. People are still moving around and spending. So there's different pockets of things, I would say, that are affecting the market. And it's hard to say really because there's so many different avenues of market growth, let's say, for example, or market consumption really at the end of the day. So we really don't have a total handle on it, to be perfectly honest with you. But we just -- we get the results, obviously, and it's a little bit here, a little bit there, and it all adds up to -- maybe, Chuck, you want to add into that? Chuck Ward: Yes. No, I think, Martin, again, I think to be clear, that's the market overall. As Glenn said, it's all the -- it's not just in imprintables. It's across the whole market we're talking about the way it looks at that, and we talked about inventory and retailers and so forth. I mean when you're talking about the imprintables market, Martin, we feel great about our positioning. When we look at our brand portfolio, what we have and the ability to address the market. Glenn's talked about our soft cotton technology, things we've done there that's really driving our basics category. Plasma print, which we've talked about, which has been testing with DTG printers is going great. It's going to be launched in Q4. It looks good. We're expanding the Gildan line and with the new Hammer Max heavyweight that kind of takes on the workwear, streetwear side. He talked about Comfort Colors, it's our fastest-growing brand. We've doubled our manufacturing capacity with that. And we're seeing a lot of organic marketing coming out of that, like CNBC had an article recently, New York Times had one. GQ had something. We're just getting a lot of organic marketing through that brand. And we're capitalizing on that brand strength and going to expand it into premium bags and hats. We're doing a women's fleece collection. So Glenn talked about AA. And really, when you think about it, Martin, one of the things if you look back at our investor presentations and what's on our website, we had said that we really participated in the core of the imprintables market, which is about 60% of that market. And we've said we really don't play in the 40% overall. But now we're looking -- for example, I just talked about Comfort Colors going into hats and bags. We hadn't historically played in hats, outerwear, teamwear, bags, accessories. And we're working to now try to reach into that 40%. We're investing in innovation in our polyester fibers and the imprintability of poly and poly yarns to maybe benefit going forward, as Glenn was talking about bringing in poly product. And so that brings me to ALLPRO, where that's hitting new white space categories with performance and corporate ID, uniforming markets, outerwear, some outerwear jackets in that. Champion, obviously, going off the heritage of the Champion brand with authentic sports team colors or fanwear, teamwear, coaches jacket, shorts, different things. So I would say we feel very good about our ability to address the imprintables market and as we go forward and again, to play in areas maybe we hadn't played in the past. Glenn Chamandy: So just to summarize that despite there could be some negativity in the market, we're well positioned for growth regardless. And despite the market being down, we're still seeing mid-single-digit growth from all these factors that Chuck just mentioned. And hopefully, as we move into 2026, we'll see some positive momentum in the market, which will even accelerate our growth further. Martin Landry: Okay. That's great color. And just to be clear, you said, Chuck, that you're entering into hats. Are you entering into other categories like bags and workwear or just hats? Chuck Ward: No, no, hats. We're doing hats. We're going to do some bags. Things like our Hammer Max will probably play a little bit in workwear, as I mentioned. We're going to do some outerwear jackets things in ALLPRO, and Champion has coaches jackets. So yes, we're playing in areas that if you go back to that investor presentation in areas where we said we didn't play in the past, we're reaching into. Operator: Your next question comes from the line of Paul Kearney with Barclays. Paul Kearney: First one is just looking at inventories, can you comment on levels in the quarter? How much of the increase was from the higher tariff costs? And where do you expect to end Q4? And then I have a quick follow-up. Luca Barile: Yes. Thanks for your question. So we're comfortable with where inventories are. The inventory levels are slightly higher, and there's a few reasons for that. One, yes, there are some costs related to tariffs that are in our inventory, but it's better -- it's more that we're really well positioned from an in-stock level. And if you remember that when we have really good in-stocks, that drives really good availability, and that's what's really important from the market's perspective of our customers. So as I did comment earlier, look, we've got a strong focus on working capital, a strong focus on generating cash flow. Our target is to bring that working capital down towards the 37%, 38% as we're in 2026. We'll be slightly higher than that as we end Q4, but we're well positioned, and we're in control of our working capital. So it's -- I would think of it as good inventory. Paul Kearney: Okay. And that was great color on the innovation and the growth outlook for the Activewear for next year. I guess my follow-up is I'm curious, after the HanesBrands acquisition, is there anything that we should be considering for the organic outlook for the Gildan business as you kind of roll in those brands and those customers? How should we think about the hosiery and underwear part of the business or any kind of shifts as you combine the businesses? Luca Barile: Well, I think what's really important is if we take this kind of step by step is we look at what we're putting out in terms of guidance for this year, right? So when we take a look at the top line, we're reconfirming our guidance there on the top line of revenue up mid-single digit, right? We've seen this year a very strong performance, which is really fueling that top line growth. So revenue up mid-single digits, right? Then when we take a look at the margin profile, we're calling up our operating margin guidance to 70 basis points year-over-year. Just as a reminder, 2024 was at 21.3%. And then this all feeds into an adjusted EPS guidance range that we've tightened right at $3.45 to $3.51, which is up 15% to 17%. As you think of the go forward, right, in terms of the proposed acquisition, what we've gone out to the market with, right, is a view that net sales are going to accrete over