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Operator: Good morning. My name is Stephanie, and I'll be your conference operator today. At this time, I would like to welcome everybody to RenaissanceRe's Third Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] I will now turn the call over to Keith McCue, Senior Vice President of Finance and Investor Relations. Please go ahead. Keith McCue: Thank you, Stephanie. Good morning, and welcome to RenaissanceRe's third quarter earnings conference call. Joining me today to discuss our results are Kevin O'Donnell, President and Chief Executive Officer; Bob Qutub, Executive Vice President and Chief Financial Officer; and David Marra, Executive Vice President and Chief Underwriting Officer. To begin, some housekeeping matters. Our discussion today will include forward-looking statements, including new and updated expectations for our business and results of operations. It's important to note that actual results may differ materially from the expectations shared today. Additional information regarding the factors shaping these outcomes can be found in our SEC filings and in our earnings release. During today's call, we will also present non-GAAP financial measures. Reconciliations to GAAP metrics and other information concerning non-GAAP measures may be found in our earnings release and financial supplement, which are available on our website at renre.com. And now I'd like to turn the call over to Kevin. Kevin? Kevin O'Donnell: Thanks, Keith. Good morning, everyone, and thank you for joining today's call. Before we begin, I want to take a moment to acknowledge the devastating impact of Hurricane Melissa. Being in Bermuda, we are familiar with the challenges of hurricanes, but the scale of this storm is unprecedented, and our thoughts are with the people of Jamaica, Haiti and Cuba at this difficult time. Shifting now to RenaissanceRe's third quarter performance. We delivered another strong quarter with operating income of $734 million and an operating return on average common equity of 28%. In aggregate, year-to-date, we have earned almost $1.3 billion in operating income and delivered about a 17% operating return on average equity. Finally, we grew our primary metric, tangible book value per share plus change in accumulated dividends by 10% in the quarter and almost 22% year-to-date. These results are consistent with our track record of strong returns over the last 3 years. In fact, since Q4 2022, the quarter after Hurricane Ian and just prior to the step change in property CAT, and we have delivered operating return on equities above 20% in 10 of the 12 -- in 10 out of 12 quarters with an average return of 24%. As a consequence, we more than doubled tangible book value per share during this period. As strong as our performance has been over the last 3 years, I believe we can continue growing tangible book value per share in the future at an attractive pace. This is because many of the factors that have contributed to our success since 2023 should persist into 2026 and beyond. Looking back over our achievements. First, we grew into an attractive property CAT market, increasing our property CAT portfolio from $2 billion of gross written premium in 2022 to around $3.3 billion today, which creates a strong base of profit in our portfolio going forward. Second, we focused on preserving our underwriting margin. Our average combined ratio in property CAT since 2023 has been about 50%. David will explain the many tools we have to preserve this margin going forward. Third, we nearly tripled our capital partner fees from $120 million in 2022 to just over $300 million over the trailing 4 quarters. As we have discussed, these fees are consistent, low volatility addition to our earnings stream that should continue to grow in 2026. Fourth, we grew retained net investment income from $392 million in 2022 to almost $1.2 billion over the trailing 4 quarters. Despite declining interest rates, we expect investment income to persist and potentially grow over time as our asset base continues to increase. Finally, we returned over $1 billion in capital to shareholders so far this year. We continue to have considerable excess capital and believe our shares represent exceptional value making share repurchases highly accretive to our bottom line. Looking forward to 2026, while we are facing decreasing property CAT rates and falling short-term interest rates, these are challenges we successfully overcame in 2025. We will continue to do so in 2026 by executing on the 5 factors I just enumerated and building upon the foundation that we have established. Our success starts with strong underwriting. In 2026, we will continue to prioritize margin over growth. Strong returns have resulted in reinsurers increasing supply through retained earnings. Demand, however, is expected to grow at a slower rate than what we have seen over the last few years. This dynamic will likely put pressure on rates, resulting in some reduction in excess margin. That said, given the strong profitability of this business, we are confident in our ability to construct an attractive property portfolio. To be clear, we will always pursue top line growth when it makes sense. That said, reinsurance is a risk business where jointly managing the bottom line is more important than consistently growing the top line. Over emphasizing top line growth is the surest way to fail to grow tangible book value per share over the long term. Managing this business is knowing where and when to expand, and where and when to hold. In the current environment, the best move is to focus on margin. By doing so, I'm confident that our growth in tangible book value per share will significantly exceed our cost of capital. In our Casualty business, you can see our strong underwriting reflected in how we pulled back on several lines this year, such as general casualty and professional liability. We did this in a way that was sensitive to the needs of our customers, which will help preserve future options. While we believe rate is outpacing trend in general liability, we will not reflect this in our reserves until we have more confidence in sustainability of the improved results. Having maintained good relationships with our customers opens opportunities for future growth if conditions improve. Moving now to a few comments on the upcoming January 1 renewal, which David will elaborate on later in the call. We begin with a very profitable property CAT book. While we expect some market reductions return levels should remain very attractive. I expect the market to remain disciplined with reinsurers holding on retentions and terms and conditions. Consequently, in 2026, property catastrophe rates should remain strong and should produce returns significantly in excess of our cost of capital. In other property, this book is performing very well. As you saw this quarter, and we believe this momentum will carry into 2026. We are seeing increased competition in the CAT-exposed pro rata delegated book and are keeping a close eye on it. Ultimately, we will manage our exposure based on the expected profitability and the opportunities in the market. Moving now to our Casualty and Specialty segment, where January 1 is a significant renewal. We expect increased competition in some lines but are confident that our customer relationships and risk expertise will enable us to select the best risk and to construct an attractive portfolio. Ending now with some comments on capital management. Consistent an execution of the 5 factors I mentioned earlier has created a cash-generating engine. On a GAAP basis, we have earned $1.9 billion so far this year, while generating $3.2 billion in operating cash flow. This facilitated growing limits in our property CAT portfolio by over $1.7 billion during 2025. Adding new business and strong expected returns for all of our capital providers. It has also allowed us to share our success with our shareholders through repurchases. Despite significant capital return, we have grown tangible book value by $1 billion year-to-date. So we have grown assets, grown capital, deployed significantly into a high-margin business and returned capital to shareholders. Bob will address our future capital management plans in greater detail shortly. But for all the reasons I just gave, we expect to continue generating profits and cash at an attractive rate. And one of the best uses for that cash right now is repurchasing our shares because we believe they represent exceptional value. That concludes my opening comments. And as discussed, Bob will cover our financial performance for the quarter, followed by David who will provide an update on our segment performance. Robert Qutub: Thank you, Kevin, and good morning, everyone. We delivered excellent results this quarter with annualized return on equity of 35% and operating return on equity of 28%. Year-to-date, annualized return on equity is 25% and operating return on equity of 17%. As Kevin mentioned, this is the 10th quarter out of 12 where we have delivered an operating return on equity over 20%. Operating income per share was $15.62 in the quarter. This is our strongest operating EPS to date, driven by continued growth in all 3 drivers of profit. Specifically, we reported underwriting income of $770 million, nearly double from Q3 2024. Retained net investment income of $305 million, up 4% and fee income of $102 million, up 24%. One of the key messages you should take away from this call is that our earnings has improved significantly over the last 3 years. Our underwriting and fee businesses as well as our investment portfolio have reached a scale where earnings are consistently higher and large individual loss events are having a smaller impact on our financial outcomes. As a result, we are better able to deliver strong annual returns with less volatility now than we could 10 or even 5 years ago. Last quarter, I shared 4 numbers that demonstrated this strong earnings profile. I would like to highlight these numbers again on a year-to-date basis, which means they include the impact of the California wildfires. Reviewing our financials through this lens shows the improved returns and lower volatility of our business. The first number is 15 points, which is the aggregate contribution from fee income and net investment income to our overall return on average common equity so far this year. This is consistent with last year. And together, these 2 drivers of profit created a stable base of earnings quarter-over-quarter. The second number is $600 million, which is our underwriting profit so far this year, including the impact of California wildfires. This profit complements the stable earnings base we generate from fees and investments each quarter. The third number is 22%, which is the amount we have grown tangible book value per share plus change in accumulated dividends so far this year. Ultimately, we measure our ability to deliver enduring value to our shareholders through growth in tangible book value per share plus change in accumulated dividends. This metric reflects the aggregation of our past successes and most directly comparable to our peers. The final number is $1 billion, which is the amount of capital this year we have returned to our shareholders through repurchases as of October 24. As you can see, we are consistently generating substantial capital. Consequently, capital management will continue to play an important role in creating value for shareholders going forward. We pride ourselves in being good stewards of your capital and sharing our successes with you, our shareholders. Since Q2 2024, we have returned over $1.7 billion of capital through share buybacks. This represents about half of the net income during this period or alternatively over 80% of the shares we issued to support the Validus acquisition. In the third quarter specifically, we bought back over 850,000 shares for $205 million. We continued repurchasing post quarter end, buying back another $100 million as of October 24, 2025. Repurchasing over $300 million in the wind season demonstrates confidence in our sustainable earnings, our strong capital position and our conviction in the compelling value of our stock. For all these reasons, we anticipate continuing share buybacks, consistent with our long-term track record of being good stewards of our shareholders' capital. Now I'd like to provide a detailed view of our third quarter results, starting with our first driver of profit underwriting. In the third quarter, our adjusted combined ratio was 67%. This result reflects disciplined underwriting, coupled with a low level of catastrophic losses and favorable prior year development. Specifically, property catastrophe, we reported a current accident year loss ratio of 10% and an adjusted combined ratio of negative 8%. This benefited from 44 percentage points of favorable development on prior years, primarily from large catastrophes in 2022 and small events across accident years. Other property results were exceptional again this quarter with a 50% current accident year loss ratio and an adjusted combined ratio of 44%. Reported significant prior year favorable development, which was related to large catastrophes as well as attritional losses. Our Casualty and Specialty adjusted combined ratio was 99% this quarter consistent with our expectations. Prior year development in Casualty and Specialty was slightly favorable -- slightly unfavorable, however -- was slightly favorable, excuse me, however, noncash purchase accounting adjustments of 50 basis points pushed the segment's prior year to adverse. We remain comfortable with reserve development in this book and have not experienced heightened trend this quarter. Across our underwriting portfolio, gross premiums written were $2.3 billion and net premiums written were $2 billion, both slightly down to the comparable quarter. Within both these segments, we continue to shape the portfolio. Specifically, in property, we grew property catastrophe at the midyear renewal while keeping other property flat. As you can see on Page 12 of the financial supplement, underlying growth in property catastrophe was 22%, excluding the $116 million year-over-year change in reinstatement premiums. These reinstatement premiums were negative $50 million this quarter due to reversals of reinstatement premiums from accident years that have developed more favorably than expected. Conversely, gross reinstatement premiums were positive $66 million in Q3 2024 related to Hurricane Helene. In Casualty and Specialty, gross premiums written were roughly flat to the comparable quarter, but there was movement at a class of business level as we manage the cycle, specifically in general Casualty, we have been reducing our exposure to U.S. general liability. As a result, gross premiums written in general Casualty were down 7% this quarter with continuing rate increases helping to offset exposure reductions. In credit, gross premiums written increased by 19%, largely driven by additional premium on seasoned mortgage deals from older underwriting years. And finally, we held Specialty largely flat as we continued to retain our share in this attractive market. Looking ahead, in the fourth quarter, we expect other property net premiums earned of around $360 million and an attritional loss ratio in the mid-50s. Casualty and Specialty net premiums earned of about $1.5 billion and an adjusted combined ratio in the high 90s. Moving now to fee income on our Capital Partners business, where fee income continues to be a strong contributor to our results with $102 million in fees in the third quarter. As you can see on Page 17 of our financial supplement, only $13 million of these fees are included in underwriting income. The remaining $89 million of these fees are incremental to our earnings as they flow through noncontrolling interest. This quarter, management fees were $53 million, and performance fees were $49 million. Performance fees were particularly strong due to the impact of favorable development on prior years. Looking ahead to the fourth quarter, we expect management fees to be around $50 million and performance fees to be around $30 million, absent the impact of large losses or favorable development. Once again, we expect the significant majority of these fees to flow through noncontrolling interest, which means they are incremental to our underwriting income. Moving to our third driver of profit investments where retained net investment income was $305 million, up 6.5% from the previous quarter, driven by continued growth in our investment assets. In addition, we reported significant retained mark-to-market gains of $258 million, primarily from equity and gold futures. As I've discussed in the past, we have increased our allocations to derivatives over time, including equity, interest rate, credit and commodity futures. We use these derivative positions to shape our portfolio, and as part of this, we carry cash collateral to support the positions. Looking ahead, we anticipate our investment income to persist at similar levels and potentially grow over time as our asset base increases. Next, I'd like to provide an additional update on expenses, where our operating expense ratio was in line with expectations at 5.1%, flat from the comparable quarter. In the fourth quarter, we expect our run rate and operating expense ratio to be about flat. That said, we typically make accruals for performance-based compensation expenses at the end of the year, which may impact the ratio. In conclusion, each of our 3 drivers of profit outperformed this quarter and contributed meaningfully to our results. We deployed significant capital through share repurchases while also growing into opportunities in property catastrophe business. We believe the strong earnings engine that we have built will continue to generate enduring value for our shareholders in the fourth quarter and beyond. And with that, I'll now turn the call over to David. David Marra: Thanks, Bob, and good morning, everyone. We're pleased to deliver another excellent underwriting quarter, both financially and strategically. Financially, we grew underwriting income to $770 million with strong current and prior year loss ratios and low catastrophe activity. These results reflect our disciplined underwriting approach in addition to our market-leading access to business. Strategically, this preferential access enabled us to continue deploying capacity into an attractive market in 2025. We closed out a highly successful midyear renewal and began planning for January 1. Looking across the reinsurance market, we believe it remains highly attractive for underwriters with deep expertise and strong access to risk like RenaissanceRe. Our vision is to be the best underwriter. Our integrated systems and our underwriting culture are aligned around this goal. Our 2025 portfolio is largely underwritten, and I'm proud of the book we built. This is not a market where all risks are equally attractive. In fact, returns vary significantly between classes of business and between deals within each class, which presents opportunities for us. We've been successful in 2025 because we applied our deep underwriting expertise to differentiate the best deals and deployed our strong customer value proposition to secure these lines. This combination is a differentiator and enables us to build a portfolio that is accretive to shareholders year after year. You saw this benefit when we were able to bring on the full Validus portfolio in 2024. You saw it again in 2025 when we were able to shape our larger portfolio by growing property CAT, holding lines in other property and Specialty and reducing risk in Casualty. In 2026, we will follow the same disciplined playbook, engaging early with customers on how we can solve their risk challenges across lines, leveraging our underwriting excellence to identify the best opportunities and deploying our owned and partner capital balance sheets to construct an attractive portfolio. Moving now to a discussion of our segments and outlook for January 1 renewal in more detail. Starting with property, focusing on property catastrophe first. Over the last 3 years, we have grown this business by about 60% in one of the most attractive rate environments in history. It has been highly profitable with an average margin of 50% over this period, even with significant catastrophe activity. In 2025, we grew U.S. property CAT, which is our highest margin business by 13%. We did this by selecting the most attractive risks in areas like Florida, California and loss-impacted nationwide accounts and securing these lines with our strong access to business. As a result, we captured more than our share -- market share of the $15 billion in new demand this year. Looking ahead to 2026, we expect continued growth in demand. Supply will likely exceed this demand, which will result in some rate pressure at January 1. The market anticipates rates could be down about 10%. As we have seen in 2025, however, this will not be uniform across all accounts. There are some [Technical Difficulty] renewals, which are impacted by California wildfires, and some of our accounts are already secured on a multiyear basis. Our experienced team has a fantastic track record of underwriting and dynamic markets like this as we demonstrated at the midyear renewal, where we grew faster and at better rates than the market average. Let me provide some more context on our view of the market and our underwriting approach to deliver superior risk-adjusted returns. Since the 2023 step change, the market has appropriately balanced risk between reinsurers and insurers with reinsurers largely providing balance sheet protection. Interests are appropriately aligned. Insurers have adjusted their business to support current retention levels, and the level of expected attritional losses is well understood in the market. We do not expect insurers -- reinsurers to sell new bottom layers below expected cost, and we do not expect clients to pay high rates for these layers. Therefore, we expect new demand to be mostly at the top end of programs and most of the competition to be focused on rate rather than terms and conditions and retentions, which will help insulate our bottom-line profitability if rates decline. In addition, our gross-to-net strategy is a key differentiator and supports sustained attractive returns. We retain approximately 50% of our assumed property catastrophe premiums making our returns less elastic to rate change. To achieve this, we typically share about 1/3 of our property CAT business with partners in our joint venture vehicles, which produces fee income that is less sensitive to movements in rate. We also protect and shape our portfolio with ceded reinsurance. As we look 2026, I'm confident in our ability to deliver underwriting results that are substantially accretive to the guidance Bob gave on our other 2 drivers of profit. Following several years of strong growth, our focus is on preserving margin, enabling us to continue delivering market-leading returns on equity. Shifting now to other property, where we continued our disciplined approach through 2025 renewals and to deliver excellent returns. This book includes a combination and non-CAT business, and we adjust its composition based on market opportunities. Following years of rate increases, we are seeing pressure on rates in the most profitable areas. Similar to property CAT, terms and conditions such as deductibles and policy supplements remain attractive. This combination of rate and terms and conditions has led to profitable returns since 2023. We have seen positive development on our initial loss estimates from prior years, which has benefited our results in 2025. This consistent prior year favorable development, combined with strong current year underwriting results and solid terms and conditions favorably impacts our view of the sustained profitability of the other property business, despite pressure on rates. Moving now to Casualty and Specialty. Over the last year, we have seen positive progress in the Casualty market as clients have acted with determination to combat social inflation trends in U.S. general liability. Rates have nearly tripled since 2018. In early 2024, rates further accelerated and have been covering loss trend. In addition, clients are implementing increasingly sophisticated claims management practices. As we have discussed with you, we reduced our exposure to general liability business significantly through 2025. We did this carefully and thoughtfully taking the data-driven approach and working to understand our customer portfolio actions in order to position our portfolio with the best programs for the next cycle. At January 1, we will continue to stay closely connected with our clients to understand the trends they are seeing, and how they are managing claims. Actions of our clients and our portfolio repositioning will take time to show up in the claims data. Until this happens, we will not reflect the benefit in our reserving. As Bob discussed, we expect the Casualty and Specialty segment to deliver a high 90s combined ratio. This segment remains highly accretive due to the substantial float that it generates in an attractive interest rate environment. In addition, it is strategically important to our goal of being the best underwriter, allowing us to trade with clients across classes and access the most attractive lines across Property, Casualty and Specialty. In closing, through 2025, we built an attractive portfolio by focusing on our clients, identifying accretive growth opportunities in the market and preserving margin through disciplined execution. This market is one where underwriting excellence will produce a more attractive portfolio. We believe that this will continue to be true in 2026. Our underwriting expertise and access to risk will enable us to deliver superior underwriting returns in the short term and value creation for our shareholders over the long term. And with that, I'll turn it back to Kevin. Kevin O'Donnell: Thanks, David. In closing, we had another strong quarter in which all 3 drivers of profit performed well. We delivered excellent underwriting income as well as strong fee and investment income. Together with robust share repurchases, we delivered record-high operating EPS results. This outcome is especially impressive given our status this year as a Bermuda taxpayer. Looking forward, even with anticipated market dynamics, we are confident that our underwriting excellence, investment management capabilities and gross to net strategy will continue providing us with significant competitive advantages. Consequently, we are very optimistic regarding our potential for future performance and ability to continue delivering superior shareholder value. Thanks. And with that, I'll turn it over for questions. Operator: [Operator Instructions] We will now take our first question from Elyse Greenspan with Wells Fargo. Elyse Greenspan: For my first question, I wanted to start with something Bob said, right? So we said there was 15 points this year on your return from the aggregate contribution from fee income and net investment income. So obviously, this year, right fee income, I think, would have been higher than normal, right, just because it's been a pretty low CAT year. So for that 15-point contribution from those 2 pieces, what is, I guess, normal expectations? Like what would you be expecting from fee income and net investment income on your return going for 2026? Robert Qutub: Thanks, Elyse. I'll take that. This is Bob. My context was the full year, 15 points. So we look at around 11% to 12% from investment income and around 3-plus percent that comes in from the fees. That's our starting point. And that when you look back over the last 3 quarters and even back into last year, that's been what has been the absolute contribution to our operating return on equity. And that's how we think about it. We think about that as our starting point. And David goes, and I've said this on the past calls as builds his book of business, that is and will be accretive to that number, which is telling you that we have an outlook of a strong financial performance and giving you a foundation from where we start from. To be honest, I also want to point out I did say for the full year. So this isn't a low CAT year. Remember, we took a $750 million charge on a $50 billion event in the first quarter, and that was the point I was trying to emphasize on that for the full year. Elyse Greenspan: Okay. I appreciate that color. And then for my second question, just thinking about the market dynamics that you laid out on the property CAT side, right, it sounds like baseline expectation 10% decline in price at 1/1. Obviously, it will vary depending upon where you are in programs and maybe some incremental demand higher up, I think, is what you said. But as you guys' kind of think about the factors impacting the renewal, if it comes together based on how you expect today, what do you think the expected ROE on CAT business written in 2026 will be? Kevin O'Donnell: That's a tough question to answer because it's part of our portfolio. So they're stand-alone and kind of the marginal. But what I would say is Dave's comments, I think, are important and twofold. One is rate change, which is a benchmark is -- what is '25 and '26, relatively look like together. But more importantly, the bigger comment we're trying to make is rate adequacy. So if we -- maybe one way to frame it is, if we go back to when things changed, and the property CAT was rerated at 1/1/23, if it was rerated 10% less, which is where we ultimately expect '26 to look relative to '25, we would have done exactly the same thing over the last 3 years that we have done. So having the rates pull back a little bit is simply pulling some of the excess margin that we've been enjoying in property CAT. It is not bringing property CAT anywhere close to -- and it's still abundantly above rate adequacy. So we still have very strong rate adequacy even with some reduction in rate change. I don't know if anything you'd add, Dave? David Marra: That's true. We still remain very positive on the business. It's been very profitable over the last few years. We expect the terms and conditions to largely persist and some pressure on rate. Our team is well positioned to figure out how to underwrite around that. Not all risks will be equal. So we'll be able to pick the best risks based on what happens on each individual program and construct an attractive portfolio. Operator: We'll take our next question from Josh Shanker with Bank of America. Joshua Shanker: Typically, when people see pricing going down, there's an assumption that too much capital is chasing too little risk or something to that effect. I'm curious to the extent that your third-party investors or potential new third-party investors are showing interest such that 2026 might be a strong or maybe a weak year for capital raising. Can you sort of speak to that a little bit? Kevin O'Donnell: Yes, I'll start there. That's a -- it's a broad question. So we -- because of the structures we have and because of the reputation we have in managing third-party capital, we have very good access to third-party capital, and that has been true even when it's been more constrained for others. Right now, I don't think third-party capital is going to be the driving influence on pricing in 2026. I think it's more about comfort with return levels within property CAT, and I think reinsurers having a little bit more confidence and a little bit more capital. Good news is we expect that the demand side, so there'll be more -- will grow. So more property CAT demand, although that level of increase is smaller than what we saw in '26. So that said, the market will be slightly more favorable for buyers than for sellers, where I would say '25 was a little bit better balanced. And that's the reason we're projecting about a 10% reduction in rate. The other thing I want to mention is there is more third-party capital that is becoming interested in longer-tail liabilities. So basically looking at that to fund their investment strategies, I think that will continue through 2026. So I think there'll be a little bit more third-party capital coming into perhaps longer tail Casualty or Specialty lines. So all in all, it's going to be driven by traditional reinsurers, third-party capital will continue to be available but not driving the show. I don't know if anything you'd add? David Marra: Yes, yes, we're definitely -- the competition we're seeing, especially on the CAT side is from retained earnings on traditional reinsurers more so than new capital projections. Kevin O'Donnell: Thanks, Dave. Joshua Shanker: And given that situation, I mean, there's a lot of expectation that you'll be in the market for your own stock given where it's trading and how much capital you have. But in this third-party business, a part of the reason why it's been so successful is because you eat your own cooking and your investors know that whatever risks they're taking, giving you money, you're also taking yourself. When we look at the minority interest on our balance sheet and we look at your own shareholders' equity, there's obviously some off-balance sheet third-party capital as well. They're -- somewhere close to the same amount. If you're returning capital, do we ever think there could be a situation where third-party capital is a bigger balance sheet for RenRe than the proprietary capital of the company? Kevin O'Donnell: It's a good question. One of the things we look at each year is what is the right balance between what we're retaining and what we're sharing. And I think Dave mentioned, we share about 50% of our property CAT and