the next 3 years at a rate of 3% to 5% CAGR, right? So that's the way you have to think of the top line. In terms of how much we're going to continue to invest in the business is 3% to 4% of that top line into CapEx, which is going to be really important, we're going to be doing this within a leverage framework of always with our target between 1.5x to 2.5x. It's really important to us to maintain that. If you notice where we are right now, we're actually at the midpoint of our range going into the closing of the transaction. And then from an EPS perspective, really jumping up to the low 20% range off the midpoint of what we're guiding to in terms of 2025. So that's the profile of how you have to think about the coming together of the 2 entities. And then the first year, what we've articulated as well is that the EPS will be meaningfully higher than that average of the 20% over the next 3 years. So hopefully, that's helpful, but that's the way you should be thinking about the coming together of the 2 entities. Operator: Your next question comes from the line of Luke Hannan with Canaccord. Luke Hannan: Thanks for the commentary thus far. I wanted to follow up on the topic of there being delays in floor sets by large retailers. I know it was mentioned in the past that you have a large fleece program that's either already in place with your large retailer customers or set to. Has the timing of that been impacted at all by the fact that retailers are being a little bit more diligent in managing inventory? Chuck Ward: No, Luke, that has set and on the floor, it is doing well. It's performing well. Early reads on it are very good. They definitely wouldn't want to miss that fleece season. So, no, it's been placed in on the floor. It was more in the innerwear categories. Luca Barile: And I would just add -- Luke, I would just add that, again, from a growth perspective this year, 75% of our growth is coming from new programs. That includes the T-shirt and fleece, meaningful programs within our national accounts. And so that plays into that piece right there. Luke Hannan: And then for my follow-up, I wanted to ask on that same sort of topic or dynamic of customers being a little bit more diligent in managing inventory, it sounds like distributors overall seem to be okay with their inventory balances. What's your view on why that sort of dynamic wouldn't impact distributors, but retailers seem to be a little bit more impacted? Chuck Ward: Well, I think when you look at it, again, distributors have always known that availability is their #1 purchase criteria. So they have to have the product available. And so -- and they found as they do that, they have a better chance of servicing the market. So there's been an appetite to make sure they're well balanced and well stocked to service it. And again, I think when you look at the retailers, I think they're a lot wider in what they're dealing with. It's not just innerwear that we talked about or Activewear we talked about, it could be everything else in the store and fashion goods, electronics, everything across the store that they're running into, and they're really uncertain about tariffs and so forth going forward. So I think they look at it probably a little differently than the distributors have to look at their supply chains. Operator: Your next question comes from the line of John Zamparo with Scotiabank. John Zamparo: I wanted to come back to the free cash flow guide, but related to the CapEx. Apologies if I missed it, what is the nature of that update? Are you deferring projects? Or are some areas of spending no longer as compelling as they were prior? And if it's the former, is that based on the supply chain uncertainty from some customers that you referenced? Luca Barile: No. So 2 things. Starting with the CapEx guide, right? So going from 5% to 4% of net sales, I mean, still that's a healthy number, number one. One thing that we do not move off of, I think it's important to understand is how we reinvest in the maintenance of our assets. So always think about almost around 2/3 of what we spend in CapEx goes through maintenance and reinvesting into our assets to make sure that we maintain our competitive advantage. That doesn't move. And there is a little bit of shift in terms of timing of projects, which is effectively the difference between the 5% and the 4%. So that's the way I would think of the CapEx. And again, you touched upon free cash flow. I think, again, free cash flow is very important to us, and we're comfortable in terms of our free cash flow generation. The difference in the guide, again, comes down to we've reflected the transaction costs incurred to date. There's a bit of timing of working capital where we have a little bit of tariff cost that's in our inventories, but we're comfortable where we are, and we're comfortable that where we're going. There's nothing really major. It's timing. John Zamparo: Okay. Understood. And then I wanted to ask about the competitive landscape, and I wonder if you've seen any meaningful change in that over the last quarter or so. Do you think your competitors are behaving rationally? Are they also passing on costs as you'd expect? Glenn Chamandy: I'd say overall, the whole market has passed on costs associated with tariff. I mean that's pretty consistent across all categories, all markets, all channels. I would say that in the printwear market, we're continuing to win. Our strength, like Chuck mentioned, in all the brand portfolio, the technology, the innovation, that's all a function of the capital that we've been spending and leveraging our large-scale low-cost manufacturing. And so it takes a long time to put that in place, and then we're really capitalizing it in this type of market where our competitors, we think, are weak, undercapitalized and don't have really the brand strength, the innovation, the manufacturing to really grow their businesses. So we're continuing to lead and widen the gap against the competitive landscape in most of the cases where we operate. Operator: Your next question comes from the line of Chris Li with Desjardins. Christopher Li: Glenn, I want to follow up your last answer to your last question. I just want to confirm, so have you seen a widening of your price gap versus your competitors given your low-cost advantage? And is that also allowing you to gain more market shares? Glenn Chamandy: No. We've taken price equal to whatever tariff impact, and we did it in stages, too. So we didn't really go out and price at one time. So we slowly took prices up to cover the impact of tariffs, so they would be aligned. And basically, the market had to follow because everybody has that same type of cost. So I would say to you that the pricing, I would say, relationship before and after tariffs is probably pretty consistent in the market, and everybody had to react to the tariff cost and everybody really reacts to our pricing because we're the price leader. Christopher Li: Okay. That's helpful. And maybe, Luca, just a follow-up for you. Just on the SG&A expense, sorry if you answered this already. It was a bit higher than what we were expecting in Q3. You noted there's some increase in variable compensation. Are you able to kind of break out for us just how much of that was from variable comp? And then maybe a follow-up to that is, as you look out for next year, your SG&A rate, should we be kind of anchoring around 10% of sales for next year? Is that still a good soft target? Luca Barile: Yes. Thanks for your question. So look, in the quarter, I mean, slightly higher. I think there's 2 things. The drivers are some higher variable comp, but there was also some IT-related expenses that were more onetime in nature. The way you have to think about the target for SG&A and specifically for this year, right, we've given the operating margin guidance of 70 basis points higher year-over-year. And when you look at the composition of the gross margin and the SG&A, our SG&A is always targeted to be around 10% of sales. So there's a couple of onetimers here in the quarter, but we're comfortable with that target. And then with your question with respect to next year, I would point you towards the guidance that we've given in terms of the 2 companies coming together, the combination, which really yields really strong adjusted diluted EPS CAGR over the next 3 years with the first year being meaningfully higher than that low 20% range. So 10% is what we're looking at for this year in terms of what we can control on our end. Operator: Your next question comes from the line of Ryland Conrad with RBC. Ryland Conrad: Just on the 3 quarters of expected growth from new programs this year. Just curious how long of line of sight or how much visibility you have on incremental program wins in national accounts into 2026? Chuck Ward: Yes, Ryland, thanks for the question. We have similar -- as we've mentioned, we have similar line of sight on our growth for next year. So similar percentages that we're looking at, as we said, for this year of growth that we see and have line of sight for next year. Ryland Conrad: Okay. Great. And just on Comfort Colors, I guess, could you talk a bit about the performance year-to-date and just the underlying drivers there? And then on the plans to expand that brand into additional product categories, like is there anything that you could share additionally there on that front, whether it be kind of timing or just expectations on how that will benefit the brand? Chuck Ward: Sure. I mean, again, the brand is -- again, it's our fastest-growing brand with double-digit growth. It's been very strong all year long. We haven't seen it falter at all. It just keeps growing. I mentioned we doubled our manufacturing capacity for that brand, and we're going to invest additional in 2026 to grow that capacity more. And so that's the reason we think it has brand strength to move outside of just where we have been, which is tees and fleece. We're adding more women's collections, which will be very strong. We're going to go into caps and bags, as I mentioned. Again, I think that will be well received because then people can -- when they're putting this product out in the printwear, could go to fraternity stores, resorts, see it in bars where they're putting the things, they want to sell a hat and a T-shirt. They don't -- we're actually seeing it picked up quite a bit in band merch. And when people go to a concert, they may pick up a shirt, but they also want a hat. So we're trying to put out things that will go well with the core product and a lot of it will move together. Glenn Chamandy: And just to reference, even though there's hats and bags, these are all going to be cotton-based. They're going to be basically dyed in the same process as we make the T-shirts. So it's going to give an nostalgic look in terms of the pigment type technology that we use on all of the Comfort Colors products that we sell. So it's really going to be enlightening and stay consistent with the brand's heritage and focus. Operator: There are no further questions at this time. I will now turn the call back over to Jessy Hayem for closing remarks. Jessy Hayem: Thank you, everyone, for joining us today and attending our call, and we look forward to speaking with you soon. Have a great day. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good afternoon. Welcome to the Penske Automotive Group Third Quarter 2025 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately 1 hour after completion through November 5, 2025, on the company's website under the Investors tab at www.penskeautomotive.com. I will now introduce Tony Pordon, the company's Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead. Anthony Pordon: Thank you, Rob. Good afternoon, everyone, and thank you for joining us today. A press release detailing Penske Automotive Group's third quarter 2025 financial results was issued this morning and is posted on our website, along with a presentation designed to assist you in understanding the company's results. As always, I'm available by e-mail or phone for any follow-up questions you may have. Joining me for today's call are Roger Penske, our Chair and CEO; Shelley Hulgrave, EVP and Chief Financial Officer; Rich Shearing, North American Operations; Randall Seymore, International Operations; and Tony Facione, our Vice President and Corporate Controller. We may include forward-looking statements on today's call about our earnings potential, outlook and other future events, and we may also discuss certain non-GAAP financial measures such as EBITDA. Our future results may vary from our expectations because of risks and uncertainties outlined in today's press release. We also have prominently presented and reconciled any non-GAAP measures to their most directly comparable GAAP measures in this morning's press release and the investor presentation, both of which are available on our website. Our future results may vary from our expectations because of risks and uncertainties outlined in today's press release under forward-looking statements. I also direct you to our SEC filings, including our Form 10-K and previously filed Form 10-Qs for additional discussion and factors that could cause future results to differ materially from expectations. At this time, I'll now turn the call