anywhere, depending on the line of business, 15% to 30% on the Casualty, Specialty lines. There are scenarios where even -- we can make this narrow enough that within a certain target strategy, we are larger in third-party capital than we are with our own deployment of risk into that narrow strategy. So there are scenarios where we could have larger third-party balance sheets than our own balance sheets. I don't see that occurring in '26. Operator: We'll take our next question from Andrew Kligerman with TD Cowen. Andrew Kligerman: I was a little curious shifting over to the Casualty line or the Casualty and Specialty area. It looked like you talked on the call about pricing being very firm, but you're still pulling back a bit on the U.S. general liability. Yet, when I've talked to others in reinsurance, I've been hearing that there's certainly upward movement in pricing at the primary level, but a lot of reinsurers are kind of softening their pricing a little bit. So I was wondering if you could share some color on what you're seeing in the Casualty reinsurance line and how pricing is coming along? David Marra: Thanks, Andrew. This is David. So we're seeing a continuation of what we've seen for the last several quarters as overall, the market is responding to elevated loss trend. And we're seeing the market respond in a couple of different ways. Most of the pricing increase has happened at the insurer level. And if reinsurance is normally quota share of an insurer, so we're taking a share of every policy they write every loss they pay. And as they get additional rate, that inures to our benefit. So that's what's going on in the market. They've been getting rate, which has been exceeding trend. They're also investing in better claims management practices. So the third angle that we have to improve our own portfolio is to take action and reposition our reinsurance lines to those that we think that are doing that the best. And that's what we've been doing over the last year. It's just a standard part of how we would always optimize our Casualty and Specialty segment within a class like we're doing in general liability and then also the overall balance between classes. Andrew Kligerman: I see. So Ren is not increasing their ceding commissions at all. It's sort of steady as she goes. David Marra: So the ceding commissions that we pay to our clients have been pretty flat. Most of the improvements in the economics have been insurers getting more rate and improving claims handling. Andrew Kligerman: Got it. And then just one last thing on Casualty. So you talked about a slight favorable development. And I was wondering if you could provide some color around the vintages, the product lines that it played out. Were there any big movements in one direction or another with a specific product or vintage? David Marra: Yes. So the way I think about the overall Casualty and Specialty segment, like Bob described, there was slight favorable development. That -- our view is that was flat. That was stable reserves. And we think just from the top down, we've shown a lot of favorable development as a group, a lot of those products, our reinsurance book. A lot of those clients buy products across Property, Casualty and Specialty. Within Casualty and Specialty, reserves have been stable. Combined ratios are in the high 90s, and that -- the main contribution we get is from the float, which is an attractive piece of the ROE contribution with stable reserves and growing float. Operator: We'll take our next question from Bob Huang with Morgan Stanley. Jian Huang: My first question is a little bit of a follow-up on what Josh was asking earlier. If we look at -- so one of the things you've said was that you talked about loss volatilities are smaller now. And so consequently, earnings are more steady despite catastrophe risk. If this trend continues longer term, doesn't that also imply that longer-term pricing should be pressured by stable earnings, less volatility to me feels like it should have less pricing volatility as well? Like theoretically, how do you think about that? Like should we see less pricing increase going forward if we have medium-sized hurricanes running through Florida here and there? Kevin O'Donnell: Yes. So thank you for the question. I'm hearing 2 things in the question. What's going on in the market and what's going on at RenRe. What -- the volatility from catastrophes is relatively consistent from an exposure perspective and how it represents -- thinking -- you mentioned Florida -- in Florida. RenRe is different. We have much greater investment leverage with that, we have more stability coming from the investment earnings in our portfolio. We have a much bigger fee platform, which provides stability and buffers volatility. And then our property CAT has been touched on a few different points is shared between third-party capital and our own capital. Third-party capital represents the stability of fees. Our own capital represents the return for risk. So it's -- what we're trying to say is the representation of volatility from catastrophes is buffered because of who we are today compared to who we were 5 years ago. Within the market itself, it is about unchanged. Jian Huang: Okay. That's very helpful. My second question is on gold. Just given the volatility that we've seen -- and obviously, it was a strong quarter for gold in the third quarter. But just given the volatility in gold in October. Curious if you have any updates on holdings? Or have you have any strategy or change in strategy or change in view about the investments in gold? And then what is the impact of gold on the book value for October? Robert Qutub: Thank you for the question. Our view on gold from a strategic standpoint hasn't changed. We've been in gold for all of '25 and a good bit in '24, and we went into it as more of a hedge against our portfolio with the geopolitical environment and a lot of change going on and the shifting of the central governments and how they approach their base currency. This has proven to be a good strategy. I mentioned in my comments that part of our mark-to-market gain, the $258 million, a large chunk of that came from the gold position that we have out there. There's been some volatility up and down here in there, but we still see that within our strategic remit for the foreseeable future. Operator: We'll move next to Mike Zaremski with BMO. Michael Zaremski: I was curious on the Property segment, if we look at property, IBNR reserves and additional case reserves, those levels are hovering currently in the 70%-plus range. We all have the historical levels, they bob around a lot, but still above like the long-term historical levels. I'm just curious, do you -- is there a way for you guys to frame whether the reserves for those 2 buckets are kind of higher than historical levels for a certain reason, or is there any color you could add to try to frame whether there's some of just maybe some added conservatism here, how you guys think about it? Kevin O'Donnell: Yes. There's no added conservativism or any shift in the way that we've built our reserves. The property side, it can be difficult because any movement in any single large event can have a meaningful impact on whether we have adverse or favorable development within the Property segment. The -- I spend less time when I look at our reserves differentiating between ACR and IBNR for the property CAT portfolio, and I look at it as relative -- the normal process for us is looking at each large event on the anniversary of the event. So what you saw some third quarter events coming through with some favorable development from older years. I would say there's no story to tell with regard to the numbers or the way that you're looking at the reserves there, it's pretty much steady as she goes from a reserving perspective. Michael Zaremski: Okay. Got it, got it. Well, it's been a good thing you guys have been releasing a lot more than expected. So I'll keep trying to figure out how to develop that. Maybe just pivoting, you've made the point, and I think we got it that this year, because 1Q isn't a benign year for large losses, for example, would you be willing to frame kind of if you look at the year-to-date 9 months combined ratios, you could either use calendar year or accident year or both. Would you still describe this year, 9 months year-to-date as being below average, better-than-average year or about normal? Any help there? Kevin O'Donnell: It's a question because there's so many moving parts and we can get to this taking 20 different journeys. This journey began with a large wildfire loss and then light wind season and then some favorable developments and strong pricing. If I look at the economic balance sheet and our modeled loss ratios and then I look at the actual loss ratios that produce, they're not wildly apart. So it's hard to say because this is an event-driven book. So one change in the fourth quarter with the earthquake somewhere can change things dramatically. But this year doesn't look wildly dissimilar than our modeled portfolio. Operator: We'll take our next question from Meyer Shields with KBW. Meyer Shields: I don't know if there's a question for Kevin or for Bob. But when you have the sort of favorable development that we've seen in recent quarters in either the catastrophe segment or in property. How does that flow through to the models that you're using for pricing? Robert Qutub: It's all part of the information [ because there ] that we have out there. We look at our pricing. We look at our reserving, we do actual versus observed and what we do in terms of the pricing model. As we go into the 1/1 seasons, and David can talk about this, as we look at 1/1, whether it's Casualty or whether it's Property with an emphasis on loss ratios on property. As we look at the experience that we've had and over the years, we've seen that converge become closer, but that's based on the information and the data sets that we have. So they are connected, and we do observe that, and it does play into roles. But with reserving it's historical with pricing, it's forecasting in the future based on that information. I don't know if you want to add anything to that, David? David Marra: Yes. I think from an underwriting perspective, we take into account both qualitative and quantitative part of the risk when we think about future underwriting and rate change trend, that goes into the quantitative side. But some of the things that have driven favorable development will go into the qualitative side and take other property, for example, a lot of the terms and conditions like the supplements and deductibles have held up as claims have settled out. So something like that will go into our qualitative view, and that will have a positive impact on our expectations in future years. Meyer Shields: Okay. That's helpful. And the second question, and I'm not really sure how to ask this, but Kevin, you talked about an increase in demand, which makes sense, I guess. When that materializes in the marketplace, is competition for that increased demand different from the renewing demand? Kevin O'Donnell: You're right. It was a difficult one to ask. It's also difficult to answer. So what's happened last year, just to frame and maybe as a real example is a lot of the demand came in at the top of programs. Not every reinsurer is equally hungry for high layers as they are for low layers. But those that traditionally write high layers will have probably a pretty consistent targeting for the new demand if it's within their target appetite already. One of the things that David mentioned is we took a greater market share of the increased demand last year. That was partially because we have vehicles that complement our own targeted demand. And secondly, we recognize that the rate adequacy is at such attractive levels we should deploy into that because we'll be able to retain it for several years and continue to produce attractive returns. So I would say it's generally consistent if it's already within their appetite. And it doesn't -- then it could be that it's between the traditional market and the CAT bonds, but it's not as if it's binary between third-party capital and reinsurers. It's really whether it's consistent with appetite. Operator: We'll take our next question from Andrew Andersen with Jefferies. Andrew Andersen: Just on the Casualty and Specialty segment, I think you called out some higher attritional losses in the quarter. Was that on the Specialty side and more one-off in nature? David Marra: Andrew, this is David. I'll take it from an underwriting perspective. So it's been about 4 quarters now that we've had a higher view of Casualty trend. And so that has been baked in for the last 4 quarters, and there's no change there. And if you look at the comparable quarter, if you're comparing now to Q3 2024, that would be a difference. But that's been stable in the last 4 quarters. Andrew Andersen: Okay. And then just on the reducing some of the exposures to U.S. general liability, I think this kind of started the back half of '24. But maybe where are you in the reduction cycle here? Should we see this continuing throughout '26? And is it just ceding commissions that we need to see change here to get a bit more positive? David Marra: I think the thing with general liability is that the momentum in the market is very strong. It just needs to be continued momentum. So we'll be watching to make sure that clients are continuing to get rate above trend, continuing to vest in the claims. And with that, our appetite will be largely stable. If we see that slip, then we'll still be always optimizing the portfolio based on how we see the risk. Kevin O'Donnell: Yes. And one thing I'd add to Dave's comments is this isn't a re-underwriting of the Casualty portfolio. This is simply recognizing that certain companies are doing a better job changing claims behavior, underwriting and rating to address the elevated trend more effectively than others. So we just are continuing to optimize our portfolio into the best performers. Operator: We'll take our next question from Alex Scott with Barclays. Taylor Scott: I wanted to ask one on the capital. Maybe if you could frame for us the way you're thinking about the amount of excess capital you have based on the PMLs and all the things' you guys look at internally today. And maybe just help us think as well about if growth ends up being more limited next year or maybe more flattish, what would your approach to capital management and capital return be? How aggressive would you be in terms of taking the operating earnings and funneling it back? Robert Qutub: This is Bob. Thanks for the question. There's a lot packed into the question. Let me see if I can open it up a little bit. In my prepared comments, I did talk about a couple of things, probably more than a couple of things. One is that the earnings capacity in the foreseeable future, we do feel strong. As we've talked about, all 3 drivers of profit, a couple of times on the call, and we pointed it out in our prepared comments. So we feel that the earnings, the numerator, if you will, is performing quite well, and we're expecting that to continue. We're focused on margins. We're focused on protection. Growth is challenging, but we'll continue to find it and deploy it where we can, like what we did in property CAT in the third quarter where we grew that. A lot of our comments were based on managing the denominator, which would be the capital aspect. And $1 billion this year. We expect the earnings trend to continue. We expect the capital generation to continue. And rather than accumulate capital, we're looking to give back -- return that capital in the form of buybacks as we've done and we're expecting that return to continue. Taylor Scott: Got it. And second one I had is just if you could talk about an ongoing situation in California. And as we move into 2026, if there's anything we should be considering, particularly around 1/1 renewals that would be impacted by maybe moving out of some of those areas of California that you're impacted by? Kevin O'Donnell: Yes. Actually, we grew in California after the wildfires. I think the re-rating was in excess of what was required from the learnings from the wildfires that occurred. So from our perspective, we continue to like the California market. A lot of the issues that you're -- I think, that are resident within the market are affecting the primary companies more than they're affecting us as reinsurers because we're setting our own rate and our own terms for taking the wildfire risk out of California. So I would say our -- if everything continues as it is in California, our appetite is to continue to grow. Operator: We'll move next to David Motemaden with Evercore. David Motemaden: Kevin, you had said, I guess, this year, which sounds like not far off from what you had expected from a model basis, 17% operating ROE year-to-date, including that $50 billion event. I guess just given sort of everything that you're seeing as we get into 1/1, do you think that -- how should we think about that ROE profile as we head into 2026, just given everything that you're seeing from a pricing standpoint? Kevin O'Donnell: Yes. So to be clear, the question was is this year an outlier from an average year with regards specifically to property CAT. So my comment was really on what is the modeled loss ratio for property CAT and to what's our actual. If rates are down 10%, you can assume loss ratios are up. So I would say the important thing is within property CAT, it's going to be a well-rated book of business in '26. It is just going to be slightly less well rated than it was in '25. So the guidance we're trying to give or the directional information we're trying to give is fees look strong, investments look strong. And the underwriting in '26 is largely going to look like the underwriting in '25. David Motemaden: Got it. And then I think, David, you had mentioned just more interest from third-party capital and some of the longer-tail liabilities. So I'm just wondering how you're thinking about that dynamic strategically, sort of how it can impact your business, the opportunities, the risks? I'd be just interested in your thoughts there. Kevin O'Donnell: Yes. We have a long history of finding efficient capital and matching a desirable risk. This is an opportunity for us. So we will look -- we know the capital that's interested in property CAT. We know the capital is interested in other property, and we know the capital that is coming in, a lot of it to the longer-tail casualty lines. A lot of it is capital that's already been active in Bermuda, many of which have been in the life sector. So these are -- it's a different strategy where they're looking at the reserves as funding their investment strategy, not looking for low beta risk, which has been the traditional third-party capital appetite for property CAT risk. We're well positioned to produce that risk. We're well positioned to structure vehicles that allow them to share that risk that we have. The other side of that is its capital that's coming in that we'll compete with. So we're just trying to figure out how it's going to move the market, if it's going to move the market and then how it can be a tool for us to service it and to bring fee income to our shareholders. Operator: We'll take our next question from Ryan Tunis with Cantor. Ryan Tunis: I guess just for Kevin. So we're talking down 10% as sort of a base case. But I'm just curious, in a marketplace like this, as we move toward the renewal, what are the type -- for someone in your seat, what are the types of, I don't know, red flags that you'd be looking for that might suggest that the market is being a little bit less disciplined? Kevin O'Donnell: So it can be on any number of things. I am going into this renewal with optimism. It's going to be a pricing shift, not a terms and conditions shift, which I think is likely to be the case. Sometimes terms and conditions changing have material impact on economics and it's less transparent to see in the portfolio. I don't think that's what we're going to see this 1/1. So from my perspective, I think it will be a relatively transparent shift in economics, and we think it's in the ballpark of a 10% rate reduction. So there are numerous other things we'll monitor. We've got great underwriting capabilities. We have great tools to see changes in the portfolio. So we do see other ships. And economics that are less transparent than price, we'll react accordingly, but it's not my expectation. Ryan Tunis: Got it. And then I'll just end here with a couple of separate ones. First one is just for Bob. So in the 2024 10-K, the Property segment shows about $1.2 billion of IBNR for 2022 and prior years. I'm wondering after all the releases this year, if that's still a solidly positive number. And then just separately, just curious if there's anything you guys want to say at this juncture on Melissa exposure? Robert Qutub: I'll handle the first, and I'll give exposure to Melissa to David. Generally speaking, that's a question the way I would look at that and approach it. Period -- our point in time reserves in property right now are about $6.3 billion now. And a year ago, they were $6.5 billion. So we've continued to build reserves. We've had some reserve releases, and they're mutually exclusive of one another. The reserve releases are based on information that we get over time and we act accordingly. We've got independent advisers that look at this and test it. One of them is PricewaterhouseCoopers. So as far as absolute levels, they're relatively constant. David Marra: Yes. And then -- Ryan, this is David. I'll take the Melissa question. First of all, it is a CAT 5, a very powerful Cat 5 directed on Jamaica. So our sympathies are with the people in Jamaica as they work through this. It's too soon to put any number on it. We have a couple of locations and not a lot of exposure in the Cat book, but a couple of locations in the other property book. So we don't think it will be that anything of an outlier financial event, but too early to put a number on it. And it is still a live event that's going to the Bahamas next. So we'll be continuing that. We also -- in the Cat book, particularly, we don't write any of the local Jamaica companies. So we've already looked into that part of it. Operator: We'll take our final question from Tracy Benguigui with Wolfe Research. Tracy Benguigui: Interesting comments on demand, but you also mentioned that supply outweighs demand looking ahead into 2026. So this is more of a macro question rather than a run rate question specifically, but if you had to take an educated guess, how much of the $800 billion-ish reinsurance dedicated capital need to leave the industry, whether it be from like CAT losses or capital returns to get to a state of equilibrium? Kevin O'Donnell: That's a -- I don't know how to answer your question. I would say what we look at is what is the over placement programs, and maybe that is a barometer as to kind of what level of capitalization brings us back to a balanced market. I don't anticipate substantial over placement. So that would indicate that we're relatively close to balance. The fact that rates or forecast or our expectation is down 10%, would suggest we're relatively close to balance. So I think there's a bit of -- sometimes bringing together the amount of capital and then the appetite for risk. I think the appetite of risk is unlikely to be wildly disconnected from the increase in demand, which will be less than what it was last year, but still there. So I don't think we're far out of balance from a willingness to deploy into the market. So I don't think it's a matter of X billion dollars leaving the market, and then we're back in. It's really about the perception of risk, and what is the comfort level for deployment into peak zone, particularly property CAT. Tracy Benguigui: Okay. That was interesting. I understand the lot of property business that used to be underwritten by an insurer as a whole account backed by facultative reinsurance, and now that risk is being underwritten as shared and layered. So as a reinsurer, how is this trend impacting your opportunity set and relative pricing? Like I heard that some of the layers have different terms and conditions. David Marra: Yes, this is David. I think what you're referring to is a business that would go into our other Property segment or subsegment, you're right. CAT-exposed E&S business, a lot of that shared and layered, that's coming under competition. It's performed very well, but that competition for the large account E&S Fortune 1000 is where some of that is going on. That's a minority portion of our book. We also have positions in middle market, small commercial and homeowners. Overall, the book has performed really well. And like I think I said earlier, the favorable development we're seeing is a good example of how the terms and conditions that are on our portfolio are holding up really well. So there'll be some additional competition, but still optimistic with how that book is performing. Operator: And this does conclude the time we have for questions today. I would like to now turn the call back to Kevin O'Donnell for any additional or closing remarks. Kevin O'Donnell: Thank you for joining today's call. We hope the comments were helpful. We look forward to the renewal and talking to you after year-end. Thanks again for joining. Operator: Thank you. This concludes today's RenaissanceRe Third Quarter 2025 Earnings Call and Webcast. Please disconnect your line at this time and have a wonderful day.
Silvia Ruiz: Good afternoon, everybody. This is Silvia Ruiz speaking, and I would like to welcome you to Ferrovial's conference call to discuss the financial results for the third quarter of 2025. I'm joined here today by our CFO, Ernesto López Mozo. Just as a reminder, both the results report and the presentation are available on our website since yesterday evening, after the U.S. market was closed. At the end of the presentation, there will be a Q&A session. [Operator Instructions] Before starting, please take a moment to look at the safe harbor statement included in the presentation. And please bear in mind that the presentation contains forward-looking statements and expectations that are subject to certain risks and uncertainties, so actual figures may differ. Other than as required by law, the company assumes no obligation to update forward-looking statements. During this call, we will discuss non-IFRS financial measures, which are defined and reconciled to the most comparable IFRS measures in our results report. With all this, I will hand over to Ernesto. Ernesto, the floor is yours. Ernesto Lopez Mozo: Thank you, Silvia, and hello, everyone. Thank you for joining us today for Ferrovial's Third Quarter 2025 Operating Earnings Conference Call. Starting with the overview. I mean, in the first 9 months of 2025, we saw continued strong momentum across our business divisions. Our highways delivered outstanding revenue and EBITDA growth, fueled by our North American assets. Airports saw continued progress at New Terminal One at JFK. Here, we are now intensely focused on operational readiness. Construction maintained solid profitability with the adjusted EBIT margin reaching 3.7% in the first 9 months. On the financial side, net debt, excluding infrastructure projects, stood at negative net debt or net cash, let's say, EUR 706 million. The main cash inflows included EUR 406 million in dividends collected from projects and proceeds of EUR 534 million from the sale of AGS Airports in the U.K. and EUR 539 million from the sale of a 5.25% stake in AGS Airports. This was closed in July. The main cash outflows related to the acquisition of an additional 5.06% stake in the 407 ETR for the equivalent of EUR 1.3 billion and also equity injections of EUR 239 million in NTO. Shareholder distributions reached EUR 426 million in the first 9 months. We also announced a second scrip dividend and expect to submit the RFQ for the I-77 South Express project in North Carolina in December. As a reminder, we have already been shortlisted for bidding on the I-24, Southeast Choice Lanes in Tennessee and the I-285 East Express Lanes in Georgia. We expect to submit these bids in the first half of 2026. Let's move now into the operations with the slide on highways. And here, the U.S. highway revenue grew 16.4% in like-for-like terms in the first 9 months of the year and compared to last year, and adjusted EBITDA was up nearly 15.1%. 97% of the highways adjusted EBITDA and 88% of the highways' revenue come from the North American assets. Dividends from these North American assets in the first 9 months of 2025 totaled EUR 312 million, versus the EUR 420 million in the same period last year. I mean this reflects the strong growth and the cash generation of these concessions. As a reminder, in the first 9 months of 2024 included the first dividend from the I-77, which was an extraordinary amount of EUR 195 million. Let's move to the specific assets, the 407 ETR that delivered another outstanding performance this quarter. The traffic in the quarter grew strongly, 9.4%, and it grew 6.2% in the first 9 months of the year compared to last year. This growth reflects the success of targeted rush hour driving offers as well as the increase in mobility in the region from return to office mandates. The strong underlying traffic trends was the cost driving 18.6% revenue growth in the third quarter and 19.3% in the first 9 months. EBITDA surged 20.1% in the third quarter and 15.8% in the first 9 months. In terms of Schedule 22, 407 ETR reduced the 2025 Schedule 22 Payment Estimate. Given the new estimate is markedly lower than the previous estimate, the provision for the first 9 months is lower than the one recorded up to June. As a result, the 407 ETR recorded a CAD 9.8 million provision recovery in the third quarter, bringing the accrued provision for the 9 months to CAD 35.4 million. Promotions are working really well in incentivizing more efficient use of the road. Through these targeted offers, we continue to gain valuable insights into customer behavior. We expect our focus on demand segmentation to continue enhancing value for users and maximizing EBITDA growth. In terms of dividends, CAD 450 million has been paid in the first 9 months of the year. This is up 13% compared with the same period last year. And the 407 Board has approved a dividend of CAD 1.05 billion to be distributed in Q4. This is up 50% from last year's fourth quarter dividend. And this would bring the total amount of dividends approved for the 2025 year to CAD 1.5 billion. This is up 36% from 2024. Moving to the Dallas-Fort Worth Managed Lanes, Slide 6. We will start with NTE. And here, well, despite we see traffic impact from capacity improvement construction works, really, there's fewer vehicles in the corridor that has affected traffic declining 3.7% in the third quarter and 4.4% in the first 9 months of the year. The revenue per transaction has increased by a healthy 14.2% in these first 9 months. And this benefits from a favorable traffic mix that means more heavy vehicles in proportion and more mandatory mode events. The asset grew the adjusted EBITDA by 7.4% in the first 9 months, and this includes $1.3 million of revenue share in the third quarter and $4 million in the first 9 months. In LBJ, traffic grew 1.7% in the quarter and 1.5% in the first 9 months of the year. And this despite the impact of continued construction works in the surrounding roads and corridors. The revenue per transaction grew 8.7% in the first 9 months and the adjusted EBITDA grew 11.1%. Now with NTE 35W is the only Dallas-Fort Worth managed lane that is not impacted by construction works. Traffic in the third quarter grew 4.6% and by 4.1% in the first 9 months. This drove outstanding revenue per transaction growth of 12.0% in the third quarter and 10.2% for the first 9 months. The adjusted EBITDA that grew 11.8% in the first 9 months of the year included $4.9 million of revenue share in the third quarter and $14.8 million in the first 9 months of 2025. All the Dallas-Fort Worth assets, as you see, recorded solid revenue per transaction growth, and this is above the soft cap, benefiting from the favorable traffic mix that I mentioned, there's more heavy in proportion. And in the case of NTE and NTE 35 West, they are also benefiting from more mandatory mode events, which occur when tolls are temporarily forced above the soft cap to guarantee a minimum level of service. In terms of dividend distributions for the first 9 months, I mean, the figures at 100% participation would be $108 million for the NTE, $52 million for LBJ and $99 million for the NTE 35 West. There's no changes versus June. Please remember that these projects usually distribute dividends in June and December. Moving to management outside Dallas Fort Worth, we have the I-66 and the I-77. The I-66 saw exceptional traffic growth, 13.2% in the third quarter and 8.5% in the first 9 months of the year. And the revenue per transaction grew 12.1% in the quarter and 18.3% in the first 9 months of the year. This strong growth was driven by robust corridor growth, especially during peak times where we are seeing some benefits from greater enforcement of return to office policies. Really, this is happening across the U.S. and also Canada. This strong underlying traffic trends helped to drive the outstanding growth of 32.5% in adjusted EBITDA in the first 9 months of the year. The I-66 distributed $64 million in dividends in the first 9 months. The I-77 also saw traffic growth here, 1.5% in the third quarter despite adverse weather conditions, particularly in August. Revenue per transaction increased by a strong 