over to Roger Penske. Roger Penske: Thank you, Tony. Good afternoon, everyone. I'm pleased with the performance of PAG during Q3. Our teams navigated through several challenges across our business and delivered solid results. Q3 revenue was $7.7 billion, up 1%. For the quarter, EBT was $292 million, net income, $213 million and earnings per share of $3.23. Retail automotive same-store revenue increased 5%, which included a 5% increase in service and parts revenue, partially offset by approximately $200 million of annualized revenue of strategic divestitures and dealership closures made during the last year. Q3 each year typically is impacted by seasonality as we navigate the change to a new model year. This year's seasonality was coupled with the expiration of EV tax credit in the U.S., which drove a higher penetration of BEV sales during the quarter to more than 10% of our total sales, and that's up from 6% to 7% in previous quarters. The average discount from MSRP on BEV we sold in the U.S. in Q3 was $7,100. We estimate the higher percentage of BEVs sold during the quarter reduced total new vehicle gross per unit by approximately $100. The U.S. retail automotive business was strong during Q3 as same-store new units delivered increased 9% and revenue increased $300 million or nearly 10%. The strong U.S. performance was offset by two areas. The first, the U.K. retail automotive and retail commercial trucking businesses. In the U.K., a cyber incident at Land Rover impacted delivery of new vehicles during the September registration period as well as an interruption to our service and parts business. We estimate the impact reduced the total new gross per unit by approximately $61. Gross per new unit retail in Q3 was $4,726. If you add back the impact of the higher mix of BEV units during the quarter and the impact of Land Rover gross per new unit, we have been approximately $150 per unit higher. In addition to the cyber incidents, higher costs for government-mandated social programs in the U.K. drove higher SG&A costs. The net impact of these two events drove a reduction in EBT of approximately $5 million during the quarter. Also, the challenging freight backdrop continues to impact commercial truck sales and service and parts. As a result, PTG same-store unit sales declined 19% during Q3 and EBT declined $15 million. In summary, we estimate the impact -- EBT during the third quarter was approximately $23 million or $0.25 per share. Outlining at JLR cyber incident, $4 million; our social programs, $2 million to $3 million; premier truck freight and tariff impacts, $15 million; and we had a higher bad debt expense at PTS of approximately $2 million. Our teams have taken action to reduce the impact from these macro events through various initiatives, including headcount reduction, driving efficiencies, which should benefit future periods. Let me now turn it over to Rich Shearing to discuss our North American operations. Richard Shearing: Thank you, Roger, and good afternoon, everyone. As Roger indicated, our U.S. automotive retail business was strong during the third quarter. Same-store new and used unit sales increased 5% with new increasing 9% and used increasing 1%. During the quarter, 26% of new units sold were at MSRP compared to 32% in the third quarter last year. Used vehicle sales continue to be constrained by fewer lease returns, and we expect the lower level of lease return maturities to bottom this year and begin improving in 2026. We further expect franchise dealers, in particular, to benefit from these increasing lease returns for used vehicle sourcing. Our U.S. same-store service and parts revenue increased 6% and related gross profit increased 8%. Same-store gross margin also increased 120 basis points. Customer pay gross was up 5% and warranty was up 15%. On average, in the U.S., we estimate our automotive technicians generate approximately $30,000 of gross profit per month. Our automotive technician count is up 2% when compared to the end of September last year. While automotive service and parts revenue and gross profit is at a record level, we continue to focus on driving higher utilization of our base and increasing fixed cost absorption. And in Q3, our U.S. fixed cost absorption increased 380 basis points. Turning to Premier Truck Group. We operate 45 locations and remain one of the largest commercial truck retailers for Daimler Truck North America. As Roger indicated, EBT declined $15 million when compared to Q3 last year as the prolonged recessionary freight environment impacted orders, new and used unit sales and fixed operations. Tariffs pulled some orders previously scheduled for delivery in Q3 up to the second quarter, while other customers remain on the sidelines due to Section 232 tariffs and ultimate resolution of the EPA 2027 Emissions Regulations. As a result, the Class 8 market saw a 30% decline in orders and a 22% decline in retail sales during Q3. At the same time, industry backlog dropped 24% to approximately 88,000 units or 4 months of replacement demand. During Q3, Premier Truck Group was in line with the industry as new and used unit sales declined 19%. Service and parts revenue declined 3% as lower freight volumes caused customers to defer repairs and maintenance to future periods. Premier Truck Group remains one of the core pillars to the Penske Automotive Group diversification story, and we continue to adjust our cost structure to a level of business and are well positioned for an inevitable rebound. Turning to Penske Transportation Solutions. The freight environment also impacts the full-service lease, rental and logistic operations of PTS. During Q3, operating revenue declined 3% to $2.7 billion. Full service revenue, contract maintenance and logistics revenue was flat, while rental revenue declined 14%. In Q3, PTS sold 10,600 units and ended the quarter with 405,000 units, down from 414,000 units at the end of June. During the quarter, PTS incurred an increase in bad debt expense on its rental business of approximately $7.5 million from higher write-offs related to the freight environment. That increase impacted the PAG equity income by approximately $2.2 million during the quarter. Despite these challenges, equity earnings from PTS were $58 million, only down $2 million from the $60 million we reported in Q3 last year as PTS has been aggressive in rightsizing its fleet, reducing expenses and preparing for the rebound in the freight environment. I would now like to turn the call over to Randall Seymore to discuss our international operations. Randall Seymore: Thanks, Rich, and good afternoon, everyone. During Q3, international revenue was $2.9 billion. In the U.K., the macro operating environment remains challenging as inflation, interest rates, higher taxes, consumer affordability and the government push towards electrification impacts the overall market. During Q3, the number of same-store units we delivered declined by 7% as the zero-emission mandates, the cybersecurity incident at JLR and the previously discussed disposed or closed dealerships impacted our new unit sales. In fact, our unit volume at JLR was down approximately 700 units in Q3 2025 when compared to the same period last year. Despite the challenging operating environment, the loss of JLR units during Q3, new vehicle gross has only declined $163 per unit. Turning to used cars. Our same-store used units declined 8% as we closed or sold 4 locations and realigned the U.K. CarShop used-only dealerships to Sytner Select last year. We have now reached the 1-year anniversary of making the change to Sytner Select. As a result of this change and better management of used cars, total used gross profit in the U.K. increased 19%, contributing to the overall increase in used vehicle gross per unit. Service and same-store revenue -- service and parts same-store revenue was flat during Q3, while gross profit increased 4%, including a 270 basis point increase on gross margin. We also have operations in Italy, Germany, and Japan, and these businesses generated an increase in revenue of 23% during Q3 and an EBT increase of 54%. As we look to future opportunities in the U.K. and Europe, we opened our first Chinese brand locations. We will have 8 dealerships co-located in our Sytner Select locations as we look to drive further efficiencies to augment the investments at those sites. Turning to Australia. We operate 3 Porsche dealerships in Melbourne and distribute heavy-duty trucks and power systems through a network of more than 20 dealers across Australia. The Porsche dealerships are fully integrated and performing well. We have sold 1,700 vehicles year-to-date. And during Q3, the used-to-new ratio grew to 1.4:1 and fixed absorption increased 250 basis points. We utilize our existing scale of the Commercial Vehicle and Power Systems business in Australia to leverage costs while executing our one ecosystem strategy, which provides for a superior customer experience. For the Australian Commercial Vehicle and Power Systems business, we are diversified with revenue and gross profit split approximately 50-50 between on- and off-highway markets. We are really pleased with the growth we see in Australia. In fact, the recent announcement of rare earth minerals deal between Australia and the U.S. should help drive further growth in the off-highway mining segment. The Defence and Energy Solutions segments provide us with additional opportunities. In Defence, we have in-service support contracts on a variety of applications ranging from infantry fighting vehicles to frigates, destroyers, and armed personnel carriers. In Energy Solutions, we believe we are at the forefront of a rapidly growing segment that provide power solutions for data centers to support the future growth of artificial intelligence. Data centers require robust infrastructure with reliable power at the core of its operation. The engines and support we provide will be critical as this segment evolves. We see the potential for our Energy Solutions business in Australia to generate at least $1 billion in revenue by 2030. I would now like to turn the call over to Shelley Hulgrave to review our cash flow, balance sheet, and capital allocation. Michelle Hulgrave: Thank you, Randall. Good afternoon, everyone. We remain committed to our diversification strategy, a best-in-class balance sheet and a disciplined approach to capital allocation while implementing efficiencies and lowering costs across our businesses. Our SG&A to growth was 72.7% during Q3. The third quarter typically has a higher SG&A due to seasonality. However, Q3 SG&A to growth was also impacted by the higher social program costs in the U.K. the cyber incident in Land Rover and the lower business volume at Premier Truck Group. We believe these items contributed 120 basis points to SG&A to growth during Q3. Excluding these items, SG&A to growth increased by 30 basis points when compared to Q3 last year. For the 9 months ended September 30, 2025, we generated $852 million in cash flow from operations and adjusted EBITDA was $1.1 billion. Our free cash flow, which is cash flow from operations after deducting capital expenditures, was $625 million. On a trailing 12-month basis, adjusted EBITDA was over $1.5 billion, representing an increase of 3.2% compared to the same time last year. EBITDA for Q3 was $357 million. During the third quarter, we repaid $550 million of senior subordinated notes at their scheduled maturity, further reducing our non-vehicle debt. At the end of September, our non-vehicle long-term debt was $1.57 billion, which is down $281 million since the end of December last year. We have $5.6 billion total debt, of which $4 billion is floor plan and the remaining $1.6 billion is related to our 2029 senior subnotes, credit agreements and mortgages. 15% of the non-vehicle long-term debt is at fixed rate. We estimate a 25 basis point change in interest rates would impact interest expense by approximately $12 million. Debt to total capitalization improved to 21.5% from 26.2% at the end of December last year and leverage declined to 1.0x. Through September 30, we paid $253 million in dividends and invested $227 million in capital expenditures. We increased our dividend by 4.5% to $1.38 per share in October, representing the 20th consecutive quarterly increase. On a forward basis, our current dividend yield is approximately 3.2% with a payout ratio of 36.5% over the last 12 months. Year-to-date through October 24, we repurchased 1,086,560 shares of stock for $145 million, representing approximately 1.6% of our outstanding shares. We have $262 million remaining under the existing securities repurchase authorization. Over the last 4-plus years, we have returned over $2.5 billion to shareholders through dividends and share repurchases. As part of our strategic capital allocation, during the third quarter, we acquired the iconic Ferrari dealership in Modena, Italy and have 9 Ferrari dealerships worldwide. This dealership is strategic to both Penske and Ferrari and will enhance our relationship at the home of the Ferrari brand. We have an acquisition pipeline of over $1.5 billion of revenue we expect to close during Q4 and expect to meet our acquired revenue target for the year. Total inventory was $4.7 billion, down $145 million from the end of June