25.7% in the quarter and 24.4% in the first 9 months. Adjusted EBITDA grew 21.1% in the first 9 months with $5.4 million of revenue share for Q3 2025, and this includes revenue share from extended vehicles. The revenue sharing, including extended vehicles, totaled $15.7 million for 9 months 2025 compared to $6.9 million in the first 9 months of 2024. And the I-77 distributed $22 million in dividends -- I mean, since the beginning of the year. Now let's move to the Airports division. At New Terminal One, we are making a steady progress towards operational readiness. The project remains on budget. In terms of schedule, we are discussing acceleration measures with the contractor to guarantee that the official opening date of June 2026 is achieved. Construction is 78% complete and we have commitments from 21 airlines. As a reminder from previous quarters, we achieved an important milestone in July, completing the refinancing of Phase A through the issuance of a $1.4 billion long-term bond. In Dalaman, we saw steady performance. Adjusted EBITDA growth in the first 9 months is supported by commercial upgrades and despite softer international traffic during the summer, that was affected by the geopolitical situation in the Middle East. In the first 9 months, traffic declined by 1.5%, yet revenue grew 2.9% and EBITDA 1.8%. Dalaman distributed EUR 7 million in dividends during the third quarter. This is Ferrovial's share. Now let's move to Construction, that keeps showing solid profitability. The division delivered a 3.7% adjusted EBIT margin for the first 9 months of the year, aligned with the long-term target of 3.5%. And it recorded a solid 4.2% adjusted EBIT margin in the third quarter. Budimex and Webber maintained a steady profitability with very healthy adjusted EBIT margins of 7.6% and 3%, respectively, in the first 9 months. Ferrovial Construction's adjusted EBIT margin was 1.7% in the 9 months, and this is down slightly versus the same period last year due to significant design activity in bidding for projects in the U.S. and costs related to digitalization and IT systems, while partially offset by increased margins in projects approaching completion. So these expenses should be for the good growth that we're seeing ahead. Our order book stands at EUR 17.2 billion at the end of September. This is up 9.1% in like-for-like terms from the -- compared to the close of 2024 December. The composition of the order book remains very healthy given the lower weight of large design and build projects with nongroup companies. It does not reflect approximately EUR 2.3 billion in contracts that are pre-awards or are pending financial close. And almost half of our -- half of our backlog is in our core U.S. and Canada market, we expect will continue to support future growth. Now let's move to the next slide, just to have a look at the main figures. You see the strong revenue and profitability performance for the first 9 months of the year. I mean, strong across the board, revenue growing 6.2%, adjusted EBITDA, 4.8% and adjusted EBIT by 6.0% in like-for-like terms. Let's move now into the consolidated net debt position. In the next slide, the net debt, excluding infrastructure project companies, as I mentioned in the introduction, was negative EUR 706 million or net cash of EUR 706 million at the end of the third quarter. This reflects a strong cash generation also disciplined investment and the impact of recent divestments. Here, we have the bridge where we see that we collected a strong dividends. Please remember, this figure does not include the latest dividend announced by the 407 ETR that will be paid in the fourth quarter. The cash flow from construction is affected by the lack of significant advanced payments during the first 9 months. You know that there's usually seasonality in construction. We expect to see a substantial improvement in working capital in the last quarter of the year. Then in this operating section, we also have tax payments that are mainly related to Budimex and to a lesser degree, construction projects in Australia and Canada. We also looking into the investment bucket, we see significant activity in terms of investments for growth. I mean, the main one being the 5.06% acquisition, additional stake in the 407 and also the equity injections in NTO. Just a reminder, NTO has no additional equity injections scheduled for the year. Additionally, in this block, we also reflect the interest received in cash and deposits, right? And also here, we reflect the divestments from the sale of Heathrow and AGS primarily. Then we have the shareholder distributions, including cash and share buybacks amounted to EUR 426 million. Here, we are on track, remember, to deliver across the years 2024 through 2026, EUR 2.2 billion in cash to our shareholders. So we are on that. And then we have the cash flow from financing activities related to external debt repayments, interest and so on and also the FX translation of the cash balances sheet. So it's a very solid net cash position. So let's move to the -- I mean, closing remarks I would like to make before moving into the Q&A session. Really, the performance in the first 9 months of 2025 demonstrates, I mean, shows the strength and resilience of our portfolio, the North American assets continue to drive growth, supported by increased customer segmentation and favorable market dynamics where the assets are located. Looking ahead, we're really looking forward to the attractive pipeline of opportunities in North American highways mainly. I mean, we expect to have bid submissions for the I-24 in Tennessee, I-25 in Georgia in the first half of 2026. And also at the end -- before the end of this year, the submission of the RFQ for the I-77 South in North Carolina. The construction order book remains healthy and the division ready to enable delivery on the growth opportunities that the infrastructure concession pipeline shows. Well, thank you, and let's move into the Q&A session. Silvia Ruiz: Thank you very much, Ernesto. Let's start with the Q&A session. Operator, please go ahead. Operator: [Operator Instructions] Our first question comes from Ruairi Cullinane from RBC Capital Markets. Ruairi Cullinane: First question on the NTO. What are the potential financial consequences in a scenario where there is a delay to the launch of Phase A? And secondly, the widening of operating losses in the other segment, was that just driven by the divestment? Ernesto Lopez Mozo: Okay. So well, as I mentioned, we are working with the contractor for the official opening date in June. If there were to be delays below -- I mean, beyond June, then the contractor will have to face liquidated damages. For us, delays in opening would mean that there's delay in the perception of revenues, right? But as I said, we are working on what's needed for the original opening. Regarding the other segments, yes, this plant, Isle of Wight was commissioned some months ago. Usually, when -- I mean, you have just commissioned some of the operations could be affected, right? So basically, we needed to invest to improve the ash removal from the chamber. And also, we delayed a little bit the ramp-up, right? So it's related to this commissioning and start-up of this plant. Remember that when we divested the whole services business. We mentioned that this part of waste treatment in the U.K. needed overhaul of the plants before divesting. So we've been doing that with all the plants. It was the last to be commissioned. And yes, we are now -- we would be exiting this business, let's say. Ruairi Cullinane: Great. Actually, could I just... Ernesto Lopez Mozo: Yes, go ahead. You're on the line. Ruairi Cullinane: Should we expect any impact from the U.S. government shutdown in Q4? Just one more question. Ernesto Lopez Mozo: Thanks. I mean, up to date, I mean, we haven't really seen any significant impact on the I-66. That is the one that is closer to Washington, not really maybe some tweak in traffic, but nothing significant in terms on revenue. So up to date, nothing. We'll have to monitor that, but we haven't seen anything. And regarding all the bidding processes are mainly carried out at the, let's say, state level. So that's not affected. And the only, let's say, federal agency involved here is [indiscernible]. So the process goes on as scheduled so far. Operator: The next question comes from Elodie Rall from JPMorgan. Elodie Rall: My first one is on Schedule 22. The provision reversal in Q3, I think, came a bit as a surprise. Maybe you can come back on what drove this reversal, if it's the fact that underlying traffic was a lot higher, promotions outperformed. And also what that means with regard to how optimistic you are with regard to Schedule 22 penalty decreasing to 0 maybe sooner? And what would be the time frame? And my second question is on the NASDAQ 100 inclusion. I was wondering if you could give us some color what you think about your chances to get in and the latest on that. Ernesto Lopez Mozo: Thanks, Elodie. Yes. So with the Schedule 22, several things. I mean, first of all, there's been more mobility in the area. As I mentioned with the U.S., it's also happening in Toronto. There's a clear mandate of return to the office. And you see in general congestion in the area. I mean one example is the 407 East that was the toll and has seen traffic jumps in the summer every now and then. So clearly, there's more mobility in the area. That's something that has helped. But the main driver has been that we've been positively surprised how accurate promotions have been, right? So all the heavy users remain using it as they were expected or even a little bit more and then the infrequent users are starting to use it, right? So really, the combination of our rush hour preposition being more valuable given what's happening in the area and really this segmentation, it has worked much better. I mean we don't make comments on basically how this could pan out in the future because, I mean, the product has to have all the quality that is needed. So maybe we see in the future Schedule 22. What is sure is that it's performing much better than the assumptions we had when we bought the additional stake. So we are super happy with this situation, but we won't comment on the projections of Schedule 22. And then regarding the NASDAQ 100, well, it's going to be determined at the end of November with all the relative market cap. So it's not for me to talk about chances. It will be performance and relative performance, right? So I won't comment on chances. I mean the good thing about NASDAQ is that all the criteria are very clear. Everybody can have their own bet, but it's not for me to make any, okay. Operator: The next question comes from Cristian Nedelcu from UBS. Cristian Nedelcu: On the ETR, you have the pricing for next year you will announce in November. I don't know if you can offer any color there. It seems that the backdrop is favorable. You have more mandates to the office, more congestion. And also, if we look at your last 5 years price increases in the context of the tariffs being frozen, you've been doing smaller price increases on average than pre-COVID levels. So I guess my question is any reason why the price increase will not be comparable with what you've done over the last 2 years in the ETR for 2026? The second question on the ETR our estimate, and please correct me if I'm wrong, but I think the discounts you're offering, this represents somewhere around $100 million, $150 million per year in discounts. Now we just discussed the S22 provisions are lower than we thought. Can you give us a bit of a directional steer into 2026? How should we think about these discounts? Should they be flat year-over-year? Or do you see reasons to increase them year-over-year or maybe decrease them? And the last one, if you allow me, on the I-66, I mean, we've seen double-digit volume growth in Q3, more returns office mandates. Could you talk a little bit about the development we've seen there on revenue per transaction actually decelerating versus Q2? What caused that? Is it mix or other factors? And to what extent this development in Q3 is sustainable for the next quarters? Ernesto Lopez Mozo: Thank you. Well, let me -- maybe I'll ask you to come back to some because there was a lot of explanation, very well crafted by the way. I mean let me start with the last one. I mean, with the I-66, we have to go back to 2024 to understand that it was in that quarter that we, let's say, insisted more on the dynamic pricing with the algorithms more flexibly looking at the opportunities there. So there was already, let's say, a bump or growth at that time. And then it seems like a deceleration, but really everything kind of started there has been building up throughout the year, right? But the algorithm keeps improving. Let's see how it performs going forward, but we are optimistic there. Then regarding the 407, as you say, discounts or so, we probably view it in a different way, right? And we look at the revenue and EBITDA growth, right? So some of these promotions are helpful to incentivize other trips, right? So yes, it could be seen as a discount or just a kind of loyalty or incentive. I mean what we focus in the end is out of all the noise that we have a solid revenue growth, client satisfaction, and we have proper segmentation, right? So I wouldn't be looking into discounts. I would be looking into the revenue growth. And then, I mean, I cannot comment on all the logic that you expressed, so thoughtful. Yes, I mean, we expect the 407 to have in terms of timing and announcement date similar to last year, the rest of the logic, I cannot tell, okay? So we will have to wait for that to be announced. Operator: The next question comes from Ami Galla from Citi Research. Ami Galla: Just a few questions from me. The first one was on NTO. If you could give us some color based on the agreements that you've had with the 21 airlines as to the broad framework of how should we think about fees and the revenue structure when you start operating? I appreciate it's early days, but if you can give us some ballpark estimates of how should we think about that, that could be helpful. The second question I had was on the managed lanes business. Where you've been operating -- you've had mandatory mode events. Were there any specific events or disruption in Q3 that drove that? Or was that a general increase in traffic that led to that? And last one was on the competitive backdrop. Any color as to how do you see competitive intensity across your markets on the contracting side? Ernesto Lopez Mozo: Okay. Thanks. Let me see if I can address those. If I mean, forget one, I will ask you again, sorry for that. So the first one regarding NTO airlines and ramp-up. I mean, we are really in a commercial sensitive stage, right? Ahead of the opening, you always have airlines coming ahead of some months before the opening. So that's been negotiated now. We cannot comment now. It's true that we -- I mean, we know we have to provide more information to the market that will have to be decided later on right now. As I said, the focus is operational, the first thing and commercial, okay? So we will have to update later on. Regarding the mandatory modes in the managed lanes, really, it's probably an effect of also more peak hour activity. As I mentioned before, across the U.S. in Toronto, we are seeing a very clear mandate to go back to the offices 5 days a week, and that drives traffic and also drives peak performance, right? So that also combined with a higher proportion of heavies, as we mentioned, has brought the demand at remote. Even though, as I said, there's less traffic in the corridor on the NTE, not NTE 35 was that is unaffected, right? So I mean, the explanation we have is what I mentioned, right? And then the last one, sorry, could you say again what was the third question? Ami Galla: It was more on construction and the contracting side. If you -- from a competitive perspective, are you finding it more difficult to win contracts at the margins that you are looking for? I mean, how is that backdrop in the current? Ernesto Lopez Mozo: No, I would say that in contracting, rather the contrary, I mean, there's more activity. I mean, the heavy civil works that is our focus normally remains as active as it has been. You also have on top of that all the data center activity. So the construction sector has more activity and there's no more resources or more competition in that regard, right? So we are not seeing, let's say, tightening in terms of people being super aggressive. It's very -- I think it's a rational market environment, if I may. Operator: The next question comes from Dario Maglione from BNP Paribas Exane. Dario Maglione: Three questions for me. One on the Texas managed lanes. You mentioned in the press release, there was a positive effect due to traffic mix. Can you tell us more about this? Is it both heavy vehicle and light trucks that have a higher share? And if you could tell us why this is happening? Second question, how far is the LBJ from hitting mandatory modes? Third question on the 407 ETR, going back to the incentives working very well. Can you give us some examples of these incentives -- and maybe more color on which ones are working best in your view? Ernesto Lopez Mozo: Well, thanks. Really, in terms of the traffic mix in the managed lanes, that has helped more heavy, that is a combination, probably not of the heaviest, but probably more on the other side, the lighter trucks or commercial vehicles that we can call it. I mean there's more. I mean, I cannot give you like a macro rationale of why this is happening. Maybe they are also keener to basically use our road in peak times given the -- I mean, the more intensity, right, that we are seeing because of the mandate back to the office, right? So I mean, the reality is that there is more. I don't have a cost effect that I can comment now. We keep looking at it. But right now, I cannot give you any specific one. Regarding LPJ, LPJ, really, there's more free lanes. So there's more capacity. And also, you have people that have avoided the corridor because of all the works in the surrounding roads, right? So yes, it's not expected anytime soon because of all these components that I mentioned. We will have to see going forward how much traffic comes back to the corridor and how growth happens. But no, we are not expecting any in the near term to have the mandatory modes. And then regarding incentives, I think that anything that has to do with the rush hour now with more the mandate back to the office is really appreciated. So I think that as always, it works well with people that work or live close to the road, right? So this is where the impact is always more effective. But I mean, I don't have any kind of specific segmentation to comment now, and this will keep evolving a long time. So we will be discussing this in the future. At the moment, what I say is just the value of the peak hour promotion is higher than what it was some time ago. Operator: The next question comes from José Manuel Arroyas from Santander. José Arroyas: Two questions, please. First one is on the potential to deleverage any of the managed lanes. I know there is a limit, which is the need to incur a refinancing gain if you do so, but I wanted to hear from you if you expect any of the managed lanes to pay dividends in excess of their underlying free cash flow anytime soon. And my second question is again on 407 ETR's promotions. I wanted to understand -- I understood a comment you made earlier, Ernesto. I think you said that the promotions are helping to increase customer segmentation. And I'm not sure how that's happening. And I was wondering if you are just alluding to the fact that the current tariff in 407 ETR has more segments than before. I wanted to understand your comment earlier about this. Ernesto Lopez Mozo: Okay. I will start with the -- I mean, yes, well, the first one, right, the leverage on the managed lanes. Yes, there's a possibility of relevering some of them, namely the I-66. Not short term, but also not far away, right? So clearly, in the coming years, there could be an opportunity there. In the 407 -- well, not much about 407 clearly, and that's very obvious. And in the rest of the Express Lanes, not at the project level. Maybe there could be some tweaking just outside the project level that we are exploring. But I mean, we will be commenting to the market when they are closer. I don't expect any short-term news there. Yes, the 407 has more headroom there. And then when I'm talking about segmentation, no, it's more than the current time frame and so on. I mean you have some people that have been infrequent users and you end up maybe providing some teasers, some promotions that make them travel more. So yes, you can do that and it's working, right? So if someone that you have understood that won't make more trips than a certain given amount, then the promotions are different for them, right, than for someone that can maybe increase some usage, right? So that's when we talk about segmentation helping is more in that regard. Yes, I think that was it, right? Operator: The last question comes from Marcin Wojtal from Bank of America. Marcin Wojtal: So I have a couple of questions. One is on the share buyback. I mean, you committed to return EUR 500 million through the buyback. I believe based on the last weekly disclosure, EUR 142 million has been spent. So should we still assume that this buyback is on track to be completed in full by the end of the mandate, which I believe is May 2026? And can you explain why is this buyback only being done through the U.S. line? Originally, I believe you were buying both through the European listing and the U.S. listing and now it's only going through the U.S. And my second question is regarding your business plan, which goes from 2024 to 2026. Should we expect a new business plan to be presented at some point in the next, let's say, 18 months? Ernesto Lopez Mozo: Yes. Thanks, Marcin. Absolutely, we are committed to the EUR 2.2 billion. You mentioned May 2026 is the end of 2026 that we will be delivering on the EUR 2.2 billion. We have some catch-up to do. We've also been wondering the mix of distributions and buybacks because we have to also help that liquidity is not, let's say, drained from the market, and you see that the U.S. needs a lot of liquidity. So yes, buybacks have been tiny. We need to catch up. So point taken. And it has been small and has been in the U.S., but it could be done elsewhere. So short answer is yes, we'll deliver. We have to catch up. It's not May, it's the end of 2026, but we are on it. Marcin Wojtal: I'm sorry, what about your business plan targets... Ernesto Lopez Mozo: I forgot about that. I mean Silvia was pointing that you're missing about the business plan. Well, we'll -- I mean, there's no decision yet, but yes, we will have to update the market. Also bear in mind that we have important bids that will be awarded next year. So yes, definitely, we will have to be getting in touch with you guys. There's no official date, nothing just in the calendar yet, but yes, we will have to update. Operator: We have a new question, and the question comes from Alvaro Lenze from Alantra Equities. Alvaro Lenze Julia: Yes. Just one quick question. We saw last week, I believe, a small acquisition in data centers. Just if you could run us again just to catch up on what's your strategy in data centers? I think you have been not very enthusiastic in the space compared to some of your peers. But I don't know if this acquisition signals that you see more opportunity? Or is there any change to your strategy in data centers? Ernesto Lopez Mozo: Yes. Thanks. Well, really, the acquisition is tiny. It adds capabilities, let's say, for the Construction division in data centers because it has capabilities -- the company acquired has capabilities in installation, data center maintenance management. So all these kind of works and capabilities are in general scarce in the market, and we are being demanded by our clients to deliver on this. So this is more related to the Construction division. Data centers, we remain opportunistic. It could be a good business. We go on a piecemeal approach so far. So no change there. Operator: There are no further questions at the conference call. I will now hand back to the Silvia Ruiz. Silvia Ruiz: Thank you, operator. So I have one question here from the webcast. This is from Miguel González from JB Capital. The question is, could you please explain the reasons behind the acceleration in highways headquarters and other costs? And do you expect this trend to continue in the coming quarters? Ernesto Lopez Mozo: Yes. And maybe I should have covered this in the presentation because I've seen some notes from analysts really highlighting this. Two things. I mean, one of them is comparing to last year, last year, we got the ST spend of roughly EUR 12 million from the SR 400 that we lost. So we got the ST spend and that was reflected in the Q3 of '24 overheads from Cintra. And now really, what we are doing is 2 things that are adding. We are spending or investing, you may call it that way, on the engineering for the bidding of the pipeline that is about to come and for bid. And then the other part is also IT that, of course, there's developments with all the evolution that we have in systems with AI and so that is really helping in revenues. But yes, it has this expenditure. So it's IT and bidding costs. And I think that both of them are for the good reason. Yes, I should have picked us in the speech, okay? So thanks for bringing this up. Okay. I think there's no further questions. So thanks for being with us. I think that the results are excellent. We're looking forward to meeting you and to the new developments in the business coming up. Thank you, and bye-bye.
Operator: Good day, ladies and gentlemen. Welcome to Pacasmayo Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this call is being recorded. At the conclusion of our prepared remarks, we will conduct a question-and-answer session. I would now like to introduce your host for today's call, Mrs. Claudia Bustamante, Investor Relations Managing Director. Ms. Bustamante, you may begin. Claudia Bustamante: Thank you, Rafael. Good morning, everyone. Joining me on the call today is Mr. Humberto Nadal, our Chief Executive Officer; and Ms. Ely Hayashi, our Chief Financial Officer. Mr. Nadal will begin our call with an overview of the quarter, focusing primarily on our strategic outlook for the short and medium term. Ms. Hayashi will then follow with additional commentary on our financial results. We'll then turn the call over to your questions. Please note that this call will include certain forward-looking statements. These statements relate to expectations, beliefs, projections, trends and other matters that are not historical facts and are therefore subject to risks and uncertainties that might affect future events or results. Descriptions of these risks are set forth in the company's regulatory filings. With that, I'd now like to turn the call over to Mr. Humberto Nadal. Humberto Reynaldo Nadal Del Carpio: Thank you, Claudia. Welcome, everyone, to today's conference call, and thank you for joining us today. I would like to start with a quick overview of our results for the quarter. We continue to see solid momentum in sales volume with a 9% increase compared to the same period of last year. This growth was driven mainly by stronger demand from infrastructure projects and a consistent performance in the Self-construction segment. Gross profit increased by 14.4%, reflecting the impact of our ongoing efforts to improve cost efficiency and strengthen profitability. These efficiencies transferred into bottom line growth as net income also increased 14.4% this quarter, reaching PEN 71.5 million this quarter and a very solid accumulated growth of 15.6% for the first [indiscernible] months of this year. Moving on to the progress of our strategy. We continue to be at the forefront when it comes to advancing innovative building solutions, developing those that promote more efficient, safe and sustainable construction. A prime example of this is an industrial langard that integrates prefabrication and B-methodology, technologies identified by the World Economic Forum as having the greatest transformative potential for our industry. This strong combination allows us to significantly reduce execution times, ensure operational continuity, enhance quality, minimize waste and strengthen the safety of our teams. In the same spirit of innovation and collaboration, we are working closely with Newmont and Bechtel Corporation in the construction of our water treatment plant at the Yanacocha operation. Treating acidic water in mining is essential for environmental sustainability, helping maintain a balance between economic development and responsible use of natural resources. By ensuring proper water management, we not only reduce environmental impact, but also preserve resources for future generations. Both of these projects are clear examples of how we are adapting our products and services to meet current and future demand, always, and I stress always with a client-centric view and aligned with our purpose. Our reputation is not built on words, but on actions. And this year, we once again demonstrated our consistency and purpose truly make a difference. For the third consecutive year, we proudly ranked among the top 10 companies in the American corporate reputation ranking, a recognition that affirms our commitment to responsible, transparent and always ethical management. Reputation after all is simply the result of what we do every day. We're confident that these positive results are only the beginning and the momentum we've built, we will continue to strengthen in the coming quarters because ultimately, our long-term success stems from a simple conviction doing what's right for our clients, our communities, especially for our country. I will now turn the call over to Ely to get into more detailed financial highlights. Ely Hirahoka: Thank you, Humberto, and good morning, everyone. This quarter's revenues increased 10.9% compared to the third quarter of 2024, mainly due to the increase in sales of concrete and pavement for infrastructure projects as well as bagged cement, reaching PEN 574.1 million. During the same period, gross profit increased 14.4% when compared to the same period of the previous year, mainly due to a decrease in cost of raw material on the above mentioned higher revenues. Consolidated EBITDA was PEN 160.6 million this quarter, a 3.9 percentage increase when compared to the same period of 2024, mainly due to the previously mentioned increased operating income. For the first 9 months of the year, revenues increased 7.3 percentage when compared to the same period of 2024. Gross profit during this same period also increased 10.5 percentage when compared to the same period of 2024, mainly due to lower cost of raw material, higher consumption of our own clinker as well as the operational efficiencies derived from our maintenance and production plan. Likewise, EBITDA increased 4.6 percentage when compared to the same period in 2024. Turning on to operating expenses. Administrative expenses for the third quarter of 2025 increased 20.2% when compared to the third quarter of 2024. Likewise, administrative expenses for the first 9 months of the year increased 18.7% when compared to the same period of the previous year. This increase was mainly due to higher personnel expenses because of the union bonus. Selling expenses increased 25.5 percentage during the third quarter of 2025 and 24% during the first 9 months of the year when compared to the same period of 2024, respectively. This increase was mainly due to higher advertising and promotion expenses, as part of our commercial strategy focusing on our product attributes as well as the union bonus mentioned before. Moving on to the different segments. Sales of cement increased 10.4 percentage this quarter when compared to the same period of last year, mainly due to increased demand. Gross margin increased 1.6 percentage points during the same period when compared to the third quarter of 2024, mainly due to lower cost of coal and energy. For the first 9 months of the year, results were similar with sales increasing 7 percentage and gross margin increasing 2.5 percentage when compared to the same period last year. During this quarter, concrete, pavement and mortar sales increased 26.3 percentage when compared to the same period in 2024, mainly due to increased sales of concrete for infrastructure projects such as the Tarata Bridge and the Yanacocha water treatment plant. Gross margin increased 2.6 percentage points this quarter when compared to the same period of 2024, mainly due to higher dilution of fixed costs. For the first 9 months of this year, sales of concrete, pavement and mortar increased 19.5 percentage, mainly due to increased demand for infrastructure projects. However, gross margin decreased 2.3 percentage points during the first 9 months of the year when compared to the same period of last year. Regarding precast materials, sales increased 23% this quarter when compared to the third quarter of last year and 11.6% during the first 9 months when compared to the same period of 2024, mainly due to a strong increase in sales of [indiscernible], the most profitable product within the precast line. Gross margin this quarter and during the first 9 months of the year was higher by 5.6 and 1.3 percentage points, respectively, compared to the same period of 2024. Moving on to our consolidated results. Net income for the period increased 14.4 percentage this quarter when compared to the third quarter of 2024 and 15.6 percentage during the first 9 months of the year when compared to the same period of 2024, primarily due to higher operating income, lower interest payments due to debt amortization and a favorable foreign exchange rate effect. Finally, in terms of debt, our net debt-to-EBITDA ratio was 2.5x as we continue to delever because of both higher EBITDA and debt amortization payments. To summarize this quarter, we continue delivering solid financial results, making the most of our favorable market conditions while managing costs in order to achieve profitability. Operator, can we now open the call for questions. Operator: [Operator Instructions] We have our first voice question coming from Marcelo Furlan from Itaú BBA. Marcelo Palhares: I have two questions. The first regarding volumes and the second one regarding capital allocation. So for volumes, you guys mentioned in the release that you guys expected an accommodation at least until April 2026 ahead of the federal elections. So I'd like to understand what to expect in terms of cement volumes performance in the country and then also for the company? And also what we expect after that? Do you guys still have an expectation or maybe it's too early to say after the elections, so could cement volumes evolve? And my second question regarding capital allocation is, what has driven the CapEx deployments to date? And what could we expect for -- in terms of for 2026? And also in terms of dividends, could we see maybe similar dividends or yield levels as you saw -- announced in October around [indiscernible] expect similar levels for 2026? So these are my questions. Humberto Reynaldo Nadal Del Carpio: Marcelo, thank you. I'm trying to answer your questions even though the line was kind of on and off. So I'm trying to figure out your questions. I'm going to try to answer. If I don't, please, you can try again to ask. In terms of volumes, this year has been very positive. I think the north is growing -- the north part of Peru is growing above the national average, which is pretty flat. But we think that the remaining quarter of this year should see the same level of activity. I mean, we mentioned Yanacocha, we mentioned Tarata, self-construction, they all seem to be pretty strong. When you -- and in general, there is a concern about the [indiscernible] coming next year, I think we've had 7 presidents over the last 8 years. We've had many elections going left, right, up, down, whatever. And it seems that 80% of the economy of Peru doesn't really care much about that. So we don't see really an impact of the election. We have a recently appointed President, he is pushing very strongly for the regional governments to spend the money they have left for the remaining part of the year. I read today that 50% is normal. At this point, being 9 months of the year, only 50% of the budget has been spent in regional government. So I don't see the electoral situation affecting too much, either self-construction or infrastructure projects. I don't really quite heard your second part, but I think it has to do with debt. I mean, if not, please correct me. And like Ely mentioned, I mean, we keep lowering our debt, both because we are paying the club deal that is -- we have 4, 5 years remaining and also because the EBITDA keeps being at a higher level. Like I said, communication was poor, if you want to rephrase the question, we can try that. Marcelo Palhares: Yes. The first question was answered. The second was actually related to the CapEx deployment to date. So with the CapEx deployments and what we expect in terms of for '26? And the second part of the question is regarding dividends, we could see similar dividend expected for '26 as we saw now announced in October? Humberto Reynaldo Nadal Del Carpio: Once again, I know what's wrong with your [indiscernible], but to do with the CapEx, I mean, our sustaining CapEx has remained around PEN 100 million, which is roughly around PEN 30 million over the last 2, 3 years, except for 2021 when we did kiln number four in Pacasmayo, that level should remain pretty steady. And I don't know if your questions have to do with dividends. I mean, we just announced a dividend last week in line with previous years, even though probably net profit will be up in the double-digit field for the rest of the year. We remain -- we decided -- the Board decided to keep the dividend PEN 190 million. I think in line with what Ely was mentioning, keep lowering the debt at the level-1 and we think it's a reasonable dividend yield and keeps everybody pretty much happy and the company financially very solid. Operator: So we are moving to the next question, which is a text question from Cesar [indiscernible]. Considering that electoral cycles often lead to a pause in private investment and shift in public spending priorities, how are you adjusting your commercial and operational strategy to sustain volumes and margins in an environment where project execution may temporarily slow down? Do you see opportunities to gain market share if other players reduce their activity? Humberto Reynaldo Nadal Del Carpio: Cesar, I mean, with all respect, I mean, I differ hear in your view of what happens in Peru in the electoral period. I think over the last periods, companies, private sector have learned that, I mean, we have to keep going. I just had a chance to write an article that will be published a week from now for a National [indiscernible] Association saying that private sector, and I mean the small entrepreneur all the way to a big corporation like us, we cannot stop. The country keeps going, the country keeps growing. We have elections every 5 years, but we change Presidents on average every 3 years. So we have to keep going. And I think this is part already on the decision-making process of companies. I mean, you see [indiscernible] going ahead. You see many announcements happening over the last 60, 90 days, and they're going all across election. So nobody is really waiting for the March elections because if you have a leading position, no matter what is your industry, if you decide not to invest, somebody else will do it. And in terms of opportunities to gain market share. I mean, we fight for our market share every single day, but it's election time and election time arrived is basically the same. As Ely mentioned, we have increased marketing expenses because we defend clearly our position in the market, but that is really independent of whether there's an election or not in the short term. Operator: Our next text question comes from Giovanni Sánchez from Prima AFP. Could you explain the extraordinary increase in financial income to PEN 8.7 million in the third quarter -- next text question comes from Mariane Goñ from CrediCorp Capital. Humberto Reynaldo Nadal Del Carpio: So I'm going to take it here, and there's a question from Giovanni Sanchez saying, could you explain the extraordinary increase in financial income to PEN 8.7 million in 3Q '25. Any guidance -- okay. That increase has to do fundamentally because we want to try [indiscernible] over mining royalties. This lasted, I think, over 10 or 12 years. And that meant an extraordinary income for us, and that's why the financial income changed. Any guidance for the last part of the year, like I said, I think volumes should remain strong. Usually, seasonality helps us in the second part of the year. So we're doing that. And in terms of 2026, a little bit too soon to tell, but we're optimistic that we will be seeing another year of growth next year. And the next question, I think, from Mariane Goñi from CrediCorp Capital. I answer the first part. In terms of margins for 2026, there's 2 parts of the question. I think the margin should remain steady for the coming year, even though volumes are going to grow. And relating the SG&A, there's 2 things here. I mean, we're going to keep being very strong in terms of marketing expenses because there's increased competition, and we like to defend our solid market share. And like Ely mentioned before, I mean, in terms of administrative expenses this year because we signed the 3-year union contract, there's a higher impact of the bonus we give our workers on the signed agreement. In the coming years, there's still a little part of it, but the amount would be lower. And the last question from Integra. Looking ahead, do you plan to maintain this level of marketing and promotional spending for this year to the coming year? Like I said before, I mean, this is -- we'll see what is -- there's always a plan for us, but we always act depending on what the competition does. We'll have to see what is the impact of what we are doing. But yes, we are very happy with the levels of this year. We have to bear in mind that we have increased our marketing expenses and our net profit is up 15%. So that's the idea. I mean, it's not so much how much we spend in marketing, but it's really paying off our strategy. And as far as it pays off, we will probably keep along the same lines. We're going to give one more minute in case somebody else has any additional questions. Operator: [Operator Instructions] Humberto Reynaldo Nadal Del Carpio: Thank you very much. We had some technical issues. On the first call we have done like a self-service, like a McDonald's Drive-Thru. And to close this, I would like to take a moment to thank you for your continued confidence and interest in our company. Peru faced many challenges and changes in the last decade. Progress is never a matter of chance, it's a matter of choice. It relies on the conviction of those who believe and continue to build even in difficult times, and we are among those. Cement embodies that conviction, turning belief into roads, homes and opportunities. Those of us who believe in the outstanding potential this country holds cannot step back, cannot be on standby. It is our responsibility to move forward, to invest, to innovate and to keep building its future. Thank you so much for your time today. And should you have any questions in the future, we will -- you know where to find us. Thank you, and have a nice day.
Operator: Good morning, and welcome to Nabors Industries 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 William Conroy, VP of Corporate Development and Investor Relations. Please go ahead. William Conroy: Good morning, everyone. Thank you for joining Nabors' Third Quarter 2025 Earnings Conference Call. Today, we will follow our customary format with Tony Petrello, our Chairman, President and Chief Executive Officer; and Miguel Rodriguez, our Chief Financial Officer, providing their perspectives on the quarter's results, along with insights into our markets and how we expect Nabors to perform in these markets. In support of these remarks, a slide deck is available, both as a download within the webcast and in the Investor Relations section of nabors.com. Instructions for the replay of this call are posted on the website as well. With us today, in addition to Tony, Miguel and me, are other members of the senior management team. Since much of our commentary today will include our forward expectations, they may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Such forward-looking statements are subject to certain risks and uncertainties as disclosed by Nabors from time to time in our filings with the Securities and Exchange Commission. As a result of these factors, our actual results may vary materially from those indicated or implied by such forward-looking statements. Also, during the call, we may discuss certain non-GAAP financial measures, such as net debt, adjusted operating income, adjusted EBITDA and adjusted free cash flow. All references to EBITDA made by either Tony or Miguel during their presentations, whether qualified by the word adjusted or otherwise, mean adjusted EBITDA as that term is defined on our website and in our earnings release. Likewise, unless the context clearly indicates otherwise, references to cash flow mean adjusted free cash flow as that non-GAAP measure is defined in our earnings release. We have posted to the Investor Relations section of our website a reconciliation of these non-GAAP financial measures to the most recently comparable GAAP measures. With that, I will turn the call over to Tony to begin. Anthony Petrello: Good morning. Thank you for joining us today as we review our third quarter results. We will highlight a number of positive accomplishments. In particular, we have completed the transaction to sell Quail Tools. This is a transformational development for our capital structure. I will start my remarks with details of this transaction. The terms of the deal are straightforward. On August 20, we sold the Quail business for a total consideration of $625 million. This amount includes a working capital adjustment. We received $375 million in cash at closing and a $250 million seller note, which was fully prepaid earlier this month. To be explicit, we have collected the entire proceeds. Next, I'll discuss the merits of the transaction. When we acquired Parker on March 11 of this year, we estimated its operations would generate full year EBITDA of $150 million. Quail accounted for about $143 million of this EBITDA. Further, we were confident we would realize cost synergies during 2025 totaling $40 million. Consideration for Parker consisted of 4.8 million shares of Nabors valued at $180 million, assumed net debt of $93 million and less than $1 million of cash. This valued the acquisition at $274 million. We estimated full year EBITDA of $190 million, including synergies. That translated to paying a very attractive 1.4x EBITDA. Now we have sold Quail for $625 million. We estimated Quail by itself would generate 2025 EBITDA of $150 million. With those metrics, we sold Quail for approximately 4.2x EBITDA. These valuations speak for themselves. Combining both steps of the Parker and Quail deals, it is important to note that we effectively sold Nabors shares at approximately $130 per share. Moreover, following the Parker transaction, we have completed considerable restructuring efforts. We now expect the non-Quail businesses that were earning $7 million of EBITDA to earn $70 million in 2026. For this remaining business, we effectively paid $94 million or about a 1.4x multiple. In the third quarter, we used the proceeds to pay down approximately $330 million of debt. Adjusting our quarter end capital structure for the subsequent repayment of the seller note, pro forma net debt stood at approximately $1.7 billion. This is our lowest net debt in more than 10 years. We expect to deploy the entire proceeds from the Quail sale to debt reduction. In summary, we effectively issued common shares at a 350% premium to the market. We are reducing net debt by more than 20% this year, and we retain a business portfolio that includes the leading casing running contractor in the Middle East. Now let me turn to our financial results for the quarter. Adjusted EBITDA totaled $236 million. This performance was better than the expectations we laid out in September after the sale of Quail. Several factors contributed to these results: improved performance in our International Drilling segment, increased EBITDA from our legacy Drilling Solutions, excluding Quail and lower corporate expenses as we realize additional cost synergies from the Parker acquisition. I want to highlight that our total EBITDA, excluding Quail, improved in the quarter. I am pleased with these accomplishments. They provide further confidence to our performance outlook in the coming quarters. Next, I'll address the broader market environment. Global oil prices reflect a combination of factors. Most recently, the U.S. announced sanctions targeting 2 of Russia's largest oil producers. There is also the potential for secondary sanctions. Crude oil prices reacted sharply to this announcement. Should these actions impact Russian production, we would expect global producers, including a number of our customers to step in. We are carefully evaluating the ultimate impact of this action and any lasting impact on commodity prices. However, there remain a number of conflicting issues, including recent actions and lingering uncertainty around tariffs, oil production increases, both inside and outside OPEC, reported excess inventories and higher demand outside of the OECD. The sanction announcement was positive for oil prices. However, there remains the probability that global supply could potentially exceed demand. This outcome was weighing on oil prices prior to the sanctions announcement. We believe the effect on our global drilling markets could be mixed. Each market has its own drivers. U.S. Lower 48 has evolved to a very short-cycle market. We would expect a rapid activity response to lower oil prices there. Domestic E&Ps remain focused on meeting their production goals. This focus, coupled with economic uncertainty, improved drilling and completion efficiency leads to a muted activity outlook in the near term. We believe that U.S. activity should begin to stabilize and could see an uptick in the latter part of 2026. This market is complex. Numerous factors have influenced. With our diversification across geographies, we expect our international markets would lessen the effect of any potential further short-term decline in the U.S. As for natural gas, the outlook remains constructive over the next several years as expected U.S. LNG exports ramp up. In addition, large-scale natural gas development in the Middle East and Latin America should help drive drilling activity. The gas-directed industry rig count in the Lower 48 has increased thus far in 2025. Nabors rig count in the gas basins has grown since February. Natural gas activity in the U.S. appears poised for further recovery over the coming quarters. We are prepared to meet that demand. Next, I will comment on our third quarter results. Adjusted EBITDA in our International Drilling segment increased sequentially by more than 8%. SANAD, our land drilling joint venture in Saudi Arabia, drove most of this growth. The other significant driver was Kuwait. The 3 previously announced rig start-ups there contributed to the segment's growth. Next, I want to spend a moment on Nabors Drilling Solutions. Excluding Quail, NDS' EBITDA increased in the third quarter. In the Lower 48, the average Baker Hughes land rig count declined by 5% in the third quarter versus the second quarter. NDS' EBITDA without Quail in the Lower 48 was up slightly. This outperformance compared to the market confirms the strong value proposition we have developed at NDS. Turning to Lower 48 drilling business. Our average rig count exceeded our guidance. Our average activity in natural gas basins increased slightly. Oil-directed activity, especially in the Permian, declined. We entered the third quarter at 60 rigs. We held in a tight range throughout the quarter. The quarter ended at the high watermark, 62. Since then, a few operators have released rigs. Recently, our rig casted at 59. Our Lower 48 business continues to feel some pressure. A number of clients, especially in the oil basins, are still adjusting their activity. Next, I'll discuss the international markets. Let me start with Saudi Arabia. Drilling and completions activity seems to have stabilized recently. A rebound in the near to medium term may also be possible. Aramco remains committed to increasing gas production capacity through 2030. The client there recently conducted a tender for onshore and offshore rigs. The potential number of rigs to be awarded is significant, considering the large number of suspended rigs. We believe awards on land could return as many as half of the number of suspended land rigs by the second half of 2026. SANAD participated in the tender with its suspended units. We should know the results in the next several weeks. In the third quarter, SANAD delivered strong results. It deployed another newbuild rig. With the balance of new build awards in hand, SANAD's future newbuild deployment schedule calls for 1 more in 2025, 4 in 2026 and 2 in 2027, which would complete the fourth tranche of new builds or 20 rigs in total. This solidifies SANAD's growth trajectory over the coming years. Elsewhere in the Eastern Hemisphere, there is potential for further activity growth. Currently, we are aware of approximately 2 dozen opportunities for additional rigs. Nearly 2/3 of those are in markets where we currently operate. This number is encouraging. These additions would support both industry utilization and pricing. In Latin America, our activity outlook in Mexico remains uncertain. We currently have 3 offshore platform rigs working. As it stands now, 2 of those 3 are likely to suspend work during the fourth quarter. This is reflected in our outlook. Our customer in Mexico continues to express interest in working these rigs. The rigs were specifically designed for its offshore platform requirements. However, the customers' initiatives to conserve cash are impacting its activity levels. Turning to Argentina. As we previously announced, we have 2 rigs scheduled to start in the fourth quarter. These are for 2 different clients. We have a third rig scheduled to start work in Argentina in the second quarter next year. These deployments would bring our rig count in Argentina to 13 in early 2026. Next, I'll comment on the U.S. market. The Baker Hughes weekly Lower 48 land rig count increased by 3 rigs from the end of June through the end of September. This apparent stability was a welcome shift in the market after the reductions completed earlier this year. Once again, we surveyed the expected drilling activity of the largest Lower 48 operators. The group accounted for approximately 42% of the market's working rig count at the end of the quarter. In the aggregate, these operators expect the rig count to remain unchanged through the end of 2025. Digging deeper, 8 of the 13 companies surveyed expect some change. This indicates widespread fine-tuning of activity up and down across the group. We see modest downside risk to our own current rig count through year-end. Now I will make some comments on the key drivers of our results. I'll start with our International Drilling segment. In this business, we consistently focused on long-term development markets that via technology and performance. With this approach, we have established a portfolio that includes operations in 12 countries. This breadth serves us well as prospects in individual markets can vary over time. Across multiple markets, we continue to start up previously awarded rigs. These included 1 rig in Kuwait, a rig in India, marking our return to that drilling market, and we added 2 rigs in Colombia. In Saudi Arabia, beyond the future additions I mentioned earlier, SANAD is already in discussions with its client for the fifth tranche of newbuild rigs. We expect these discussions to conclude in the coming months. This tranche will bring the total number of new builds to 25. The program calls for 50 rigs over 10 years. Once this fifth tranche is deployed, SANAD will be halfway to completing the industry's most compelling growth opportunity. I've said multiple times that the visibility afforded by the newbuild program is unmatched in the industry. With that, SANAD shareholders remain committed to realizing the value that is accumulating in the venture. Now I'll discuss our performance in the U.S. Once again, our geographic diversification across the major U.S. markets demonstrated its value. Adjusted EBITDA from our operations in the Gulf and in Alaska combined exceeded our guidance. Alaska, specifically the North Slope, remains constructive. LNG developments would improve this outlook. We're tracking multiple future projects there. As expected, our Lower 48 daily rig margins declined in the third quarter. The effects of continuing rig churn and progressively more demanding drilling contributed to an increase in our daily rig expense. Daily revenue in the Lower 48 also increased, though less than our costs. Before I move on, I want to highlight an important development during the third quarter. We deployed the most powerful rig in the Lower 48 for Caturus in the Eagle Ford. This rig, which we call the PACE-X Ultra is an upgrade to one of our existing X rigs. The PACE-X Ultra combines a 10,000 psi circulating system, 35,000 feet of racking capacity, 1 million pound mast and an upgraded high-torque [ Can ] rig top drive. We worked closely with Caturus to develop the PACE-X Ultra's specifications. The rig recently completed drilling its first pad. I am pleased to report that its performance exceeded expectations. It drilled its first 2 wells ahead of their targets. In particular, in the lateral, it averaged more than 240 feet per hour. As an upgrade to an existing rig, this is a cost-effective solution to drilling requirements that are beginning to exceed the capabilities of the existing industry fleet. We are optimistic that more will follow this one. Next, let me discuss our technology and innovation. On the PACE-X Ultra rig I just discussed, NDS deployed a full automation package and its integrated managed pressure drilling. It also provides casing running services. Looking more broadly, our penetration of NDS services on Nabors' own rigs in the Lower 48 increased. We averaged 7 services per rig. This is an all-time high. And on third-party rigs in the Lower 48, NDS revenue, excluding Quail, increased slightly. That increase came in a market where the third-party average rig count declined by 6%. These successes demonstrate the wide-ranging demand for the NDS portfolio even in challenging markets. Next, let me make some comments on our capital structure. Our highest priority is the reduction of our debt. The Quail transaction demonstrates our commitment to this objective. Our net debt now stands at the lowest level in many years. We are dedicated to making even more progress. Now let me turn the call over to Miguel to discuss our financial results in detail. Miguel Rodriguez: Thank you, Tony, and good morning, ladies and gentlemen. I want to start by reiterating my steadfast commitment to our goals to improve balance sheet leverage and strengthen our capital structure. Reducing our gross debt undoubtedly remains our top priority. Our organization is poised to continue performing at its maximum potential and delivering sustained value. Our financial goals and objectives will be set in a way that while ambitious and demanding are at the same time realistic and achievable. In addition, we have recently increased our disclosure around our business portfolio, especially SANAD, and we will continue to build on that progress. Today, I will review our third quarter results and outline our guidance for the fourth quarter. Then I will provide an update on the integration of Parker Wellbore. I will close with some comments on capital allocation, adjusted free cash flow and recent actions that have materially improved our capital structure. Third quarter consolidated revenue was $818.2 million, a decrease of $14.6 million or 1.8% sequentially. The divestiture of Quail Tools resulted in a reduction of $28.4 million compared to the second quarter. This was partly offset by continued growth in our International Drilling segment. Our consolidated revenue without the contribution of Quail grew sequentially. EBITDA was $236.3 million, representing an EBITDA margin of 28.9%, down 96 basis points sequentially. These results exceeded the expectations we laid out in September after the sale of Quail Tools. In absolute dollars, EBITDA decreased $12.2 million or 4.9% with the effect of the Quail Tools divestiture representing $16.7 million of the sequential decline. I want to highlight the strong performance recorded by our International Drilling and Drilling Solutions segments, excluding Quail. Total EBITDA without Quail grew sequentially. Now I will provide you with details for each of the segment's results. International drilling revenue was $407.2 million, solid growth of $22.3 million or 5.8% sequentially. EBITDA for the segment was $127.6 million, increasing $10 million or 8.5% quarter-over-quarter, yielding an EBITDA margin of 31.3%, up 76 basis points and 44.4% fall-through. Our average daily margin was $17,931, a sequential increase of $397 and was in line with the [ open ] bound of the guidance from our last earnings call. The improvement was mainly driven by stronger activity in our Eastern Hemisphere markets, including the deployment of a new build in Saudi Arabia for a total of 4 year-to-date, the deployment of a rig in Kuwait, totaling 3 rigs working during the third quarter and the start-up of a legacy Park rig in India. In addition, rig start-ups that occurred in Q2 contributed to our incremental revenue and EBITDA in the third quarter. The international drilling average rig count increased by more than 3 rigs to 89. Our quarter end exit rig count was 91. Moving on to U.S. drilling. Third quarter revenue was $249.8 million, a 2.2% sequential decline. EBITDA totaled $94.2 million, a decrease of 7.5%, resulting in an EBITDA margin of 37.7%. These results exceed the guidance from our last earnings call, mainly due to stronger performance in Alaska. Looking specifically at our Lower 48 business, revenue of $185.4 million decreased by $4.7 million or 2.5% sequentially, reflecting a decline in average rig count of 3.2 rigs to 59.2 rigs slightly higher than the open bound of the guidance range we provided during the last earnings call. We exited Q3 with 62 rigs operating and recently stood at 59 rigs. Despite the lower sequential activity as a result of moderating industry demand in the Permian Basin, revenue per day improved by $551 to $34,017, including $220 from reimbursable revenue with little to no impact on margins. Our base revenue per day remained stable in the quarter in our most recently signed contracts, expected daily revenue remains at the low $30,000 range. Average daily rig margin was $13,151, a decrease of 5.4% sequentially, driven primarily by lower activity, labor inefficiencies and cost absorption related to higher-than-expected activity churn in the latter part of the quarter and higher repair and maintenance expenses as a reflection of harsher drilling conditions on several of our rigs. Turning to Alaska and U.S. offshore. On a combined basis, our Alaska and offshore drilling businesses generated revenue of $64.4 million in the third quarter a 1.4% decrease sequentially. EBITDA was $28.4 million, generated at 44.1% margin, essentially in line with Q2. Our Alaska drilling operations remained strong in the North Slope. Our Drilling Solutions segment generated revenue of $141.9 million in the third quarter and EBITDA of $60.7 million, resulting in a 42.7% margin. Quail Tools revenue and EBITDA for the third quarter were $34.2 million and $20.3 million respectively. Normalized for the sale of Quail Tools, NDS EBITDA increased modestly versus the second quarter. Notably, NDS EBITDA margin without Quail reached 37.5%, an improvement of 79 basis points sequentially, reflecting growth in casing running and performance software in the U.S. Now on to Rig Technologies. Revenue was $35.6 million in the third quarter, a sequential decrease of 2.5% and EBITDA was $3.8 million, down $1.4 million from the prior quarter. The decline reflects reduced demand for aftermarket offerings in the current market environment. Next, let me outline our expectations for the fourth quarter with total EBITDA to be essentially in line with the third quarter, excluding Quail. Turning first to U.S. drilling. As previously highlighted by Tony, given the outlook and market conditions for the next few quarters, with activity anticipated to remain relatively steady from current levels, we cautiously expect the average rig count in our Lower 48 drilling business to be in the range of 57 to 59 rigs for the fourth quarter. Daily adjusted gross margin is anticipated to average approximately $13,000. We foresee some decline in our average daily revenue as we renew contracts at leading-edge day rates that are lower than the third quarter average. We also expect a slightly lower OpEx. For Alaska and U.S. offshore drilling combined, we expect additional scheduled maintenance days in the quarter with EBITDA of approximately $25 million. International drilling average rig count is projected to be approximately 91 rigs. This mainly reflects 1 newbuild deployment in Saudi Arabia, 2 rig deployments in Argentina, partially offset by up to 2 rigs in Mexico potentially being suspended temporarily following activity and budget allocation uncertainty. We expect daily adjusted gross margin in the $18,100 to $18,200 range. Drilling Solutions EBITDA is expected to be approximately $39 million, reflecting a full quarter without the Quail business and some marginal decline in the Lower 48 market. Finally, Rig Technologies EBITDA should increase sequentially to $5.5 million, mainly from committed capital equipment deliveries. Let me now provide an update on our integration of Parker Wellbore, which is progressing in line with our expectations. Following the sale of Quail Tools, Nabors retained the balance of the Parker Wellbore operations. These retained businesses seamlessly integrate in our Nabors portfolio and are expected to produce approximately $55 million of EBITDA in 2025 post acquisition and including synergies. We continue to realize synergies as planned from cost savings related to overlapping administrative functions, procurement efficiencies and redundant facilities. These initiatives are and will continue generating incremental EBITDA and cash flow, and we remain confident in delivering $40 million in cost synergies in 2025. Based on our estimated EBITDA for the fourth quarter of 2025, this should translate into more than $60 million of cost synergies in 2026, with an estimated EBITDA from