and up $65 million from the end of December 2024. Retail automotive inventory is down $9 million, while commercial vehicle inventory is up $74 million. New and used inventory remains in good shape. New vehicle inventory is at a 51-day supply, including 54 days for premium and 34 days for volume foreign. Our BEV inventory is at 12 days in the U.S. at the end of September. Used vehicle inventory is at a 43 days supply. At the end of September, we had $80 million of cash and liquidity of $1.8 billion. At this time, I will turn the call back to Roger for some final remarks. Roger Penske: Thanks, Shelley. As I mentioned earlier, I continue to be pleased with our performance and remain confident in our diversified model and its ability to flex with market conditions. Thanks for joining the call today. We'll now open it up for your questions. Operator: [Operator Instructions] Your first question today comes from line of Michael Ward from Citigroup. Michael Ward: Randall, I wanted to clarify something. You went over kind of quickly. You mentioned 8 locations with Chinese brands, and then you tied in Sytner Select together with it. What were you talking about there? And can you identify the brands you're kind of working with now with the Chinese-based manufacturers? Randall Seymore: Yes, sure. So as we made the transition from CarShop to Sytner Select last year, we reduced the number of these big box retail stores down to 8. And -- so these are high-quality locations. The strategy there was to have less inventory, I'd say, better inventory through better source and increase our gross profit. And for the numbers we just went over, we were successful with that and happy and proud of the team with what they've executed over there. But we had the opportunity to take on some Chinese brands. So Chery, we've taken on in 3 locations. We launched that in October. And then Geely, we're in the process of launching right now. So we'll be running in November at 5 other locations. So look, these are existing locations, no capital expenditures to speak of. We've got fixed operations there. So it's a really good opportunity. And then just while we're on the Chinese topic, 2 other locations in Germany. So in Aachen, we're going to take on BYD again, at an existing location facility we already have. And then MG in Heinsberg, Germany, same thing with the location that we already have. Roger Penske: I think, Mike, also, when you think about these big box stores, these are built first-class originally for CarShop, and we've obviously changed the brand name, the Sytner Select, but we're getting about 400 people coming through the store, am I right, Randall? Randall Seymore: Per week. Yes. Roger Penske: Per week. So this isn't like opening up a new branch or a new dealership with no service and no sales. This gives us a chance really to do with the Chinese brands. And it's minimal, very minimal impact from the standpoint of capital expenditure. Michael Ward: Okay. Wow, so you're doing with the Chinese brands at a Sytner Select location? Roger Penske: Correct. Maybe that's the easy way to put it, correct. Michael Ward: Okay. Rich, you talked a little bit about on the truck side. In the Big Beautiful Bill, there was the tax deduction for depreciation. Is that or will that have any impact on 4Q demand? Or is that more of a '26 type story? Richard Shearing: No, I think it will have impact. In fact, the production schedule for DTNA is closed for Q4. So they filled their production schedule. And we saw, I wouldn't say significant activity as a result of the Big Beautiful Bill. I think that was a piece of it, but I also think DTNA extended the aluminum and steel tariff pricing through the end of the year and customers who are waiting or don't want to wait to understand what the impact of Section 232 tariffs are decided to lock in that pricing from the steel and aluminum tariffs and place orders in the fourth quarter this year if they're looking for business early next year. So I'd say it was a combination of those two things, Mike. Michael Ward: So we should expect a little uptick relative to Q3 and Q4. Richard Shearing: I think it's going to be consistent. If I look at what we've delivered on a year-to-date basis, just over 2026 -- sorry, 12,700 units. You look at what our backlog is for the fourth quarter, it's going to be in line with those quarterly numbers. Of course, they've got to deliver them to us, and we've got to get them retailed to our customers, but I think it will be in line with what we've seen from the first 3 quarters. Michael Ward: And then Shelley, that's still -- from a cash standpoint, that's still a positive rate depreciation intent? Michelle Hulgrave: Definitely, Mike. So it will ultimately depend on how many trucks PCS decides to buy, but I think we're still comfortably in that 125 to 150 range, especially as you look out at each of the next 3 years. Operator: Your next question comes from the line of Rajat Gupta from JPMorgan. Rajat Gupta: Just wanted to follow up on PPG. I appreciate the call out on the headwinds in the quarter. But it doesn't look like -- I mean, those headwinds are going away anytime soon. I'm curious what kind of visibility you have on the cadence there bottoming out. I'm assuming like once that business comes back, it's going to lever pretty well. But I'm curious like what kind of visibility do you have on the recovery there? And I have a follow-up. Richard Shearing: Yes. Sure, Rajat. Rich again here. I think if you look at freight rates, I think they have bottomed out. They just haven't improved. So they've been fairly consistent in the last 6, 9 months. The issue we've got at the moment is the capacity, meaning there's too many trucks and trailers for the goods that need to be moved. And I think as I look into next year, just returning from the American Trucking Association Conference, there were some discussions there that were encouraging to me. So there was two executive orders written this year, one in April and one in September, and they're both under the responsibility of the Department of Transportation and the FMCSA to enforce related to non-domiciled CDL holders and non-English-speaking CDL holders. These two groups of CDL holders is estimated between 500,000 and 600,000 or about 6% of the total CDL driver population. And so as enforcement and kind of reconciliation occurs with these CDL drivers, we think that's going to take some capacity out of the marketplace. What we're also hearing is that it's not a one-for-one removal because we think that a number of these CDL holders are operating illegally around electronic logging devices. So if you take out one of them, it's like taking 1.5 drivers out of the market. So I think those two things are going to be beneficial for capacity tightening and freight rates as we go forward. The other thing I would add is, obviously, we're anticipating some news today on interest rates. The housing market is a significant driver of freight as well. We're about 1 million units below the 2006 peak of housing starts at the moment. And if we get lower interest rates, that could drive some activity in the housing, whether it's relocations, people becoming more mobile, certainly refinancing. And I think those things will be beneficial as well. And as we look here in October, our fixed operations, we're still 122% fixed coverage. We are seeing that customers are only repairing what they have to repair. We are seeing our collision business is a bright spot. That is up year-over-year, but certainly, parts that are consumed as trucks go up and down the road is reduced and service activity is reduced as well from an RO count perspective. Rajat Gupta: Got it. Got it. That's clear. Maybe just to follow up on just the U.S. parts and service business. If I heard you correctly, you said the U.K. was up 4%, which would mean the U.S. business is probably up like high single digit, double digit on growth. I mean, it's a pretty solid number considering you do not have the easy compares from -- because you didn't have CDK issues last year. I'm curious, is there anything you would point out that's driving that kind of double-digit growth? Is that sustainable? Anything that you're doing company-specific that might be supporting that? Richard Shearing: Yes. Sure, Rajat. Rich here again. You look at our business, same-store performance, customer pay was up 3.5%. Warranty was up over 14% and collision is up 7.5%. And so I think each aspect of the fixed ops continues to perform well. And I think it's a combination of a couple of things. First of all, you look at the age of the car park, it continues to increase almost 13 years now. The average age of the vehicle we're servicing is 6.25 ages or years of age. And then average mileage is approaching 70,000 miles as well. So I think that's going to continue as even the SAAR this year is forecasted to be below historical norms. And so we're going to continue to see that increase. You look at what we're doing on the service lane and what we're doing with technician videos, all of these things are driving efficiencies. We're using AI in our service scheduling and reception answering. And these are driving efficiencies, which we see manifested in our effective labor rate, which is up 4% or almost $7 per hour, which comes to discounting and a focus there as well. So I think all those things combined are paying dividends. Obviously, the OEMs try to mitigate recalls, but we continue to see new recalls on a monthly basis from each of the OEMs. And so we'll see that warranty work, I think, continue. Roger Penske: I think the focus also on body shop, we were up significantly both in the U.S. and internationally, and we're making investments. And our return, Rajat, return on sales on the body shop somewhere between 10% and 12%. Rajat Gupta: Got it. Got it. If I can join like just one quick one. You mentioned like the data center like opportunity in Australia going very well. I'm curious like if there's any parallels there for you to tap into that opportunity in the U.S. at all, either through PTL or just building that business given how much build-out is happening here? I know the scale levels are very different, but any thoughts on that would be helpful. Randall Seymore: Yes, Rajat, it's Randall. So yes, this has been the fastest-growing part of our business in Australia. We've got about 60% market share when you talk about 1,250 KBI and higher. But one benefit we have in Australia and New Zealand is we're the exclusive importer for that MTU product. The challenge in the U.S. -- and look, we've looked at opportunities in the U.S. and continue to, but it's much more fragmented where you have numerous distributors in North America, contrasting that where we're the sole distributor in Australia. And then MTU, who's the provider, manufacturer of the engine, they go direct to some of the bigger players, data center players in North America, whereas everything in Australia is through us. So it's a little bit hard to copy and paste it, but we have a great relationship with them and evaluate opportunities as they come. Operator: [Operator Instructions] Your next question comes from the line of Jeff Lick from Stephens. Jeffrey Lick: A question for Rich. Rich, I was wondering, there's been some -- a lot of comments amongst the other dealers that have reported already about where things are in luxury in October and just kind of going into the all-important kind of December to remember season. I was just curious if you can just talk about where you see things playing out there? And then also, if you can maybe address the GPU was down about $300 on a year-over-year basis, where you see GPU trends heading? Richard Shearing: Yes. So Jeff, if you look at the Q3, start there first. Our premium luxury was up almost 9%, so we felt good about our mix and performed well in the quarter. As you look to where we're at right now, it's certainly a brand-by-brand situation. And of course, we've talked on the call here about Jag Land Rover. If you look at where we're at when the production cyber incident occurred, we had about a 74-day supply. As I sit here today, we're down to a 39-day supply. We expect to get visibility to their wholesales and what we'll receive in the fourth quarter on November 8, when their production software system comes back online. So in the interim, obviously, with the demand still being high for that product, it enables us to hold price, and that should be good for our grosses. So that's kind of the story on JLR. You look at Lexus, they've been one of the hotter luxury brands this year. Certainly, the launch of the GX and the TX, those models are taking a younger demographic that they really haven't played with in the past. And I think they're competing neck and neck with BMW for the highest volume luxury car this year. So I would expect BMW and Lexus to be pretty aggressive in the fourth quarter incentive-wise to try and knock down that trophy. If you look at BMW, I think the challenge we have in the fourth quarter this year with BMW is the comps to last year. If you recall, last year and really into the first part of this year, they had a significant recall that impacted almost their entire model range with the integrated brake system, stop sale and fix. And it was about this time last