the retained businesses of $70 million. In summary, we are very pleased with the smooth progress of the Parker integration and robust realization on synergies in line with our plans. The combined organization is ideally positioned to continue delivering both operational and financial benefits in the coming quarters. Next, I would like to discuss our CapEx, adjusted free cash flow and liquidity. Then I will conclude with details of how the Quail transaction has transformed our capital structure and reset our financial flexibility. Total capital expenditures for Nabors in the third quarter were $188 million, including $81 million related to the SANAD newbuild program. Total CapEx in the second quarter was $199 million. For the fourth quarter, we are currently targeting capital expenditures between $180 million and $190 million. As a result, we are now revising our capital expenditure outlook to be slightly up in the range of $715 million to $725 million, of which approximately $300 million support the newbuild in Kingdom program. The slight increase from our previous guidance accounts for the earlier-than-anticipated successful deployment of our PACE-X Ultra rig in the Lower 48 market and other key automation projects planned for some of our rigs. From these and other drilling projects, we expect to receive upfront payments from our customers of approximately $9 million during the fourth quarter, bringing the total upfront receipts to approximately $42 million for the year, all of which are related to long-term contracts. Although we are not ready to offer capital spending guidance for 2026, we don't expect it will come down from the 2025 levels. This will be largely attributable to approximately $60 million of new build milestones originally planned for 2025, moving to 2026. We will provide firm guidance during our fourth quarter earnings call. During third quarter, we generated adjusted free cash flow of $6 million. This accounts for the negative impact of approximately $18.2 million on our adjusted free cash flow from the divestiture of the Quail Tools business. In addition, our collections from Pemex were only $12 million, falling short of our expectations by more than $13 million. During the third quarter, PEMEX implemented payment mechanisms targeted to address revenue earned during 2025. In October, we received $11.2 million under this mechanism, and we expect more robust collections over the remainder of Q4. There is no structure yet available to resolve the outstanding services from 2024. There is progress being made by PEMEX, although it is very slow based. We expect adjusted free cash flow in the fourth quarter to be approximately $10 million, considering timely settlement of outstanding receivables related to our 2025 operations in Mexico. We continue to work relentlessly with our customer to invoice and collect for our 2024 services. However, we have not considered these amounts in our fourth quarter guidance. These delays represent a timing factor in our adjusted free cash flow estimates. On a full year basis, we expect our adjusted free cash flow to be breakeven. The primary drivers of the variance from our full year guidance of $80 million are the impact of the Quail divestiture for the remainder of the year after the sale, totaling approximately $56 million and the outstanding collections from PEMEX related to 2024. These are partly offset by proceeds from sales on noncore assets associated with the Parker Wellbore acquisition in excess of $40 million, most of which have already been realized in prior quarters. Out of our full year estimated adjusted free cash flow, we expect SANAD to consume approximately $70 million with around $45 million to be consumed in the fourth quarter. Excluding SANAD, the rest of our business units are expected to generate $70 million of adjusted free cash flow for the full year with approximately $55 million in the fourth quarter, the strongest free cash flow generated quarter of the year. In addition to my earlier comments and the remarks made by Tony on the Parker and Quail transactions, each exceptional and transformative in their own merits, I would like to highlight the significant accomplishments we made during the third quarter regarding our capital structure and next steps. In August, we completed the sale of Quail Tools for a total consideration of $625 million, inclusive of the working capital adjustment, consisting of $375 million in cash received at closing and a $250 million seller financing note. We immediately applied the cash proceeds to repay all outstanding borrowings under our revolving credit facility. And later in the quarter, we redeemed $150 million of the notes due in 2027. Subsequent to quarter end, we received full prepayment of the $250 million seller note, well ahead of its scheduled maturity. We intend to deploy these proceeds to further reduce gross debt, concentrating on our outstanding notes maturing in 2028. In addition, we plan to refinance our 2027 outstanding notes. Taken together, these actions reflect our unconditional commitment to improve balance sheet leverage and to strengthen our capital structure. Our net debt leverage metric at the end of the third quarter and accounting for the receipt of the $250 million seller note on a pro forma basis stands at 1.8x, which is the lowest it has been in more than 10 years. I am looking forward to meeting more of you and helping you gain a further understanding of Nabors. With that, I will turn the call back over to Tony. Anthony Petrello: Thank you, Miguel. I will finish this morning with a few points. First, the Quail transaction has enabled a significant transformation in our capital structure. Now we are looking at opportunities to decrease debt further. In addition to improving our capital structure, we expect to materially reduce our annual cash interest payments that should result in a boost to our free cash flow. Second, we have seen recent relative stability in U.S. drilling activity, our own and the industries, but we also recognize some uncertainty in the global macro environment. We are prepared to adjust our operations accordingly. Third, our international business continues to demonstrate its value, highlighted by the continued expansion at SANAD. Each successive new build deployment adds material cash flow through the joint venture. As a result, value is building in SANAD. The next tranche of new builds will take that value even higher. And our growth across markets beyond the Kingdom highlights our success in expanding our broad-based international franchise. That concludes my remarks. Thank you for your time this morning. We'll now take your questions. Operator: The first question comes from Dan Kutz with Morgan Stanley. Daniel Kutz: So, maybe just on the U.S. Lower 48, appreciate all the color that you guys shared in terms of your own views and customer views on where you think activity trends from here. I guess, against that activity outlook, how would you -- anything you'd share beyond the fourth quarter on kind of daily revenue and cost or margin trends, assuming that the kind of broadly flat activity outlook that you guys shared would play out as you guys see it? Anthony Petrello: Sure. Yes. I think one thing to note, if you look at our numbers for this quarter, our daily revenue actually increased sequentially by about [ $500 ] per day. That was as a result of performance bonuses under contracts where we're trying to have operators recognize more of the value of what we're delivering because of the record times. So obviously, that's an objective for us going forward in the year. Now the net result of that, as became clear from Miguel's comments about our cost structure is because of the churn in the last quarter, that did not drop to the bottom line. In fact, it was more than offset I think looking forward, one of the objectives, and I'll let Miguel talk to it on operating expense is to actually make sure that more of that does drop to the bottom line and the priority is to actually make more realization from that as a mission going forward as well. So that's how I would say it. Miguel Rodriguez: Yes. Thank you, Tony. So, one thing that I will add is that one thing that encourage us actually is the fact that we have seen the daily revenue on a leading edge basis to be fairly stable over the past several quarters. So, at around the low $30,000 per day. Right now, when we look at the fleet, we are maybe around $700 away from that level. As the rig fleet reprices, once we get there, basically, we will be talking around a gross margin per day of $13,000. That's the reason why we are guiding our fourth quarter to be at that level, combined with a decline in the OpEx. So in terms of the activity levels for the quarter, we saw a lot of churn in the latter part of the quarter. We expect some level of churn to remain in Q4. But once we reach the low $30,000s in terms of daily revenue per day, excluding reimbursable items, if you will, I feel very strongly that the drilling team will be able to maintain the $13,000 per day going forward. We will see some erosion in pricing a little bit from current levels in Q4. From there, we should not see major pricing erosion, absent a bigger decline than what we are anticipating for the following quarters. Daniel Kutz: Great. That's all really helpful. And then maybe going to the comments around Saudi onshore activity, kind of 2 components of the question, one at the macro level and then one specific to Nabors. So of the -- and correct me if I'm wrong, but I think maybe there's been 30 or 40 onshore rig suspensions and against your comment that there's tendering activity and potential for as much as half of those suspended rigs to come back. Any sense for how much of that could actually be net activity adds versus just bringing back suspended rigs when other rigs roll off of contracts in the Kingdom? And then specific to Nabors, I think there were 3 at least rigs suspended. Wondering if you guys are participating in the -- in the tendering? Or anything you could share about potential for those to go back to work? Miguel Rodriguez: Sure. I mean, look, overall, I mean, since the start of the suspensions in 2024, on a cumulative basis, we have seen in excess of 80 rigs being suspended in land, right? We are not commenting about offshore here, but in land, we are talking about cumulatively around 80 rigs. A number of rigs have been added on unconventional projects here and there. But what we are hearing actually from the market is that Aramco may be contemplating to add back probably around 50% of the cumulative suspensions, right? So, a tender has been issued. A number of drilling contractors have responded to this tender. The customer is evaluating as we speak. And we will know the results probably during the course of Q4. The expectation or what we are hearing from the market is that potentially 50% of the suspended rigs will come back to work, right? Anthony Petrello: Yes. Just also realize that of the 80, 21 have actually come back online during the same period. So the net number down is 59. Miguel Rodriguez: That's right. Anthony Petrello: So, that's what he is talking about. And then there's -- and you're correct about 3, SANAD has 3. And as we indicated, we'll find out what happens with our rigs as well. Miguel Rodriguez: Of course, I mean, we answered to the tender for our 3 rigs, and we are waiting on the results. Operator: Next question comes from Derek Podhaizer with Piper Sandler. Derek Podhaizer: Maybe still going on the last conversation, the question Dan brought up about Saudi. I'm just curious kind of the philosophy around Aramco and these new tenders and bringing back some of the suspended activity. Is there anything different this time around versus prior cycles? Just thinking about the requirements around the rig, maybe through like a technology lens. I mean, I think there's going to be more gas development, more unconventional development, trying to bring that Western technology over to Saudi. Tony, you've been through many cycles. Like have you seen any difference now in the tendering and what they're looking for versus historically? Anthony Petrello: Well they're slow to move in terms of changing their requirements. The Schedule G requirement is still out there, and they haven't made a change to that yet. But we do -- we are aware that the fact is that because of stuff that we presented to them as well as others, that they are looking at introducing more technology there. That doesn't necessarily mean different rigs, but changes to the rig with automation and software and other things like that. So there is an interest on that. And that only applies to Saudi, that applies to also the ADNOC operations to Kuwait as well. The whole region is realizing that if they really want to get a quantum change level in performance, they have to start actually doing some things differently. But in terms of specifics on rigs themselves, I would say no. And Nabors has 80% of its fleet in SANAD is gas directed. So we're well positioned with the shift to the gas market to be -- to serve that. I think the other point is we have in the pipeline, we mentioned the or automation on the Caturus rig for the U.S. on the shale. That philosophy there is similar to what we did with the X rig back in 2011 when we announced the X rig, you remember that was the first pads specific rig and back then where we had the pump capacity, the power, and we also introduced the notion of XY walking rigs. remember the whole debate whether you needed that versus slide rigs. And I think we were saying XY or need in that slide. Anyway, the cannabis rig is a new paradigm to do that. And that rig has automation -- an automation package that's going to go in. And that kind of automation package, Saudi, the Saudi market is now looking at as well. In fact, we have a contract to actually to deploy an upgrade to our existing fully automated rig with our one major customer here in the U.S., and we have 2 other customer contracts lined up, including in the Middle East for that as well. So the changes our foot, I would say, if that's a long way of getting to your answer, but that changes our foot along the lines you're talking about. Derek Podhaizer: Got it. No, I appreciate all the color. It's very helpful. So obviously, a lot of detail in the opening comments. Just want to hone in on the leverage levels here. Obviously, exciting to see you guys at 1.8x on a pro forma basis, lowest in 10 years. So where could we go from here? Just thinking about the different levers that you could pull to continue to delever the balance sheet. Obviously, you'll be saving $45 million in interest expense annually. And just thinking about the ability to pull cash out of SANAD. Obviously, we'd love to see more collections out of Mexico. You have organic free cash flow generation ex SANAD new build. Just maybe help us understand the different levers you expect to pull over the course of next year, just considering that you don't see CapEx being down year-over-year? Just trying to think about where this $1.8 billion can go to over the next year or so. Miguel Rodriguez: So this is an excellent question to be very honest. I mean, first of all, I mean, when we talk about the 1.8 on a net leverage basis, I think in the next few months, you will see that our gross debt will move from the $2.4 billion to around the $2.1 billion because we plan to really use the $250 million proceeds to pay down some of our outstanding notes. Now going from the 1.8x forward and the CapEx, although we are not very ready to provide guidance, as I mentioned before, one thing that you need to consider is the fact that the SANAD CapEx will be the one going up in terms of the milestones. That said, in 2026, we should expect some reduction in the CapEx in the rest of the Nabors businesses, which should, everything being equal, free up additional cash flow from the rest of the business. One thing that I wanted to point out very clearly in the cash flow of 2025 and potentially beyond is that when you think about the breakeven cash flow of the consolidated Nabors, that includes SANAD are around $70 million, which means that the rest of the Nabors businesses post the sale transaction of Quail are going to generate $70 million, 7-0. Most of that will happen in Q4. On an adjusted basis, if you remove the impact of the Kingdom Bricks, the Nabors consolidated businesses are generated around $300 million, which I will say is equivalent to a 30% free cash flow conversion, which I believe is very, very strong for a drilling contractor. And we are choosing together with Aramco, obviously, to reinvest the standard cash flow into the business for longer-term or 10-plus year contracts. That's the decision that we have made in terms of SANAD for the Kingdom Bricks and the future of the Saudi business there. That said, we expect the rest of the Nabors businesses to continue to generate cash flow and use the proceeds really to continue to pay down debt from here. Where are we going to stop? I think Tony and I want to take the company on a net debt basis to something around the $1.1 billion, $1.2 billion, nothing lower than that. So we are absolutely in the right trajectory. We are not done yet. Anthony Petrello: Yes. In this climate, by the way, it's kind of interesting. We were asked that question 15 years ago, what my number was -- was always 2:1. And obviously, the world has changed and the way people think about it has changed. But what's also changing, I think now based on the press this point with Mr. Gates and his view on climate change is the concept that this industry doesn't have a half-life of 2030 anymore. People are starting to realize that if you're going to build x 100 gigawatts a year of power, 10 gigawatts more a year of power or 100 gigawatts more power than the new number is, that means natural gas can be a part of it. That means we're going to be a part of it, and that's going to go on for a long time. And therefore, I think the whole way we're thinking about capital is going to start to change as well. So I would just say that, which also means that you all need to really think about your terminal value multiples for valuation for the whole sector. Miguel Rodriguez: There you go. Anthony Petrello: I'm just going to get that out there. So... Operator: The next question comes from Arun Jayaram with JPMorgan Chase. Arun Jayaram: Tony, I want to get your insights on if Saudi is going to be bringing back a decent chunk of the previously suspended rigs. Any insights on what you think is driving that? Is this to rebuild productive capacity in the Kingdom, stem declines but I assume this is on the oil side, but just one of the more unique data points we've heard in earnings season, so I want to get more thoughts from your perspective. Anthony Petrello: I think it's more on the gas side. And remember, on their gas production, they get an extra bonus because there's a lot of condensate that comes out of that gas. And economically, that gas -- that condensate doesn't count against the oil quota as well for the OPEC requirements. So you get kind of a double bonus there. I think Saudi, I won't pretend to know anything inside because you guys all have multiple sources that you're hearing about Saudi, including the big 3 guys. But I mean, from my point of view, they are always the first mover. And so they're looking at a market basically in 2027, and I think they're realizing and coming to conclusion, whether it's to build their extra capacity or to ensure that the curve -- the decline curves that they're having are met, whatever those are, they're preparing for a 2027 event. And I think that's what's really going on, and they're moving before the market is moving. And so from that point of view, I think it's a good sign if they actually go through with it. We'll see whether -- how much they go through it. Like I said, this is just what the talk is right now from our perspective. But we know these concrete receipts have been done. And therefore, it is a positive development, I think a positive signal for at least 2027. Arun Jayaram: Great. And then, Tony, I just want to get your broad thoughts on the growth in unconventional activity outside of North America. Maybe you could give some insights on what you're seeing kind of around the globe. You mentioned in Argentina, you're up to, what, 13 rigs or so, at least on the contracted basis. Algeria is obviously spot. But just wanted to see if you could shed some more light on that. Anthony Petrello: Well, I think, you hit me on the head. I mean, Argentina, I think, is a great story with the elections -- with the change -- with the elections now over, I think whatever instability there was associated with that, I think it settled. And I think even ourselves with the 13, we see additional growth opportunities in Argentina. Algeria is another story. But oh, by the way, back in Argentina, I think actually that may -- they may actually be looking at becoming an LNG exporter market as well. So just giving you some insight there. I think Alaska, potentially gas up there could be a good story, including for an export market if they figure that out. And Algeria and the Middle East is for sure. So I think there's many signposts around the world right now where the gas story is real. And given what's happening on the whole power thing. You saw the announcement with Google in terms of their power data needs, et cetera. And all these guys are now saying they're not making the requirement anymore that they realize they can't get there with renewables, and therefore, they're all realizing natural gas is going to be part of it. So, I think that's going to drive a wholesale move around the world everywhere for natural gas from my point of view. Operator: That's all the time we have for questions today. I would like to turn the conference back over to William Conroy for any closing remarks. Please go ahead. William Conroy: Thank you, Asha. If there are any additional questions, please reach out to us directly. With that, we'll wind up the call here. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings, and welcome to Regency Centers Corporation Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Christy McElroy. Thank you. You may begin. Christy McElroy: Good morning, and welcome to Regency Centers' Third Quarter 2025 Earnings Conference Call. Joining me today are Lisa Palmer, President and Chief Executive Officer; Mike Mas, Chief Financial Officer; Alan Roth, East Region President and Chief Operating Officer; and Nick Wibbenmeyer, West Region President and Chief Investment Officer. As a reminder, today's discussion may contain forward-looking statements about the company's views of future business and financial performance, including forward earnings guidance and future market conditions. These are based on management's current beliefs and expectations and are subject to various risks and uncertainties. It's possible that actual results may differ materially from those suggested by these forward-looking statements we may make. Factors and risks that could cause actual results to differ materially from these statements may be included in our presentation today and are described in more detail in our filings with the SEC, specifically in our most recent Form 10-K and 10-Q filings. In our discussion today, we will also reference certain non-GAAP financial measures. The comparable GAAP financial measures are included in this quarter's earnings materials, which are posted on our Investor Relations website. Please note that we have also posted a presentation on our website with additional information, including disclosures related to forward earnings guidance. Our caution on forward-looking statements also applies to these presentation materials. As a reminder, given the number of participants we have on the call today, we respectfully ask that you limit your questions to one and then rejoin the queue with any additional follow-up questions. Lisa? Lisa Palmer: Thank you, Christy. Good morning, everyone. We're proud to share another quarter of outstanding results, highlighted by strong same-property NOI growth and earnings growth. These results reflect the continued success of our team in leasing space, commencing our SNO pipeline and driving rents higher amid robust operating fundamentals and strong demand at our shopping centers. Our tenants remain healthy, which is evident in sustained sales strength and historically low bad debt. Our earnings growth is further amplified by the successful execution of our capital allocation strategy this year. Our investments team has accretively deployed more than $750 million of capital into high-quality opportunities, including acquisitions, ground-up development and redevelopment. By year-end, we expect to have started around $300 million of projects, bringing total starts to an impressive $800 million over the past 3 years. I am so proud of our team for this accomplishment. I'll let Nick talk in just a few minutes about the specific development projects we started in the third quarter, but I want to emphasize again how ground-up development is truly a key differentiator for Regency. We are the only national developer of grocery-anchored shopping centers at scale in an environment of otherwise limited new supply. We are building the types of assets that we would acquire, and we're doing so accretively and with manageable risk, creating meaningful net asset value with yields well ahead of market cap rates. Given our exceptional results and a continued strong fundamental backdrop, we are raising our full year earnings growth outlook and reflecting that strong performance, increasing our dividend by more than 7%. Our strong and consistent track record of dividend increases over time is very important to us in driving total shareholder returns while also maintaining a substantial level of free cash flow. Before turning it over to Alan, I want to say again how proud I am of our team's performance this year. And as we look ahead, we believe our competitive advantages position us well to drive sustainable cash flow growth from our essential grocery-anchored shopping centers in suburban trade areas with strong demographics to our leading national development platform, strong balance sheet and the best team in the business. Alan? Alan Roth: Thank you, Lisa, and good morning, everyone. Our team did an incredible job producing another quarter of outstanding results, growing same-property NOI by nearly 5% with strong base rent growth as the primary contributor at 4.7%. This outperformance is a culmination of a record amount of new leasing in recent years and accelerating rent commencement from our SNO pipeline, combined with favorable bankruptcy outcomes and historically low levels of bad debt. Our tenant base is healthy. And across our portfolio, we continue to experience significant demand from nearly all retailer categories and for both anchor and shop spaces. Our same-property percent leased rate sits at 96.4%, and we remain confident that we can exceed prior peak levels in this favorable retail environment with limited new supply and sustained strong demand for our high-quality space. Looking ahead, our leasing pipeline is robust, fueled by interest from vibrant restaurants, leading health and wellness brands, off-price retailers and, of course, our best-in-class grocers. In fact, we signed 3 new grocer leases in the third quarter alone, unlocking exceptional redevelopments that will drive enhanced merchandising and better foot traffic to these assets, all at highly accretive returns. Our same-property commenced rate increased by 40 basis points in the quarter to 94.4%, with 8 anchors rent commencing, including several key openings at redevelopment projects. At our hub at Norwalk asset located in Fairfield County, Connecticut, the long-awaited Target opened in the quarter to strong crowds. We also opened a brand-new Publix at our Cambridge Square asset in Atlanta and a Nordstrom Rack at our Pine Ridge Square Center in South Florida. All of these retailers reported exceptional openings, and we couldn't be more pleased with the upgraded merchandising and success we've seen at each of these projects. While we've made meaningful progress converting our SNO pipeline into lease commencements, we are also actively backfilling our pipeline with newly executed leases. Our 200 basis points of pre-leasing now represents approximately $36 million of signed incremental base rent. Additionally, we have another 1 million square feet of leases in negotiation, representing visibility to continued strong leasing activity. We also continue to have great success driving higher rent growth. Cash re-leasing spreads were strong at 13% in Q3, while GAAP rent spreads were near record high levels at 23%, demonstrating our ability to achieve strong mark-to-market rent growth while also embedding meaningful annual rent steps into our leases. Importantly, we are also being prudent with our leasing capital investment. In closing, I am so proud of our team's great work. Strength in retailer demand, leasing fundamentals and tenant health indicators remain favorable, and we have great visibility into continued above-trend same-property NOI growth in 2026. Nick? Nicholas Wibbenmeyer: Thank you, Alan, and good morning, everyone. As Lisa mentioned, this was another very active quarter for accretive investment activity. We're seeing great momentum in starting new development and redevelopment projects, executing on our in-process pipeline as planned and continuing to successfully source acquisition opportunities. Since our last update a quarter ago, our most significant progress has been in growing our development and redevelopment pipeline. We started over $170 million of projects during the third quarter, bringing our year-to-date total to more than $220 million. Our starts in the quarter included 2 exciting new ground-up projects. Ellis Village will be a 50,000 square foot Sprouts-anchored center located in the Bay Area at the front door of a thriving master planned community. The Village at Seven Pines will be a 240,000 square foot Publix-anchored center in the heart of Jacksonville's well-established retail node. The property will serve as the commercial hub of an iconic master planned community that will also include over 1,600 homes. Given our success in bringing projects to fruition, we now expect approximately $300 million of starts in 2025. As the only active national developer of high-quality neighborhood shopping centers, leading grocers remain engaged with us on new projects across our platform. Our team continues to execute well on our in-process development and redevelopment projects, which now totals more than $650 million, with strong leasing activity and blended returns exceeding 9%. On the transaction side, we had another active quarter as well. As mentioned on our last call, we acquired the 5-property $350 million RMB portfolio in South Orange County at the beginning of the quarter. As a reminder, this was an off-market OP units deal with the value proposition of owning Regency stock playing a meaningful role in seller motivation. We've already fully integrated these centers into our platform and are seeing them perform very well. We also purchased our JV partner's interest in 3 grocery-anchored centers during the quarter, including 2 in Houston and 1 in Northern New Jersey. We welcome these opportunities to convert to full ownership of high-performing centers and strong markets. In closing, our team is actively working to source attractive opportunities and further build our future investment pipeline. While the opportunity set for new development projects remains limited, our flywheel effect is real and our ongoing success uniquely positioned us to take advantage of future opportunities to create value. Mike? Michael Mas: Thank you, Nick. As you've heard this morning, the Regency team delivered another outstanding quarter of results, driven largely by the strength of our leasing efforts, the health of our tenant base and the value we're creating from capital allocation. This is reflected in earnings and same property NOI growth that again exceeded our expectations. As a result, we now anticipate same-property NOI growth of 5.25% to 5.5% with the increase driven by lower credit loss and higher rent commencement from our SNO pipeline. Notably, within that expectation, we have decreased our credit loss guidance range to 50 to 75 basis points. This higher organic growth is driving our increased full year outlook for earnings per share with our new ranges now calling for growth of mid-7% for Nareit FFO and mid-6% for core operating earnings. And as Lisa mentioned, we also raised our dividend by more than 7% this quarter. Our balance sheet remains strong with leverage squarely within our target range of 5 to 5.5x. We are generating significant free cash flow to continue funding external growth, and we have nearly full availability on our $1.5 billion credit facility. You'll recall that late last year, we issued $100 million of forward equity. To update you on timing, please note that we settled $50 million in August and we will settle the balance by the end of October. Looking ahead to 2026, we plan to provide detailed guidance when we report Q4 results in February, but I want to offer some early thoughts on our current expectations for growth as we work to finalize our plan. We expect same-property NOI growth in the mid-3% area, including a credit loss environment similar to 2025. We expect total NOI growth in the mid-6% area, which includes our expectation of delivering approximately $10 million of incremental NOI from ground-up development projects currently in process. As Lisa and Nick discussed, development is an important differentiator