year where all those BMWs came off stop sale. And so the fourth quarter was a heavy delivery schedule for BMW last year. So that's kind of some color on what I would say from a premium luxury standpoint for the fourth quarter. Going to your second question on grosses, I think Roger talked about in his commentary, a couple of things I'd say when you look sequentially or compared to Q1, you got to add back the impact from the higher BEV sales in Q3. We think that was about $100 in gross. And then the JLR impact with the deferred deliveries about $60. So you add that $160 back, we're just under $5,000 all in, which is comparable to Q1. And the reason I'm not putting Q2 in there is because that's when we had a little bit of that tariff bump as people rushed out to get cars when we fully didn't understand what that impact was going to be and what the OEMs are going to pass along. Roger Penske: Jeff, let me add a little bit here. When you think about BMW going into the fourth quarter, BMW probably in the premium side was the most successful selling EVs. So we're seeing this drop. If you look at October month-to-date, we've sold 128 in the total U.S. versus 4,000 in Q3 -- for the Q3. So when you look at that, there's going to be a pivot here because BMW, they're pulling back, obviously, production. Now they're still supporting it to a certain extent. They're going to have to fill that back with ICE units. And I think that's going to be a conversion. We see the California where we had sometimes 20% of our business was going to be EVs. We're going to see that have a little bit of dynamic, I think, in Q4. And I'm sure it will smooth out as we go into the new product line and more of the hybrid units available for sale. So our days supply today, if you can believe it is only 10 days. We were talking about 100 days in the past. So taking the money out it certainly has impacted the business. Jeffrey Lick: Appreciate that color. And just kind of a quick one for Shelley. Shelley, on the net kind of $150 million tax benefit you're receiving from the accelerated depreciation on the one Big Beautiful Bill, never get tired of saying that. Where will that show up? And when will that show up in the P&L? Michelle Hulgrave: I don't really get tired of talking about it either, Jeff. So it's cash flow. It's -- we are able to defer taxes -- cash taxes paid. So you will ultimately see that at the top of the cash flow statement under cash flow from operations. When we add back the change in deferred income taxes, it will be a positive, whereas last year it was a negative or at least it will swing by that amount. So you'll see that in cash flow from operations, and we certainly look to utilize that in our capital allocation. It does not impact income or our tax rate though, Jeff. Jeffrey Lick: And does that start hitting now? Or is that kind of -- part of it was retroactive, correct? Michelle Hulgrave: Yes. It was retroactive to purchases made starting January 19 of this year. We would -- we've certainly seen it as we've made quarterly tax estimates. But as it wasn't effective until July 4, it didn't really have much of a cash impact until the second half of the year. Operator: Your next question comes from the line of David Whiston from Morningstar. David Whiston: So on the retail used, the GPU was up over 12% to a little over $2,100. And I'm just curious how much of that 12% is Sytner versus other variables? Richard Shearing: Could you repeat that, David? It was a little hard to hear you. David Whiston: Sorry. Roger Penske: How much of Sytner versus U.S. unused growth impact? David Whiston: Yes. Anthony Pordon: It basically was -- this is Tony. It basically was all coming out of Sytner. It's coming all out of Sytner and the change that we had with respect to the Sytner Select locations and moving to a lower amount of inventory but better quality used cars. Roger Penske: Yes. The GPU, David, was up 37%, up 600 pounds per unit, which obviously when you melt that in with the U.S., everything else, it is exactly what we wanted to see happen. I would say that part of the Sytner Select has worked out well then when you add on the ability to see the margins, at least initially that we're seeing somewhere in GBP 3,000 to GBP 3,500 on the Chinese brands. It will be interesting to see how that plays out over time when they add more dealers to see if the competition would drive that down. But obviously, our big issue on used in the U.S. is acquisition. And I think Rich has talked about it before that we're going to start seeing considerably more lease returns as we look at Q4 and Q1 next year. And remember that probably what today, Shelley, 55% of our new vehicles at premium are leased. So -- and those are 3- and 4-year leases, which are perfect for us as we bring those back in. And then on top of that, now with the supply will be available, we'll be able to turn our loaner cars quicker. And you think about Crevier out in California has 300 loaners. We turn it 3x. That's 1,000 used cars that come internally, and we get all the new car programs for those. So those are levers that we're pulling here as we go forward. But it's a big focus, even our CarShop business. If I look at the month of September and October, we're a little off in volume because we just can't buy the right cars and just to buy them and try to -- we're just not a 8-, 9-, 10-year-old car supplier. We want to be in the sweet spot. And I would say when you look at that, that's probably in the 3 to 6 year. Randall Seymore: One more comment on that. From the U.K. standpoint, certainly, the Sytner Select strategy has worked. But our franchise used car gross profit is up about the same as Select. So I think it's more of a I'll use the word institutional change that we've done with our team over there. It really boils down to, if you look at our total used inventory right now, less than 1% over 90 days old. So it's an age factor. It's better sourcing, so buying cars better. And then it's just discipline. I mean it is intense focus on units and then agility of pricing, quickness of reconditioning. So it's really a big -- I'd say a big, big effort for sure and discipline by the team in the U.K. Anthony Pordon: Reducing aging has been a big part of that as well. So you didn't have to discount as much. Operator: And there are no further questions at this time. I will now turn the call back over to Mr. Roger Penske for some final closing remarks. Roger Penske: Yes. Thanks, everyone, for joining us for Q3. We look forward to the remainder of the year, and we'll see you on the next call. All the best. Thank you. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.