for Regency as you consider our external growth prospects, and we are gratified to realize a more significant impact from these successful projects as they lease towards stabilization. Nareit FFO growth is expected to be in the mid-4% area, representing continued solid growth after taking into account the impact of current year and planned 2026 debt refinancing activity, which collectively is expected to have an impact on growth of approximately 100 to 150 basis points. Organic same-property NOI growth of 5.25% to 5.5%, an internally funded and growing development and redevelopment pipeline, evidencing Regency's unique competitive advantage, an A-rated balance sheet prepared to weather all seasons and an outlook for continued growth even through the realities of today's higher rate environment, it's clear that Regency's best-in-class team is operating on all cylinders. We are happy to take your questions. Operator: [Operator Instructions] Our first question comes from Greg McGinniss with Scotiabank. Viktor Fediv: This is Viktor Fediv on for Greg McGuinness. Can you provide some color on this 11 asset distribution transaction with your JV partner? What options does this transaction open actually for Regency? Nicholas Wibbenmeyer: Sure, absolutely. This is Nick. Appreciate the question. Regarding GRI, I would start with the fact that they've been a very, very good and long-term partner of ours, and our interests have been aligned for many, many years. And that portfolio aligns completely with our strategy, and we like every asset we own with them. The only challenge sometimes with these long-term partnerships is there's not a perfect way to capital recycle. And so this allowed us to do a mini DIK in order for them to own 6 assets, they now have full control over. And we now own 5 assets at 100% that we are excited about owning and anticipate owning long term and excited about the partnership on a go-forward basis, again, because they've been great partners. We expect them to continue to be aligned with our interest on the portfolio we continue to own together. Operator: Our next question comes from Michael Goldsmith with UBS. Michael Goldsmith: Mike, I appreciate the early parameters for 2026, if you will. You pointed to the same-property NOI growth in the mid-3%. What's changing from the environment that you're seeing there? Or can you help bridge to get there? And then also, you mentioned you expected a credit loss environment similar to 2025. Does that mean like your expectations at the start of 2025 or this historically low bad debt that Lisa mentioned at the beginning of the call, is that applied for next year? Michael Mas: Sure, Michael. Let me start with the second, and I'll just clear that before I move to the first on the bridge. We're expecting next year's credit loss provision to look a lot like '25 ended. So we're -- I would call that a continuation of really on both fronts, whether it's bankruptcy losses or uncollectible lease income, better than historical averages. So our tenant -- the roster of our tenants is as healthy as it's ever been. With respect to the bridge, I think you have to start with an understanding of 2025 before you can appreciate that our outlook as we sit here today, and by the way, as we continue to refine our plans, we feel pretty proud with. But I think if you really think about '25 and think about the components of this year's growth, which are culminating in today's targeted area of 5.25% to 5.5%, a lot -- this is about as much commenced occupancy as we have absorbed in this company in our history. And kudos to the team for building that SNO pipeline through 2024, kudos to the team for delivering that SNO pipeline into 2025, and they've continued to [indiscernible] expectations of that delivery. And we are quickly -- we've quickly absorbed space, and we're approaching levels of NOI that are -- levels of occupancy that are what we would call peak levels. Together with that, we have benefited from an extreme uptick in our recovery rate. All of that recovery rate benefit in 2025 is about 100 basis points. So if you -- reflecting on 2025, as I think about a mid-3% area of same-property growth next year, all of which -- nearly all of which coming from base rent, I think that's pretty darn good growth on top of really good growth in 2025. So we still feel really confident with our outlook. Lisa Palmer: Yes. And I would just like to emphasize that. I think Mike said it really well. But mid-3% same-property NOI growth a year after what we're doing this year and then adding on top of that the contributions that we're getting from development with a 6% NOI growth, we feel really good about how well positioned we are for our future growth. Operator: Our next question comes from Cooper Clark with Wells Fargo. Cooper Clark: Great. I appreciate the early '26 thoughts. I guess how should we be thinking about the potential on development and redevelopment starts into next year, considering an increasingly competitive transaction market and strong leasing? And then I would also appreciate any color on the mix between ground-up and redevelopment as you think about starts moving forward. Nicholas Wibbenmeyer: Yes, Cooper. I appreciate the question. This is Nick. So I think there's a couple of pieces to that. So let me just actually step back for your benefit and others. It wasn't that many years ago, we were talking about starting between our development and redevelopment program, $1 billion over the next 5 years. And now fast forward and as we look over our shoulder here as we round third base in 2025, we will have started $800 million just in the last 3 years. And so as we've been articulating, we continue to feel really good about finding more than our fair share of investment opportunities in our development and redevelopment program. And so I would say, as we look forward, we would expect to continue to find more than our fair share in that run rate, we feel good about as we move into 2026. And the team is working every day to find even more opportunities. And where we find those, we'll take advantage of those. And then in terms of the divide between development and redevelopment, look, wherever we can invest our capital accretively, we're going to lean into. But because of the success we've been having on the development program, as you can see, the split is starting to lean into the ground-up development. And so I expect that to continue. If you look at our in-process today, this is the first quarter in quite some time, our in-process developments outnumber from an investment standpoint, our redevelopments. And so we have now flipped the script where the developments are outweighing redevelopments. And as I look more near term into 2026, I would expect that to be the case as well. Operator: Our next question comes from Samir Khanal with Bank of America. Samir Khanal: Mike, just looking at your net effective rent page, when I looked at the new leases, just curious, there seems to be a little bit more leasing being done on -- the new leasing being done on the anchor side versus shops, which you go back the last several quarters, it's been -- the mix has been primarily shop space. So just can you provide a bit more color? Was there something like did you get boxes back? Is this related to some of the development side? Just trying to understand why the mix has gone up for anchors here? Alan Roth: Samir, this is Alan. I appreciate the question. So no, it's just an anomaly for the quarter. We happen to do more anchor transactions. It's not development-driven per se in the quarter. And again, I'd say 10 anchor transactions came in. That's what's also skewing, I think, with the lower rent that you're seeing. But importantly, that I'd slide you over and go look at the cash rent spreads and the GAAP rent spreads that happened for the quarter. So nothing more than coincidental timing that a lot of anchor transactions happen to come through the queue in quarter 3. Operator: Our next question comes from Ronald Kamdem with Morgan Stanley. Ronald Kamdem: I just want to touch on acquisitions because we definitely appreciate the early '26 thoughts on same-store. But on the acquisition front, just number one, just on just cap rates or IRRs, just what are you guys seeing in the market and how that's trended? And we also noticed a lot of the JV transactions in the quarter. I guess, you still have over 100 assets in those JVs. Is there more incremental willingness to sort of sell or buy those assets out? Nicholas Wibbenmeyer: Appreciate the question, Ronald. Let me start with your second question first, which is the joint venture side. The short answer is yes. I mean the assets we own, whether we own 100% or we own with partners, we're excited about owning them. And so where there's an opportunity with our partners to buy out their interest, we're constantly having those conversations. And where the stars align, we plan on taking advantage of that. We are obviously set up to transact quickly, and we're having those conversations on a very regular basis. So excited about the ones we were able to execute on last quarter. We can't perfectly predict when our partners want to exit the future. But again, we expect that to continue to be a pipeline on a go-forward basis. And then in terms of cap rates, I'll just reiterate the good news for us, given the development program we just spoke about based on Cooper's question is, I would just reiterate, we don't have to acquire assets to grow. But where we can find the opportunities to lean in, where they match our quality, match our future growth profile, and we could fund accretively, we're leaning in. And as you can see, that's led to over $0.5 billion of acquisitions this year. But that's becoming more difficult in this environment because there is capital flowing into our sector, no question about that. And so I would have told you last quarter, we'd probably be talking cap rates 5.5% to 6% on most core assets. Now from what we're seeing in the market, I would say it's more of the minus side on 5.5%. There's a lot of capital chasing these opportunities. And so we're going to continue to be true to our business plan, make sure we're investing our capital wisely, but also excited to see so many people finally waking up to understand how defensive and quality our NOI streams are. Lisa Palmer: Really quickly, I would just like to add, I'm going to reiterate, I think with Nick's answer to one of the first questions, we really value our long-term partners and continue to do that. And it was not that long ago that Oregon committed even additional capital to us, and you've seen us continue to acquire assets with them into that partnership. So that's one that we're growing, for example. So again, we value long-term partnership -- our long-term partners, and we often are the best buyer if there's a reason that the partner wants to exit, and that's when we have those opportunities. Operator: Our next question comes from [ Sydney Rome ] with Barclays Bank. Unknown Analyst: I was wondering if you could give a little bit of color on what your expectations are for rent spreads and if you expect them to continue to be around this percentage or... Alan Roth: Sydney, thank you for the question. Look, I'm really proud of the trajectory we have been on and how committed the team is to ensuring not just these elevated levels of rent spreads, but even more importantly, the GAAP spreads that we always talk about and the continued embedded rent steps. So I don't necessarily have a target on it per se. But what I would say is I look back at Q3 new shop leasing, 85% of our shop transactions had 3% or higher in terms of embedded rent steps and 25% of our new shops had 4% or higher. So the teams are really embracing that long-term sustainable approach with these embedded rent steps while on top of that, getting that 13% rent spread that you have seen. I will take as much as they are willing to give, and I just believe in this sort of supply-constrained environment, we have an opportunity to continue to lean in. Operator: Our next question comes from Todd Thomas with KeyBanc Capital Markets. Todd Thomas: I just wanted to revisit the mid-3% same-property NOI comments. You said that that's the base rent component primarily, so contractual rent steps and cash re-leasing spreads. Do you expect a further contribution from the SNO pipeline in 2026? And can you also speak to what sort of contribution you might anticipate from redevelopment in '26? Is that going to be sort of a neutral impact year-over-year? Or do you still expect there to be some additional growth on top of that from redevelopment? Michael Mas: Sure. Thanks, Todd. And I'm happy to dig in a little bit deeper here. But I'm going to leave some of that detail to our full plan, which we'll provide to everybody in February. Yes. So to get to mid-3s, it's going to take some occupancy climb. And we still see an opportunity, and we have some slides in our investor materials that articulate that. There remains opportunity in our commenced occupancy percentage to close that gap. We're sitting at 200 basis points wide right now. The historical average is in the 175, 180 area. And we are confident that we will continue to make headway towards closing that gap into '26, which will drive some of that base rent growth that I articulated. We do -- that includes delivering on redevelopments. So in 2025, we had a year where we contributed to growth from redevelopments north of 100 basis points. I actually think that, that's going to repeat itself into 2026. Those are overlapping concepts in some way. It's really about absorbing space and driving commenced occupancy. And then the balance is going to come from rent growth. And I thought Alan did a really nice job of articulating our position in that marketplace, both driving contractual steps as well as cash re-leasing spreads. I hope that helps. And again, we'll give some more color on this outlook in February. Operator: Our next question comes from Craig Mailman with Citi. Craig Mailman: Maybe just a 2-parter here. As we think about the breadcrumbs you laid out for next year for same-store and implicitly total NOI growth and maybe even FFO. Just looking at your same-store occupancy, you guys kind of ticked a little lower than where you peaked out at. Is there room to push that lease rate higher? Or are we going to close the gap to the historical spread by just commencing and you kind of are at the frictional level for that leased occupancy? And then just the second piece for Mike, I know you said 100 to 150 basis point drag from refinancing. Are you guys giving any consideration to putting some term loan debt in the stack, which is from what I'm hearing from some of your peers, pricing in the mid-4s, which would kind of compress that headwind a bit? Alan Roth: Craig, it's Alan. I'll take the first part and let Mike color up the second part. I do believe that we can pierce through the occupancy of where we are. That 20 basis point drop this quarter really was attributable to the Rite Aid bankruptcy and us getting 10 Rite Aid spaces back in the quarter. But as we look at, again, as I think I said on one of the prior questions, strong demand, limited supply. I think there's certainly upside there. And I think what we'll probably see that come from largely is on the anchor front. We're at 98% leased. And as we look back at peak levels there and I look at the pipeline of deals that is in process right now for those anchor transactions, there's real opportunity there. And what is even further encouraging to me is when we look at kind of who those tenants are and Five Below, Barnes & Noble, HomeGoods, J. Crew Alta, there's just a whole lot of them that are out there that are materially engaged and just great operators that will be really fantastic adds to our portfolio. Michael Mas: So hard pivot to the balance sheet, and I appreciate the question. Yes, we consider all forms of capital as we think about refinancing our obligations. And the 100 to 150 basis point impact on refinancing is a pretty wide range that we're sharing today largely because we're still considering what options we may take for 2026. The 2025 financing activity has already been executed. So we know what that impact is next year that the balance of our expectation will be driven on the solution we choose, term loans, converts, vanilla bond offerings, all of those are always considered by Regency. We will make the best decision at that point in time depending on the market conditions. Let me lastly say that with the credit position that we're in from an A-rated balance sheet and the extreme pricing we can achieve on just the vanilla bond offering with a 10-year term, I do think you squeeze out a lot of that potential opportunity that others may have as they consider their alternatives. Operator: Our next question comes from Juan Sanabria with BMO Capital Markets. Juan Sanabria: I guess a 2-part question. One, you mentioned $1 million -- or sorry, 1 million square foot pipeline in your prepared remarks. So just curious if you could contextualize that historically? And is that being skewed by some of these anchor opportunities you've kind of noted? And then the second part would just be anything unusual on bad debt this quarter that was actually a contributor to growth? And is there any of that assumed seemingly in 2026, given you expect bad debt to kind of be similar next year versus this year? Alan Roth: Juan, I appreciate that question. That 1 million square feet is pretty consistent with multiple prior quarters, again, I think speaking to the strength of the environment that we're in right now. It is -- there is no disproportion of anchors versus shops on a relative basis in terms of how we look back. And again, it's full of great retailers. And I rattled off a few junior box players that we're engaged with, but we're also doing multiple transactions and that pipeline is full with the Warby Parkers and the Jersey Mikes and the Mendocino Farms and the Joe & the Juice and just a whole host of great operators that were sprinkling in across the country. So again, we always say qualify the right operators and merchandising is very important to us. We don't just lease to anybody. And so while I'm proud of the 1 million square feet in terms of the numbers that are in there in the pipeline, I'm equally, if not more proud of the quality of those retailers that are in it. Michael Mas: On the bad debt question, and I think you're referencing our uncollectible lease income line item. Interesting this quarter -- so again, this is a line item that is reflecting the collection rate on our cash basis tenants, right? So that pool of property -- we just had higher collections from that pool of property -- the pool of tenants, I should say, this quarter. In fact, interestingly, we've been collecting this quarter on some receivables from tenants who had previously moved out we had long written off ago. And kudos to the team, both operations and legal for continuing to pursue those owed receivables, and we've collected on those this quarter. So that's what drove the positive anomaly. On a year-to-date basis, we're running in the 20 to 25 basis point area on ULI. That's as a percent of total revenues. You've heard us talk about our historical averages before, which are in the 40 to 50 basis point area. So for a couple of years now, we've been operating at historical lows. Again, the tenant base that we have today is extraordinarily healthy, doing very well. And that comment I'm making at the end, we believe will continue into next year. So we are anticipating that we'll continue to be lower than our long-term historical averages on uncollectible lease income in 2026. Operator: Our next question comes from Michael Griffin with Evercore. Michael Griffin: On the developments, I'm curious if you can give us a sense of where you're underwriting rents, both for anchor and small shop versus where current rents are in the market? And then maybe stepping back more broadly, we've heard about this dearth of new supply in strip land. And clearly, Regency is a differentiator on the development side. I mean, I realize you don't want to give away all the secrets, but how are you all able to make the math pencil? Is it the land basis? Is it the proximity to population areas like these master planned communities? It just seems like you're able to make this work, whereas others out there in the market aren't able to. Nicholas Wibbenmeyer: Appreciate the question, Michael. This is Nick. I'll start with your second part, which is, yes, there's no secret sauce. I'll tell you that. It's a lot of really, really hard work over years and years that build up to put us in the position we're in. And it comes back to, again, starting with the relationships. We have the best relationships across the country with the best grocers. If you look at our end process, I mean, we're building for Whole Foods, we're building for H-E-B, Safeway, Publix, Sprouts, doing a major redevelopment with Kroger. And so those relationships have been forged over decades of work. Capital, there's no question. We have the capital. It's where we're allocating it as we keep talking about. And so we are blessed to be in a position with our free cash flow and our balance sheet to be able to lean in and take advantage of these opportunities, and that really matters to a seller to know that we are committed and we have the capital ready to go. And then last but not least, it's just expertise, really, really hard work to grind into every aspect of our pro forma. And again, years of experience, the best professionals in the business, no doubt, working on our construction costs, working on our underwriting and sharpening every aspect of that pro forma to make these things pencil. And so again, no secret sauce, but we're really, really proud about what we've done here recently and what the future looks like for us. But it's not 0 competition. There's -- we are the only active one nationally, but we're competing with local developers in these markets. And there's some quality local developers that are forcing us to up our game and sharpen our pencil every day. And so we're excited about the ones that we're winning for the reasons I just articulated and continue to believe we'll get more than our fair share. And in terms of rents, you're absolutely right. I mean 2 aspects to every pro forma, what's the cost, which we're really smart about and understand really well, which is why you've seen our in-process perform the way they have. But the other side is the income. Given the operating portfolio we have, the platform we have there as well as our leasing agents on the ground looking at our ground-up developments, really proud of the team's ability to forecast the income side of these developments and redevelopments as well. And so if you were on our internal calls, you'd hear us say, we don't want to underperform, but we also don't expect to outperform. We expect our teams to really understand both sides of the pro forma. And you'll see on the margin, we're outperforming more than underperforming based on the team's great work. Lisa Palmer: I really appreciate Nick's answer, but I'm going to -- because he's so much more intimately involved, I think he just described the secret sauce. And I wouldn't underestimate what that is because it's our team and it's the decades of experience and track record that have built those relationships. And Nick is a part of that. So it's not something that's easily replicated. Operator: Our next question comes from Haendel St. Juste with Mizuho. Ravi Vaidya: I'm Ravi Vaidya on the line for Haendel today. I wanted to ask about capital recycling. Can you offer more commentary on the decision to sell the asset in Miami? What was the competitive process like? Were there a number of bids? And was there anything in particular about the asset or the market itself that led to this decision? Nicholas Wibbenmeyer: Ravi, I appreciate the question. I'll start again, just high level. Again, given where we're at from a capital standpoint, we don't have to sell anything, and we really like our portfolio. So I always start answering disposition questions with that. Now that being said, we're always looking at assets that we believe are nonstrategic. And they may be nonstrategic from a format perspective, which you've seen some of these smaller assets we sell at or nonstrategic from a future IRR perspective. We obviously have a future view of capital and income on these assets. And so the Miami asset would fit into that second bucket where our view of the future IRR didn't align from a strategic standpoint based on what we believe the market would pay for that asset because that market is in such high demand. And so yes, there was a deep pool of bidders that did allow us to drive pricing we thought was appropriate to transact and recycle that capital. And then I would just say, again, when you look at high level, we're selling just over $100 million of assets this year, just over a 5.5% cap rate. but we're buying over $500 million at a 6%. And so our capital recycling right now is accretive, not dilutive. And we're proud about that because we own such a great portfolio, we can take advantage where we feel like those stars align to exit an asset that we're not in love with from a future IRR and reinvest that capital in assets we think have high single-digit, if not double-digit IRRs. Operator: Our next question comes from Wes Golladay with Baird. Wesley Golladay: I just want to go back to the developments. You're doing a lot more, it looks like this quarter with master planned communities or next to master planned communities. Are the grocers leading you there? Or are you putting more emphasis on being next to those projects? And then for a development start, are you still targeting around a 50% pre-lease level? Nicholas Wibbenmeyer: Appreciate the questions, Wes. So all the above. And so we are targeting master planned communities. Our grocers are targeting master planned communities. And to be quite frank, master plan developers are reaching out to us. And it really goes back to the question I answered before, which is if you're a master plan developer, then most -- one of the most important aspects of many of these projects is having a great community grocery anchored shopping center to be an amenity to your project. And not only is it important that you can count on your retail partner to build a world-class project, but you also want to know that they're going to own it and operate it in perpetuity. And so we love the opportunity to sit down with master plan developers to create a really, really win-win partnership on both sides. And you've seen, in many cases, we've done multiple transactions with the same master plan developer. And so for all of those reasons, I think that will continue when you look at our go-forward pipeline, as you've indicated, led to success this quarter. And so -- I forgot the second part of the question. Wesley Golladay: [ Are you targeting ] pre-lease... Nicholas Wibbenmeyer: Yes. The prelease, absolutely. Again, and when you talk about derisking, that's what we're also excited about in our development program is we really do derisk these assets. And so they're fully entitled. They're designed, they're bid. We have a real understanding of the visibility on the cost side. And to your point, they're tremendously pre-leased. And so the anchor is always in place. And so depending on the size of the anchor compared to the overall project, it's not always right at 50%, but it's a large portion of that NOI is guaranteed. But again, if you look at our in-process pipeline, the team is just doing a phenomenal job. I'll point to 2 projects where our anchors aren't even open, shops at Stonebridge, our Whole Foods-anchored project in Connecticut and Jordan Ranch, our H-E-B-anchored project in Houston. Neither of those anchors are open yet, and both of those projects are already over 90% leased. And so it just gives you, again, the sense of the demand in the market for these new projects we're building. Operator: Our next question comes from Linda Tsai with Jefferies. Linda Yu Tsai: A 2-parter regarding your snow pipeline. The 1 million square feet of leases in negotiation, any initial thoughts on how much that could further contribute to your snow pipeline? And then with your snow pipeline having compressed in 3Q, is the expectation that it continues to compress in '26? Michael Mas: I'm happy to take it for Alan, you can color up the pipeline. I would -- so we're sitting at 200 basis points spread today. From my comments earlier, I do think we are -- we have the setup to continue to compress that snow pipeline into '26. That being said, and the comments that Alan has shared about our prospects for setting new levels of percent lease, there is a scenario during -- at which we also -- we maintain or potentially expand that snow pipeline. So I hope that's helpful, Linda. I think as we normalize or stabilize our occupancy, I think the comments around snow pipelines will start to dissipate, and this will just become regular leasing activity, where we're replacing a lot of the GLA every year just from natural attrition, some of which is decided by the tenants themselves, a lot of which is decided by our leasing teams who are looking to upgrade the tenancy in our shopping centers. Operator: Our next question comes from Mike Mueller with JPMorgan. Michael Mueller: I guess, Mike, what's prompting you to talk about '26 this early? Is it something looks off with the '26 estimates that are out there where you just don't want people to have sticker shock with the 3% to 3.5% same-store number after this year's great print? Or is it something else? Michael Mas: Mike, maybe a little bit surprised by the question. I feel like we've had a track record of sharing an outlook at this point in time every year. And you got to take the COVID area out of it. Maybe that's what some of our memories are missing is during COVID, all the rules were off. But we're prideful in our ability to provide some transparency on a forward basis sometime in this period -- in this quarter, in the fourth quarter of the year. Long time ago, in the way back machine, we used to do December Investor Days, and we would put out forward-looking guidance. Today, we're doing that together with Q3 results, and we've done that for a year or 2 at this point. So nothing more than that practice. I hope it's helpful. I know we want more details behind the head nods that we've provided. We look forward to providing those details later. And I'll just leave it at that. Operator: Our next question comes from Floris Van Dijkum with Ladenburg Thalman. Floris Gerbrand Van Dijkum: My question is sort of related to the occupancy. Obviously, you're 10 basis points off your peak in both leased and commenced. You've got a big pipeline coming up. There's not a whole lot more you can push in terms of your anchors. I mean, you did allude to the fact that it's 98% and your peak is probably closer to 99%. My question is partly related to your most valuable space, your shop space. How much more can you push occupancy in your shop? And maybe also talk about your renewal percentage today? And where do you see that trending going forward? It sounds like you think there might be more churn going forward as you keep raising rents, but curious to hear your comments. Alan Roth: Floris, thank you for the 2-part question. I don't know maybe it's a trend here for us to always answer the second one first, just from a memory perspective. But the renewal retention, we've always hovered around 75-ish percent. And I am very comfortable with that number. It's an opportunity to retain exceptional retailers, and it's an opportunity to also infuse additional higher-quality merchandising and higher rents into the portfolio. So on the edges, sometimes it's 70%, sometimes it's 85%. But typically, we're in that 75%. And I'm really, really comfortable with that in terms of active and engaging leasing. And so you'll also find that from a new leasing perspective, we are leasing occupied space. We have a few tenants on our watch list that for some time, we've been thinking we are getting space back. We have leases sitting there executed waiting to get some of those spaces back. And so again, that's the proactive mindset. I'm not going to guide to a percentage per se in terms of where we ultimately can go, but we're going to continue to be creative. And one example I would give you is the fact that we are invoking some relocation provisions and leases to relocate a successful tenant that the community knows is there that's doing really well, such that they can occupy a perhaps more challenging space to us to lease on the market, which then unlocks the ability to lease their space, right? And so the team is out there, I think, really creatively doing everything they can to continue to still grow occupancy and pierce through that. And again, in this environment, I feel really comfortable and confident, coupled with the quality of our assets to continue to be able to do that. Operator: [Operator Instructions] Our next question comes from Paulina Rojas with Green Street Advisors. Paulina Rojas-Schmidt: So as it has been mentioned a few times, your commenced occupancy is near peak levels. When I look at your presentation, the last time your occupancy levels were this high was around 2014, 2018 when commenced occupancy actually stayed elevated for a long period. So I'm curious how does retailer sentiment today compare to that period? What similarities or difference are you seeing between then and now? Lisa Palmer: I believe I heard consumer sentiment. Is that the retailer sentiment. I think that, Paulina, the way I would address that is there's -- a lot has kind of changed over that period of time and that retail is always evolving. We've seen that. So coming out of the GFC, there was a lot of demand for new store growth. And then we saw a little bit of a dip when we all saw the headlines of this retail apocalypse and how is e-commerce going to affect our business. And then COVID hit. And when -- what the pandemic did, and we've said this a lot, is it really generated a renewed appreciation from our retailers for the importance of a physical location. So while they may have been dialing back in that '17, '18, '19 time frame of new store expansion coming out of the pandemic, they realized the importance of having that location, the last mile close to their consumer. At the same time, a renewed appreciation from the consumer for shopping for not just buying online, but actually enjoying what we at Regency offer with regards to our fresh look connecting placemaking and having a curation of great merchants at our shopping centers. Over that period of time, from 2014 to today, there's been really limited supply. So we've had the tailwinds coming out of the pandemic. We've had the retailers understanding and really appreciating the need for and importance of a physical location. And we are the -- again, it gives me another opportunity to say, we have been the only national development platform at scale for a period of time. So with that limited supply, it's -- the supply/demand is in our favor. So as Alan has said repeatedly today, he believes that we will have the ability to push that percent commenced for all of those reasons. And I have the utmost confidence in the team to be able to do that. Operator: We have reached the end of the question-and-answer session. I'd now like to turn the call back over to your host, Lisa Palmer. Lisa Palmer: So thank you all for your time with us today. And once again, I just want to give a shout out to the Regency team. Really proud of our results year-to-date. Thank you all. Operator: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
Operator: Good evening. This is the Chorus Call conference operator. Welcome, and thank you for joining the Campari Group 9 Months 2025 Financial Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Simon Hunt, Chief Executive Officer; and Paolo Marchesini, Chief Financial and Operating Officer of Campari. Please go ahead, gentlemen. Simon Hunt: Fantastic. Thank you very much. Good evening, good afternoon to everyone. Thank you for joining us to go through our 2025 9 months results and perspectives for the remainder of the year. Paolo is here with me; our IR team, Chiara and Gulse are happy to connect after the call to further deep dive with all of you in the upcoming days as necessary. Now just before I get going, I think all of you already know, this is going to be Paolo's last call with us before he transitions to his new role as Vice Chairman. I'd like to thank him for all of his support, long-standing contribution to this group and looking forward to continuing to work with him in his new role. And it's pretty rare these days. He, as a CFO that has presided over more than 100 earnings calls, and holds the title being the longest serving CFOO in the Italian Stock Exchange and certainly across our industry by a long, long way. That is an amazing track record and an achievement. And on behalf of everyone in the company, me, my predecessors and all of you here on the call and in our investment community, I'd like to say a big thank you. And for those of you who are joining us on the Strategy Day on the 6th and 7th November, you have a chance to celebrate together with Paolo. Thank you, again, Paolo. Paolo Marchesini: Welcome. Simon Hunt: Now a short summary of our results. As you can see, our performance is on track with what we told you last time. Clearly, the operating environment remains challenging. Despite this, we are continuing to outperform the industry in sellout, and this is exactly our aim. We're keeping our strong focus on commercial execution and continuing to invest behind our brands to ensure we are well positioned for when the market normalizes. In terms of profitability, we're making strong progress, and this is supported by gross margin accretion and visible savings in SG&A more than offsetting the ongoing A&P investments, as I mentioned. And we're maintaining our guidance of moderate organic growth on the top line. While on EBIT-adjusted margin, we continue to expect a flattish organic trend as a percentage of net sales, but now with the tariff impact incorporated. And we'll dive into the details later on. We continue to make solid progress across all of our strategic priorities in line with our expectations. As highlighted in previous updates, our focus remains firmly on the areas we can control, and we are consistently advancing towards our goals. On brand building investments, as already shared, we're not making any compromises. On SG&A, as we already guided, the deceleration trend is evident, and we're also making progress on COGS efficiency. On CapEx, we are on track to complete our extraordinary program for production capacity expansion. In terms of portfolio streamlining, the disposal of our 50% investment in Tannico in Q3 is another step towards simplification following the disposals of Cinzano and the Australian plant in the first half of the year, and we are maintaining our pause on M&A. On the balance sheet, our disciplined approach means that we have now been able to reduce our financial leverage in terms of net debt-to-EBITDA ratio by 0.7x in the last 12 months, down to 2.9x with further improvements to come. Our portfolio approach continues to bear fruit. And while we will discuss this more during our Strategy Day, I can say that we keep growing across geographies where we are continuing to gain share and prioritizing execution and pricing discipline in a challenging backdrop. Now let's look at our top line performance and the drivers. In Q3, we recorded growth across all regions. I'll say that again, we recorded growth across all regions and delivered a very resilient 4.4% organic growth overall. And this means as of 9 months, our organic growth was plus 1.5%, in line with our guidance. And yes, we are still growing even in this tough market. The peak season started possibly in terms of weather, but we did see some variation across geographies in the latter part of the quarter, plus the impact of economic pressures on consumers play a role, especially in the on-premise and in the U.S. But despite this, we recorded solid growth. Regarding some of the technical impacts coming from the first half of the year, you'll remember that of the $11 million U.S. logistics delay impact we flagged in Q1, most of that has now been recovered with a limited impact expected in the fourth quarter. The delisting we flagged in Q2 in Germany continues to impact with EUR 3 million in Q3, leading to a total of $8 million in the 9 months and an expectation to reach $11 million by the end of the year. Net-net, these 2 impacts balance each other out in the quarter. And over the 9 months, the underlying performance broadly matches our reported organic growth. The perimeter impact is plus 1.1% on our top line while the FX impact was negative 2.4%, mainly driven by the U.S. dollar devaluation and Latin American currencies. Overall, our total reported top line growth is 0.2%. Now looking at the sell-out data, which is ultimately the main focus. Our outperformance continued across almost all markets in a challenging backdrop with overall shipments and sellout pretty much to line across the U.S. and EMEA. In the U.S., our outperformance in the strategic on-premise channel and in NABCA is ongoing in Q3 with plus 5% growth year-to-date in the on-premise, indicating a 4 percentage point beat compared to the sector, and a 2 percentage point beat in NABCA. And this is driven by a very resilient growth of plus 12% and plus 9%, respectively, in our tequila and aperitifs portfolio. Note that due to some data policy issues from the provider last night, we're only able to show a 52-week trend in the on-premise data, not the usual quarterly performance, but I'm sure that data will be corrected soon. On the off-premise, while our focus brands continue to show a resilient performance. The rest of our portfolio, which has a higher weight in this channel, impacted our total growth. And by the way, we should highlight that given its universe composition, Nielsen off-premise doesn't sufficiently represent a full picture of Campari America's performance or momentum in the market as we continue to make good progress across the club channel. In EMEA, we also outperformed in each of our main markets with growth of plus 2% versus a market of negative 2% in the region despite the pressurized context. Now let's start and look at our top line growth by region, starting first with the Americas. And Americas grew by plus 1% in the 9 months with an acceleration in Q3 of plus 5%, driven by positive top line across the region. In the U.S., the 9-month performance was impacted by the destocking in Q1, while the last 2 quarters have both been positive with plus 3% and plus 1% growth, respectively, in Q2 and Q3. The main drivers are Espolòn, Courvoisier and Wray&Nephew. And the aperitifs recorded a stable trend with a positive Campari, offsetting inventory reduction post tariff volatility in Aperol in the third quarter. In line with the category trends, we continue to see persisting challenges on SKYY. Jamaica recorded plus 11% growth in the 9 months with a very strong quarter 3 due to the base effect of last year's hurricane but also benefiting from a very positive local market dynamics. And given the news at this stage, I think it's important just to update you with what we know about Jamaica. So at this stage, the team are evaluating the impact of the hurricane from last night. And our primary focus is the safety and well-being of our teams, which we are confirming diligently given the lack of communication available. After that, we have got teams on the ground at each of our sites to assess the impacts and next steps to get us up and running as quickly as we can, recognizing the infrastructure damages anticipated by the Jamaican government. Once we have clarity on the situation, we'll then be able to confirm our support for whatever those recovery plans are and can provide more of an update once we receive it. In terms of the rest of the Americas, which makes up about 11% of our group sales, continued its solid performance with plus 3% growth in the 9 months and quarter 3 was flat, impacted by trade disruption in Canada in connection with the tariffs. But on the positive side, Campari has now become the second largest premium spirits player in Brazil, driven by the strong performance of Campari, and leading Brazilian brands. Now moving on to EMEA. The plus 2% growth was broad-based across almost all countries. In Italy, the environment remains challenging, especially in the on-premise. We saw less willingness by consumers to spend and decreased numbers of visits. Regarding tourism traffic, even though accommodation occupancy rates were relatively solid during the summer, consumers were more selective about spending. There were also a few Italians taking holidays during August pressured by increased prices. In August, we saw all main beverage categories. That's all beverage categories, down 10%, including water a mainstay of Italian consumption in both the on and -- in and out of home, really reflecting the economic pressures that consumers are seeing. And all of this played a role in the performance of Aperol. At the same time, we see our portfolio approach in aperitifs bearing fruit, especially with solid trends in Campari, Crodino, Sarti Rosa as well as the Spirits portfolio. In Germany, the environment has become more challenging over the last few months across all categories and sectors, as I think you know. And consumer propensity to save versus spend has increased significantly. And we are still cycling the impact of the delisting at a retailer to hold our line on pricing. Despite this, we recorded positive top line growth in Q3, mainly driven by the success of Sarti Rosa, which now accounts for more than 10% of our net sales and has become the second largest brand for Campari Group in Germany after Aperol. Again, here, the benefit of our portfolio approach and Spirits leadership is evident. In France, our solid performance is mainly driven by Aperol with plus 6% growth in Q3, and the U.K. performance remains strong, supported by our excellent execution during the peak season with the added benefit of some good weather, too. The main drivers of the plus 22% growth in Q3 were Aperol and Aperol Spritz as well as Courvoisier benefiting from the ongoing marketing campaign. In the other countries in EMEA, which contributed 16% to our overall sales, we had a positive trend in all countries in the 9 months, especially in GTR, Greece and Belgium. And the bulk of the growth is coming from aperitifs and Courvoisier. Now moving on to APAC. Growth was plus 5% in the 9 months. In Australia, the growth of plus 6% in the 9 months was driven by a 15% growth in Aperol with ongoing focus on accelerating the on-premise activations as well as a plus 12% growth on Espolòn bottle and ready-to-drink, which keeps leading the tequila ready-to-drinks. In quarter 3, which in any case, is an off-season quarter for Australia, performance was impacted by the phasing of shipments in Wild Turkey, leading into the key upselling -- upcoming summer selling period. In the rest of APAC, we saw a positive momentum in Q3 with plus 14% growth, mainly driven by China, India and South Korea. And Wild Turkey/Russell’s Reserve continued to perform well and we've also seen some initial reorders on Courvoisier following a clearing of the trade channels that we undertook following the acquisition. Okay. So let's now move on to look at it different way via the houses, starting first with the House of Aperitifs. Here, we recorded resilient growth of plus 1% in the 9 months, primarily driven by Sarti Rosa and Aperol Spritz. As I mentioned, while talking about the regional performance, Aperol performance was impacted by a variety of factors during the quarter, and I'll deep dive a bit more on the next page. But in Italy, the impact was a result of pressured on-premise, Germany due to the delisting and operating conditions. And in the U.S., we had an alignment of the inventory post tariff volatility in the U.S. market, which impacted shipments. Excluding these 3 countries, all other countries remain on track with plus 4% growth in the 9 months. For Campari, the main impact is coming from Brazil, where we had a very high comparison base from last year, I think, near on 50% due to the rapid growth as well as price increases. And excluding this impact, the performance remains solid with a plus 2% growth in Q3 and a plus 1% in the 9 months, led by the U.S., Italy and the rest of the Americas. The remainder of the aperitifs portfolio is showing positive trends across the regions. Sarti Rosa continues its solid growth in its core German market and has started to benefit from the rollout into other European markets as well. Aperol Spritz is performing nicely, driven by the convenience trends. And Crodino, our nonalcoholic Spritz, is growing double digit across all seeding European markets. As I said, let's have a closer look at Aperol. The geographic expansion is fully on track across all seeding markets. More than 10 countries representing 12% of the brand's total sales are delivering outstanding double-digit growth, reinforcing the strength of our approach and the excitement in these markets. And this really is a testament of the fact that Aperol's desirability and consumer trends continue to support its growth. On sellout, our outperformance is continuing in the strategic on-premise and in NABCA in the U.S. European markets are facing some pressure and it's evident, especially in the on-premise data. In Italy, despite this stock levels remain healthy in the trade. In Germany, given the operating backdrop, Aperol's been impacted, especially in the on-premise. But if you include also Sarti Rosa, in fact, we continue to perform better than the market. In France and the U.K., the performance is very robust, particularly benefiting from favorable weather conditions and excellent execution. This is all to say we are very confident in the trajectory of Aperol. It's a tough market without a doubt and the quarterly performance can get impacted by various factors, but the long-term opportunity remains fully intact. Okay. Looking at the House of Whiskey & Rum. In whiskey, we recorded strong growth in Q3 with Wild Turkey benefiting from the stock availability in its core U.S. market. And you'll see it later in this session, but we also launched a new campaign, which we expect to support more going forward with initial encouraging results. South Korea and China are also supporting off a small base. Jamaican Rum showed a solid growth of plus 16% with Q3, driven by an easy comp from the last -- from the hurricane last year as well as strong underlying trends in the U.S. and in Jamaica. In the House of Agave, Espolòn grew plus 3% in the 9 months. Growth was supported especially by Reposado plus 11% while Blanco remained broadly flat due to our focus on pricing. And Q3 was impacted by the phasing of shipments. Key seeding markets also continue to grow for a small base, in line with our international expansion strategy. Within the House of Cognac & Champagne, Grand Marnier recorded a stabilized performance in Q3, also supported of an easy comp from last year. Courvoisier recorded EUR 99 million of sales in the 9 months and was included into our organic growth as of May. As we already highlighted in our H1 call, we are piloting some brand marketing in the U.S. and U.K., which has shown initial positive results. And above all, I'm very proud to say that Courvoisier took top honor as Best Cognac for its 30-year XO Royal in the 2025 Beverage Testing Institute Awards. In fact, out of the total of 8 categories awarded during the event, Courvoisier was on the podium in 4 of them, with XO Royal winning the top prize with XO, VSOP and the VS expressions. And this clearly reinforces the quality of our liquid in our bottles. For the rest, I won't comment too much, just to note that 21% of our overall portfolio is currently classified as local brands given their geographic concentration. SKYY remains an important part of the portfolio and showed a positive performance in Q3 driven by Argentina, China and Brazil, more than offsetting the ongoing softness in the core U.S., in line with other major players in the category. Okay. I'd also like to share some of the highlights of our activations from last time. And given that we're in our peak season, the key focus for us has been imperative in this period. So let's start with Aperol. Music festivals are and will continue to be at the heart of our activation strategy for Aperol. This summer has been our biggest and boldest yet with over 130 festivals in EMEA alone reaching more than 10 million consumers and selling, yes, selling over 2.5 million Aperol serves. We're also once again in the U.S. Open, where Aperol engaged with more than 90,000 attendees, driving 26 million influencer impressions. For Campari, the main highlights of the quarter were the strong partnerships with the major film festivals. Venice for the 8th, Locarno for the 5th and Toronto for the 2nd year. We're also very active during Negroni week because as you all know, there is no Negroni without Campari. And this linked with our cinema and the Negroni are critical for the positioning of Campari, and we'll continue to strengthen this further in the upcoming period. And moving from aperitifs to tequila, Espolòn is also very active during the summer with its mark days of summer campaign. Media impressions increased by more than 28% compared to last year. Social impressions reached millions leading to additional coverage in Forbes and Vogue and all of this culminated in a widely publicized drone show over New York. And lastly, we're going to have a look at our new Wild Turkey campaign, which was launched at the beginning of September, focused on our legendary master distiller Jimmy Russell. This initiative represents the brand's largest ever investment with a media spend planned up to $12 million through 2026. And this campaign is rolling out across the U.S. and Japan in '25, expanding to Australia, South Korea and other markets in 2026. The and the pre-launch testing ranked the campaign in the top 1% to 5% of benchmarks, showing strong purchase intent, brand saliency across the key markets. So let's have a look at the video. [Presentation] Simon Hunt: Okay. I think back, hopefully, if the technology is working properly. So before I hand over to Paolo for the P&L and balance sheet section, I'd like to give you an update on our key strategic priorities. We're really excited to welcome many of you in-person to our first-ever Strategy Day coming up on the 6th and 7th of November in Milan. The agenda is going to be pretty packed, giving us the opportunity to review our future direction and priorities while not forgetting to have a bit of fun, showcase our brands and our amazing production capabilities. So moving on to cost containment. You can see that in Q3, the declining trend we guided for in SG&A has started and will continue in Q4. Therefore, we are on track to achieve our target of 50 bps benefit on sales in 2025 and 200 bps benefit by the end of '27. On portfolio streamlining, we continue to take the right steps after disposal of Cinzano and our American plant in the first half. We've now divested our 50% stake in Tannico, the Italian online wine and spirits business. Although this has a limited impact on our results, it's another step in the right direction in terms of business simplification, in line with our strategy to focus on fewer, bigger bets. Any additional potential disposal will be based on the optimization of potential proceeds. And I can say that more conversations are ongoing. Okay. With that said, I'm going to hand over to Paolo. Paolo? Paolo Marchesini: Thank you, Simon. First and foremost, I wish to thank Simon for his kind words at the beginning of the presentation of my past contribution to the Campari success. It's been an incredible journey, a privilege to engage with such a thoughtful and committed community of analysts and investors over the years. I look forward to continuing to support the group in my new role as the Vice Chair, and I hope to see you -- many of you again at our Strategy Day in November. For now, let's dive into the results and the outlook for the remainder of the year. Now if you follow me to Slide 17, let's start by looking at our EBIT margin dynamics for the last time together. I am happy to say that we have recorded solid results so far in 2025 with a flat EBITDA adjusted margin supported by gross margin accretion and cost containment benefits, offset by brand building investments as planned. In terms of gross margin, 9 months was up by 90 basis points with an acceleration in Q3 of a positive 180 basis points. This was mainly due to the positive mix and ongoing benefits of input costs, especially Agave as well as contained tariff impact of just EUR 6 million in 9 months. Tariff impact benefited, in fact, from some pre-tariff in-house inventory position we were holding. Accordingly, our full year impact has been revised down to EUR 15 million for 2025. A&P to sales reached 17.3% in 9 months with an acceleration during peak season leading to a positive 9% organic yearly growth and a negative 110 basis point dilution impact on margin. As Simon mentioned before, we continue to invest behind our brands and our full year guidance of 17% to 17.5% is fully confirmed. As you all know, our cost containment efforts are becoming more and more visible. In Q3, we had a declining trend of negative 4% in value, and we are on track to reach a 50 basis point accretion guidance driven by ongoing value reduction in Q4. Accordingly, EBITDA adjusted was realized at EUR 517 million in 9 months. Within this, there was a positive contribution from perimeter of EUR 1.1 million driven by Courvoisier until April, net of agency brands and co-packing. Foreign exchange impact was realized at a positive EUR 9.8 million, driven by devaluation of the Mexican pesos offsetting the negative impact of U.S. dollar devaluation. Let's move on to look at our group pre-tax profit with a few comments. So far this year, operating adjustments totaled EUR 41.9 million and that includes the impact of plant disposal in Q1 and severance payment. Financial expenses came in at EUR 80 million in 9 months. This is on track with our expectations of EUR 105 million to EUR 110 million for the full year. The increase versus 9 months of 2024 was driven by higher average net debt, actually EUR 2.365 billion this year versus EUR 2.071 billion last year, mainly due to the base effect of Courvoisier closing on cash and debt. Average cost of net debt is now at 4.3% versus 3.7% in 9 months 2024. As in previous quarters, we need to remember that last year's figure was artificially low, given cash at hand ahead of Courvoisier closing coming from acquisition funding. Adjusted 9 months 2024 figure would have been 3.8%. Overall, group pre-tax profit adjusted amounted to EUR 440.4 million in the 9 months, indicating a negative 2.6%. And group pre-tax profit came in at EUR 398.8 million with a negative 5.7% decline. Moving on to look at the net debt, Slide 19. Net financial debt was EUR 2.241 billion in 9 months, improving by EUR 136 million compared to 2024, thanks to positive cash generation. This is before the further benefit expected from the proceeds of Cinzano disposal after the closing, which is expected to occur before the end of the year and will further contribute. Cash and cash equivalents were at EUR 509 million, up versus first half due to cash generation. Compared to the end of 2024, it is down by EUR 157 million due to EUR 78 million of dividend payment, CapEx initiatives, loan repayments and employee termination payments. Lastly, in line with our strategic priority of balance sheet discipline, our leverage ratio improved to 2.9x in 9 months, down from 3.6x in 9 months of 2024, following the acquisition of Courvoisier, 3.2x at the end of 2024. So in 12 months, as we said before, we have a deleverage that is accounting for 0.7x. Pro-forma including Cinzano disposal, the ratio is slightly better at 2.85x. This is a testament to our capability of actively manage our balance sheet following acquisitions and bringing leverage ratio down with further improvement expected going forward. Let me hand back to Simon to comment on our outlook. Simon Hunt: Great. Thanks very much, Paolo. So I started this year by saying it was going to be a transition year. And in these 9 months, we've showed a resilient performance despite the ongoing challenging backdrop you all know. The environment is still one of the most complex any of us has gone through, but we continue to outperform in key markets. At the same time, we keep our focus on what we can control in order to manage our balance sheet and P&L effectively and the results as clear as you just heard from Paolo. For the full year, we continue to expect moderate organic top line growth, assuming no worsening of consumer confidence in Europe or in the U.S. and especially in the on-trade. So far in the 9 months, we recorded plus 1.5% organic growth which confirms our targeted progression. On EBIT-adjusted margin, we're maintaining our flattish organic guidance. Have this in guidance now includes the tariff impact and the drivers behind this provision are as follows: first, lower than previously guided negative impact from tariffs of EUR 15 million as Paolo mentioned before, due to the benefit of our pre-tariff in-house inventory position. Of course, this is assuming the current tariff rates remain the same, which we hope they do. But now anyway, given the stability we've established. But just to consider, we will not have the same benefit next year. Second, the benefit of efficiency gains in COGS and SG&A, where we continue to make good progress. This is more than offsetting the reinvestments in A&P which are critical for our brand building, and we believe investing now while many others are cutting their budgets, helps to deliver strong long-term brand benefits. In terms of FX and perimeter, we expect limited overall impact in value terms. And regarding the medium long-term outlook, we confirm our previous guidance, and we are confident for the future. As I mentioned before, we'll come to the market with more details of how we're going to get there next week during our Campari Strategy Day. So to summarize, we keep our focus as planned in the key areas that we've mentioned before. We continued relative outperformance in sellout, which we are doing; financial deleverage trend, which we are achieving; deceleration in SG&A growth driving operating leverage, which we are delivering; continued focus on commercial execution and pricing discipline, which we are controlling; and portfolio streamlining, which we are delivering. So let's close here, and let's open up the floor for your questions. Thank you. Operator: [Operator Instructions] The first question comes from Andrea Pistacchi of Bank of America. Andrea Pistacchi: So first of all, Paolo, I haven't been on all the 100-plus calls you've done, but many of them. So I really want to say a big thank you for the help, detailed answers, insights that you've consistently provided. And also, of course, congratulations for your appointment to Vice Chairman of the Board. And all your best -- all the best in your new chapter, and I look forward to seeing you in Milan next week. So I have 2 questions, please. First, I'll start with Paolo, on gross margin. Gross margin being one of the key highlights, I think, of these results. Now there are a lot of moving parts here from the tariff impact, the input cost benefit, Agave, mainly mix effects, maybe other things. So it would be helpful, please, if we could go through these drivers in a little more detail if that is okay? For example, how much of a benefit are you getting from input cost and Agave, and is there more to go as we go into next year? And also, if you could say, what is driving the mix benefit? Because I think your aperitifs was a bit more subdued this quarter growing below group average. Yes. So putting all this together also on the margins, how you're thinking about how these moving parts play out in Q4 and maybe going into next year? And then for Simon, please. I wanted to dig a little deeper on EMEA, which I think was very solid overall. Some markets are strong. Others not, however, various companies are calling out how affordability is weighing on consumer demand. Now given that the affordability headwind probably won't go away in the short-term, what are you doing to deal with this to adapt with this? What does it mean for pricing in EMEA in the next 12, 18 months? And in Italy, stock levels, given that there's been a bit of a softer performance that you're calling out in the on-trade in the summer, how are wholesaler stock levels there? Paolo Marchesini: Thank you, Andrea. On -- I'll start with the gross margin question. So vis-a-vis key drivers on the COGS, we have originally highlighted EUR 20 million benefit from input costs, most of it coming from Agave. But also, I have to say that many other commodities are -- the prices are coming down. The only exception to that still remain logistic costs, where we have seen negative variances vis-a-vis a year ago. In terms of -- if you look at the upcoming quarter and more directionally into 2026 for the upcoming quarter, we think we will still benefit from positive contribution at the gross margin level, as we've seen in the third quarter of the year. We will keep on benefiting from a reduction in value of SG&A due to the restructuring initiative that is having an impact in the second half as we have originally guided, more to come with a further 90 basis points in 2026 due to the full year effect of the initiatives that have been implemented in year 2025. Vis-a-vis the mix, the very good news is that on Espolòn, originally the objective was to achieve parity vis-a-vis group average gross margin by Q4 of this year. Instead, we managed to put it forward to Q3. So Espolòn in Q3 was no longer a bleeder and that contributed to a positive mix. Clearly, if we look at the composition of the margin gain in the third quarter, giving the pricing pressure that we had, most of the -- if not most of the gain is coming from cost benefits more than mix and so the very same dynamic we are expecting to see in Q4 with promo pressure negatively impacting the company's ability to take net price gains. COGS, will keep on being positive and mix as we hope will positively contribute. So this is a little bit how we see the first quarter and next year. In terms of clearly, perspective in the past years, our ability to drive gross margin expansion based on sales mix improvement is linked to the performance of primarily aperitifs but now also tequila, Espolòn will be no longer a bleeder. So we remain extremely positive vis-a-vis the possibility of expanding gross margin via sales mix. Commodities remain a tailwind in 2026, whilst at this stage, we believe pricing, the opportunity is minute and less evident given the current market conditions. Simon Hunt: Andrea, looking forward to seeing you next week. Look, your question on EMEA, look, EMEA, overall, it's tough, as you rightly said. But I'm really pleased with the performance that the team has delivered. And I think the call out on affordability, you're seeing consistently across categories and this whole cyclical structural debate. I think one example of cyclical EMEA is a great one where you're seeing it across every category. It's not just within our category, put it that way. I think, look, in terms of what we need to do on this, we are very good, I think, at positioning the brand as aspirational, yet affordable. So the space we play in, we've got to really create that value in the consumers' eyes. And so the best way to do that is execute brilliantly. And that's in the markets where we're carving out, we're getting -- gaining share or outperforming, it's where we're really doing that, and the consumers are seeing the value in what we offer. So I think that's the first thing in terms we need to do. The second thing is then leveraging our portfolio. We have a collection of brands that allow us to compete very effectively in these markets. And you see that whether it be there may be a tougher performance on Aperol in Germany, but the growth in Sarti or the growth in Crodino and other markets. So leveraging our portfolio is key. I mean, more tactically, there are some opportunities, I think we've got to focus on around revenue management, which you'll hear more about next week. And just generally, in terms of our overall strategy, I'm not going to take away from what you're going to hear next week. So maybe by the end of Friday, you can let me know whether I've answered your question probably. Operator: The next question is from Sanjeet Aujla of UBS. Sanjeet Aujla: Hi Simon. Paolo, I'd also like to echo massive congratulations on your new role and many thanks for all of the help of the years [indiscernible]. So also 2 questions from me. Simon, I just want to come back to the consumer demand environment in the U.S. and Europe. Would you highlight there's been a deterioration between Q3 and Q2? And in particular, how are you seeing the evolution of the competitive and pricing environment? Would you say that's further intensified over the summer months? And that's my first question. And then just coming back to stock levels. I think Andrea asked the question, but can you just give us a flavor for where stock levels are, particularly in the U.S. and Italy and anywhere else that might be noteworthy? Simon Hunt: Sure. Absolutely. So I think in terms of the performance in Q3 and Q2, it is really mixed. And as you know, looking at this data from a national point of view, it kind of blurs what's going on. Yes, if you look at the Nielsen data, and it seems very kind of doom and gloom across the industry in many cases, but we have pockets of growth really coming through quite nicely. I mean a good example is not picked up is, in our 11 cities that we're really focusing on building Aperol, we have 10 of them in double-digit growth. So when you talk about the deceleration, it really depends where and on what. And I think that's where we've got to be a bit careful that we [indiscernible] too many conclusions simply because of the negativity in the off-premise. We are still growing. We're growing in the on-premise. We're growing in NABCA and we're growing really successfully on the brands that we're focusing on that we're prioritizing. So I think for me, it's -- it's more about what we're doing and where we're doing it than actually what's happening in the marketplace. As I've said before, we have the benefit of being a smaller operator in the U.S. and therefore, we've got to go after opportunities and maybe some of the other companies don't have. Having your second point on the pricing environment, I think you're saying you see the same data we see, which is from a mix point of view, again, it depends on which category. I think you're starting to see a bit more price competition coming through in Blanco as we've seen within the tequila sector. Repo is dipping down a bit. But if you look at the overall price mix, actually, the tier that most of it is coming from is the tier above where we play with Espolòn. It's up at the super premium price point, where you've got a mix, from memory, at 2.6% negative as consumers are now trying to -- our brands are trying to capture that consumer affordability in that end. And that's actually creating a good opportunity for us, some people on the down trade. So, we're going to have to carry on [ sale. ] I think it's going to be a pretty aggressive festive period. I think everyone is going to be up trying to close out the calendar year strongly. So we'll have to wait and see, but I'm very confident in terms of the plans that the team has got. I mean in terms of the stock levels just quickly in the U.S., I'm very happy, as I said before, with the levels of stock we've got we can -- we've managed to take down some of the pre-tariff stock that we put in, which on the flip side of that allowed us to not get hit by the tariffs quite as much as we originally forecasting. So that's impacted some of the shipment numbers that you see in Q3. In Europe, again, very happy. We see the stock levels we've seen in Italy and perfectly normal with what we're seeing in terms of sell-out. I'm not concerned about excess stock anywhere. There was -- I'm not concerned about heavy pushing through to land Q3. I feel pretty confident. And without getting into the performance in Q4, but I'm not seeing any hangovers running from Q3, put it that way. Operator: The next question is from Simon Hales of Citi. Simon Hales: Can I echo the congratulations to you, Paolo, and look forward to celebrating properly with you when we see you next week at the Strategy Day. So just a couple of quick ones for me as well, please. I want to start, can I just go back to the U.S. sort of briefly. And I wonder if you could just talk about whether you -- obviously, we're seeing a deteriorating underlying trend in the industry through Q3. I appreciate you're outperforming that and some of your comments earlier in terms of you're still winning where you're investing. I wonder what you're seeing as we're coming to the early parts of Q4, obviously, an important festive season to come. Has that deterioration in trends fed through to just sort of do you think weaker ordering by wholesalers in the U.S.? I mean, any comments and color there would be interested. And then secondly, just coming back to Jamaica. I appreciate it's very early days, given the hurricane only hit last night and your focus is rightly on the safety of your people. But you're obviously confirming at this stage, your full year '25 guidance for group moderate organic sales growth. I think consensus is looking for around about 2% to be moderate for the year. I just wonder, is that deliverable that moderate sales growth even if the disruption in Jamaica ends up being pretty significant given the hurricane? Simon Hunt: Yes, Simon, good questions. I mean I think, look, in terms of the underlying Q3 and heading into Q4, we're certainly living in a dynamic environment at the moment is the way I describe it. So I think ultimately, we're not seeing any real pressure from, certainly from our relationships. We came through on the wholesaler side, but that's also probably because we're actually in a reasonably healthy stock position already, healthier than not too high is what I mean by that and appropriate for what we need going forward. So I think -- as I've said on previous calls, the cost of capital, both in on-premise retailers and wholesalers is clearly ask -- people are now asking about what -- are people destocking further. For us, we feel pretty confident in terms of the flow. We're very confident in terms of the stock levels at each level. So we don't really see too much of that coming through. I think what will be interesting is whether or not retailers are willing to take in the holiday stock that they normally take in. And I think that's something we don't know yet. We've had no indication they're not going to. But again, things are changing quite quickly in the marketplace, and we'll see. Maybe they're taking half as much through to a holiday to wait and see what the consumer does. So that may impact. Again, for us, it comes back to a big chunk of our business is in the on-premise as well. So we've got to make sure we're executing really well in the on-premise, which the team is doing a good job on, but also making sure that we can respond to those changes if they come through in the purchase patterns. So I think on the first question, again, it's difficult to kind of predict what's going to happen, as you know, but we feel pretty confident with the plans that we've got. On your second question on Jamaica, you're absolutely right. Look, it's all about the team and making sure everyone is safe at the moment. I've got calls later tonight with the team to find out where we are. In terms of this year, I want to be clear that we've already shipped a vast majority of the stuff that we need to close out the year out of Jamaica. And we're sitting on healthy inventory positions to meet the demand. So I don't see that being an impact into this fiscal or impacting our ambitions to close out the year strongly. I think until I see or until I hear really what the team has found, once I've established everyone is okay, then I'll be in a better position to give maybe a bit more of an update next week in terms of what we found out. But at this stage, it's very hard to get the communication. I think you know electricity is out, phones are out, a lot of the roads are blocked. We're getting kind of piecemeal information. We've got a call later tonight, and I'll know a bit more, but I probably won't have the full picture tonight either. But in terms of full year impact, I don't think there's -- it's a significant impact. Operator: The next question is from Mitch Collett of Deutsche Bank. Mitchell Collett: And I'd also like to say thank you very much, Paolo for all your help and patience over the years and good luck with the future. Two questions for me, please. So the first one is a little bit similar to what we've had before, but you've obviously reiterated this year's guidance, but you've added this line about assuming no further worsening of consumer confidence in Europe, especially impacting the on-trade and in the U.S. I appreciate the importance of OND, but maybe just a bit of color on why you felt that additional line was necessary given how far we are into 2025? And then I wouldn't want to take anything away from next week. But clearly, you've confirmed your medium-term outlook. And I appreciate visibility is low. It's still early to ask for a read on 2026. But the question I want to ask is, do you think that next year, you'll be in that mid- to high single-digit organic growth range? And I guess, if not, what do you need to see to get there? Simon Hunt: Okay. Mitch, yes, in terms of the guidance, the reason we put that in is, as I said on -- literally on the first call, I think I came on with it, we're controlling what we can control. And so the team is working through that. And so yes, we've only got a couple of months to go to close out the year. But this has probably been a year with high volatility than I've seen in 31 years. We've had tariffs, we had economic pressures, geopolitical changes. And as a result, we're seeing consumer behavior really change quite quickly and certainly a lot quicker in terms of purchase behavior. And that was the only reason we put it in. We want to be prudent. We want to make sure that we land the year in line with what we've told you, each one of these calls of what we're going to do. So I think we're just kind of being a bit prudent there. I'm confident we can get where we need to get to. But I think it's also recognizing there are some things outside of our control. And therefore, we want to make sure that we've kind of covered that off in terms of our guidance. I think in terms of your question on '26, yes, you're right. I'm not going to give you an answer yet in terms of where we are, but I think -- the reason we set our medium-term outlook, and we'll talk more about this next Thursday and Friday is really about our confidence in that longer-term outlook and medium-term outlook. What we anticipate '26 will be, will be a step on that journey. Exactly what step? We need to confirm we want to close out this year, and we'll be able to give more guidance once we see how we finish out the year. But it would be, I think, a positive step in that direction. Again, the only caveat on that is there's a bunch of stuff outside of our control and volatility at levels we haven't seen before. So again, what I want to be able to do is be prudent, make sure we can deliver what we tell you we're going to deliver. Operator: Next question is from Laurence Whyatt of Barclays. Laurence Whyatt: Simon and Paolo, and can I echo all the comments to Paolo, and thank you for all your hard work and help over the years and look forward to seeing you next week at the Capital Markets Day. A couple of questions for me there, please. Just on the tariff impact. You mentioned you've managed to get around some of the tariffs by using some of your stock. Presumably, that means that some of the impact will be felt next year. I was wondering if you could quantify what sort of tariff impact you would expect next year once you no longer have that -- the benefit of the stock and whether you think you have taken any price in order to overcome some of those tariffs and if so, sort of on what brands do you think that will be taken on? And then secondly, with regard to Espolòn, of course, the expectations of tequila over the past few years have been, I guess, pretty heroic. The growth has been enormous. And of course, that's slowed down somewhat in recent months and quarters. Just wondering on your sort of contracted Agave supply, whether you've had to adjust how much Agave you're buying in from Mexico and whether that's giving you some of the benefit on the margin on Espolòn recently? Paolo Marchesini: Yes. On the tariff, the -- we confirm -- although this year, we're benefiting from already existing in-house stocks for next year, unfortunately. If nothing changes, the EUR 37 million guidance that we've highlighted before stays. So it's completely unchanged. You alluded to opportunity of taking price. Of course, there's always the opportunity to partially mitigate the impact. But we also have to recognize the fact that the U.S. environment is particularly competitive at the moment. Therefore, I wouldn't bank on it at this stage. Whilst on the second question vis-a-vis the Espolòn brand, we've managed to tweak down the prices and the commitments. And so this is why we're benefiting from the decline of the Agave price. For next year, there will be still a tail end opportunity sitting in the current trend. We have directionally highlighted in the past EUR 5 million, which is, I think, makes sense is confirmed for next year. So we have a little bit of tailwind also on that -- on input costs for next year. We're in a good spot on Agave suppliers. Operator: Next question is from Trevor Stirling of Bernstein. Trevor Stirling: Simon and Polo, let me add to the que Paolo and look forward to really having a proper drink and celebrating next week. Simon, probably one question for you. If we look at the Espolòn shipment data, it looked kind of weak around minus 1%. And so the sellout data we see in NABCA is much stronger than that. I think you alluded to shipment phasing. Maybe could you just give us some sense of where you think Espolòn is on an underlying basis? Simon Hunt: Trevor, you're right. I mean in terms of shipments down 1% and then you see the performance on the sellout, we basically -- there are 2 drivers of this. One was actually just destocking the stock that we brought in ahead of the tariff, we're still unsure as to what was going to happen there. And so we've just been working that through, which is whether ultimately the shipments will catch up with the sell-out performance, is the first thing. The second thing on that is just there's some mix around the different states is about where we're shipping stuff as well. So in terms of whether Repo, whether it's Blanco, again, there's just some different phasing in terms of that. So I don't think either of them are big drivers. It's more just about -- I think you'll see some catch-up on that as we close out the year and head into Q1. Trevor Stirling: And then maybe just one follow-up. The strength of both Jamaica and the Jamaican Rum portfolio, it seems really strong. I mean, I think Jamaica and Jamaican Rum is down about 19%, 20% this time last year, and you're up 45%, 50% which would imply you got underlying growth as you're probably in some of the region of 20% at least. Does that sound about right? Operator: [indiscernible] you have your phone on mute? Simon Hunt: Sorry about that. I thought -- Trevor, I thought I hit it. The -- in terms of the Jamaican Rum performance, really a couple of drivers on that. One is the performance in Jamaica. So we're cycling the disruption of the hurricane last year, which now it looks like we might be doing the same this year. So that's one of the drivers. But the brand is incredibly powerful on the island, and the team has done an excellent job of continuing to drive the execution. So that's been one area. The second area has been the fact that we were out of stock in the U.S. And so now that we've got stock back in, that's allowed us to give us a very positive performance there as well. So put those 2 things together, that's really why. Operator: The next question is from Chris Pitcher of Rothschild & Company. Chris Pitcher: Another round of thanks for Paolo from me for [indiscernible] over the years. And also congratulations on the, The Glen Grant sale, which you highlight in the Annex, which has gone to raise some good money for charity. So good work there. One question on Courvoisier again. Are we through the last really disrupted period for Courvoisier? Because if my numbers are right, you've probably done EUR 13 million, EUR 14 million of organic sales through on Courvoisier. And should that be normalizing into the fourth quarter? Or should we still expect to see continued strong momentum as that brand comes back? Because certainly, the EUR 99 million was a bit ahead of what I was forecasting for the 9 months. Paolo Marchesini: I think as we progress further into the upcoming quarters, the shipment performance of Courvoisier will basically mirror the depletion and the sell-out trend. So it's clearly at the beginning, we benefited from the first time consolidation of Courvoisier. So I think most of that is behind us. Chris Pitcher: The destocking phase? So it's on a more normal comp in the fourth quarter. And are you still expecting to release -- continue to release cash from the inventories given the levels they were at? Paolo Marchesini: On the inventory side, we -- as we said that, we have a lot of aging liquid. Over time, we will more than selling liquid, contain the intake of new aging [indiscernible]. So yes, it's directionally positive. It will take time to absorb the stock we've taken on board as we bought the brand. It was more than EUR 440 million. Operator: The next question is from Alessandro Tortora of Mediobanca. Alessandro Tortora: I have 2 questions. Okay. The first one, if you can comment a little bit on the debt-EBITDA trajectory, considering the leverage ratio you already got in the 9 months, if we can assume, let's say, that you're going to stay below the 3x by year-end or if we need to think about any seasonality or any, let's say, factor that should bring this ratio, let's say, again above the 3x. This is the first question. The second one is just a follow-up on Cognac. If you can comment a little bit, let's say, the recent change on the duty-free side and if you expect also on Courvoisier side, a significant, let's say, impact on the reorder on the duty-free. Paolo Marchesini: On the leverage ratio target, we're not giving any guidance. We have also to take into consideration the fact that in Q4, we still have a significant tail of extraordinary CapEx. The total amount of CapEx is EUR 200 million. And in the first 9 months, we've already spent EUR 120 million. So there is EUR 80 million cash outlay coming from extraordinary CapEx in Q4. Yes. But directionally, you're right in saying that the company generates a lot of free cash flow, one of the highest free cash flow to EBITDA conversion in the sector. Average for the last 5 years at about 60%. So we -- you can easily calculate the deleverage potential in coming years. Simon Hunt: Okay. And Alessandro, sorry, I couldn't quite hear the question. [indiscernible] We got the recent change in duty-free on Courvoisier and others, but we aren't sure what the question was? Alessandro Tortora: Yes, it was related to China. I know it's, let's say, is not so big for you. But if we look at, let's say, the GTR and the restock that is now possible according to the recent tariff agreement. If you see, let's say, any restock for Courvoisier in the coming months? Simon Hunt: Right. So yes, so I couldn't hear you. Look, for us, as you know, look, China is very small for Courvoisier and so is the Asian duty-free at this stage. So it's not a big driver for us. I think China represents less than 2% of Courvoisier sales. So the key thing we want to look at in GTR as part of our relaunch plan of Courvoisier across the region is the strategic role that GTR plays as a shop window for the consumer. So I think that's more where we'll see it with part of the new strategy. But there's no -- we're not looking at a restock and it would be negligible in our case anyway. Operator: [Operator Instructions] There are no more questions registered. Would you like to make any closing remarks? Simon Hunt: Yes, I would just very quickly, thanks very much, and look forward to seeing many of you next week. Just to reiterate, all of your thanks to Paolo again. A remarkable run and a remarkable set of earnings reports, and [indiscernible] to him next week. So thank you again, Paolo. And we'll see you next week. Thanks for your time. Paolo Marchesini: Bye. Operator: Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.
Operator: Good day, and welcome to the Prosperity Bancshares Third Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To withdraw your question, please note this event is being recorded. I would now like to turn the conference over to Charlotte Rasche. Please go ahead. Charlotte M. Rasche: Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares Third Quarter 2025 Earnings Conference Call. This call is being broadcast live on our website and will be available for replay for the next few weeks. I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares. Here with me today is David Zalman, Senior Chairman and Chief Executive Officer; H. E. Tim Tamanis Jr., Chairman; Asylbek Osmonov, Chief Financial Officer; Eddie Safady, Vice Chairman; Kevin Hanigan, President and Chief Operating Officer; Randy Hester, Chief Lending Officer; and Mae Davenport, Director of Corporate Strategy. Bob Dowdell, Executive Vice President, is unable to join us today. David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by Asylbek Osmonov, who will review some of our financial statistics, and Tim Timanis, who will discuss our lending activities, including asset quality. Finally, we will open the call for questions. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for purposes of the federal securities laws and as such may involve known and unknown risks, uncertainties, and other factors which may cause the actual results or performance of Prosperity Bancshares to be materially different from future results or performance expressed or implied by such forward-looking statements. Additional information concerning factors that could cause the actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10-Q and 10-Ks and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now let me turn the call over to David Zalman. David Zalman: Thank you, Charlotte. I'd like to welcome and thank everyone listening to our third quarter 2025 conference call. In the third quarter, we signed a definitive merger agreement with Southwest Bancshares Inc., the parent company of Texas Partners Bank headquartered in San Antonio, Texas. We are excited about this transaction as it significantly expands our San Antonio Metro footprint with four additional branches and increases our deposit market share, bolstering our presence in the Texas Hill Country and adding an experienced C&I lending team. I would also be remiss not to mention how excited we are about our pending merger with American Bank Holding Corporation in Corpus Christi, Texas. The combination will strengthen our presence and operations in South Texas and the surrounding areas and enhance our presence in Central Texas, including San Antonio. Combined with the Texas Partners acquisition, we will have 10 banking centers in the San Antonio area. I am pleased to announce that the Board of Directors approved increasing the fourth quarter 2025 dividend to $0.60 per share from $0.58 per share that was paid in the prior four quarters. The increase reflects the continued confidence the Board has in our company and our markets. The compound annual growth rate in dividends declared from 2003 to 2025 was 10.7%. We continue to share our success with our shareholders through the payment of dividends and opportunistic stock repurchases while also continuing to grow our capital. Prosperity reported net income of $137.6 million for the quarter ending 09/30/2025, compared with $127.3 million for the same period in 2024. Net income per diluted common share was $1.45 for the quarter ended 09/30/2025, compared with $1.34 for the same period in 2024, an increase of 8.2%. Our earnings were primarily impacted by a higher net interest margin. The net interest margin on a tax-equivalent basis was 3.24% for the three months ending 09/30/2025 compared with 2.95% for the same period in 2024. As mentioned in previous calls, our net interest margin should continue to improve over the next 24 to 36 months with interest rates either increasing or decreasing 200 basis points. Prosperity continues to exhibit solid operating metrics with an annualized return on tangible equity of 13.43% and a return on assets of 1.44%. Our loans, excluding the warehouse purchase program loans, were $20.7 billion at 09/30/2025 compared with $20.9 billion at 06/30/2025, a decrease of $160 million or 77 basis points. We continue to work through credits acquired in previous mergers and we are experiencing borrowers using their own cash to pay down balances or not drawing on their lines. It is also an extremely competitive lending environment with aggressive terms and conditions being offered, and in some cases, we've just elected not to participate. Deposits were $27.7 billion at 09/30/2025, an increase of $308 million or 1.14% annualized from the $27.4 billion at 06/30/2025. We are encouraged that the core deposits have grown. Importantly, Prosperity does not have any broker deposits. Our nonperforming assets totaled $119 million or 36 basis points of quarterly average earning assets at 09/30/2025, compared with $110 million or 33 basis points of quarterly average interest-earning assets at June 30, 2025. There is a slight increase in NPAs; however, credit remains strong with some isolated incidences. The allowance for credit losses on loans and off-balance sheet credit exposure was $377 million at 09/30/2025, compared to the $119 million in nonperforming assets as of 09/30/2025. We remain focused on completing our pending acquisitions of American Bank Holding Company and Southwest Bancshares Inc. We also continue to have conversations with other banks considering strategic opportunities. We believe that higher technology and staffing costs, funding costs, loan competition, succession planning concerns, and regulatory burden all point to continued consolidation. We remain ready to move forward in the event a transaction materializes and will be beneficial to our company's long-term future and will increase shareholder value. As of October 2025, Texas boasts one of the world's strongest and most diverse economies, ranking as the eighth largest globally with a GDP of approximately $2.7 trillion in 2024. The state produces 9.3% of the US GDP and continues to outpace national growth in many metrics. Although the economy is showing some signs of moderation, influenced by factors such as tariffs and immigration policies, we believe Texas remains the best place for business with a pro-business attitude and no state income tax. This is evidenced by major corporations continuing to move their operations to Texas and Oklahoma. As of October 2025, Oklahoma's economy is demonstrating resilience and modest growth, outpacing national averages in key areas like unemployment and population expansion despite broader US slowdowns from tariffs and policy uncertainties. Charlotte M. Rasche: Thanks again for your support of our company. Let me turn over the discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss the specific financial results we achieved. Asylbek? Asylbek Osmonov: Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended 09/30/2025 was $273.4 million, an increase of $11.7 million compared to $261.7 million for the same period in 2024, an increase of $5.7 million compared to $267.7 million for the quarter ended 06/30/2025. Fair value loan income for 2025 was $2.9 million compared to $3.1 million for the second quarter of 2025. The fair value loan income for the fourth quarter of 2025 is expected to be in the range of $2 million to $3 million. The net interest margin on a tax-equivalent basis was 3.24% for the three months ended 09/30/2025, an increase of 29 basis points compared to 2.95% for the same period in 2024, an increase of six basis points compared to 3.18% for the quarter ended 06/30/2025. Excluding purchase accounting adjustments, the net interest margin for the three months ended 09/30/2025 was 3.21% compared to 2.89% for the same period in 2024 and 3.14% for the quarter ended 06/30/2025. Noninterest income was $41.2 million for the three months ended 09/30/2025, compared to $43 million for the quarter ended 06/30/2025, and $41.1 million for the same period in 2024. Noninterest expense was $138.6 million for the three months ended 09/30/2025, and for the three months ended 06/30/2025, compared to $140.3 million for the same period in 2024. For the fourth quarter of 2025, we expect noninterest expense to be in the range of $141 to $143 million. The efficiency ratio was 44.1% for the three months ended 09/30/2025, compared to 44.8% for the quarter ended 06/30/2025, and 46.9% for the same period in 2024. The bond portfolio metrics at 09/30/2025 have a modified duration of 3.8 and projected annual cash flows of approximately $1.9 billion. And with that, let me turn over the presentation to Tim Timanis for some details on loan and asset quality. Thank you, Asylbek. Tim Timanus: Our nonperforming assets at quarter-end 09/30/2025 totaled $119,563,000 or 54 basis points of loans and other real estate, compared to $110,487,000 or 50 basis points at 06/30/2025. This is an increase of $9,076,000. Since 09/30/2025, $1,121,000 of nonperforming assets have been removed as a result of the sale of homes. The 09/30/2025 nonperforming asset total was made up of $105,797,000 in loans, $16,000 in repossessed assets, and $13,750,000 in other real estate. Net charge-offs for the three months ended 09/30/2025 were $6,458,000 compared to net charge-offs of $3,017,000 for the quarter ended 06/30/2025. This is an increase of $3,441,000 on a linked quarter basis. There was no addition to the allowance for credit losses during the quarter ended 09/30/2025. No dollars were taken into income from the allowance during the quarter ended 09/30/2025. The average monthly new loan production for the quarter ended 09/30/2025 was $356 million compared to $353 million for the quarter ended 06/30/2025. Loans outstanding at 09/30/2025 were approximately $22,028,000,000 compared to $22,197,000,000 at 06/30/2025. The 09/30/2025 loan total is made up of 36% fixed-rate loans, 34% floating-rate loans, and 30% variable-rate loans. I will now turn it over to Charlotte Rasche. Charlotte M. Rasche: Thank you, Tim. At this time, we are prepared to answer your questions. Our call operator will assist us with questions. Operator: We will now begin the question and answer session. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, at this time, we will pause momentarily to assemble our roster. Our first question comes from Catherine Mealor with KBW. Please go ahead. Catherine Mealor: Thanks. Good morning. Good morning. Wanted to start maybe with your outlook for loan growth. Kevin J. Hanigan: Hey, thanks for the question. This is Kevin. I'll take the first cut at that. I think for the fourth quarter, first of all, year to date for the fourth quarter loans are down slightly maybe $40 million to $45 million. And as David said in his lead-in comments, we're seeing some structure and pricing aspects that are not favorable in terms of what the way we're thinking about credit. Still maybe on an accelerated basis, so between that and some elevated payoffs in the fourth quarter, I think this is gonna be a flat quarter which I know is disappointing, but I think that's really where we're gonna kinda come out of this. Going into next year, we feel a little bit better about it, in that we've got a bunch of construction deals that we have approved over the course of this year that have not funded up yet, we're still waiting for all the equity to go into those deals. So just off of a steady state book, I would say low single digits for next year. And as you know, expect to have both of the acquisitions that we have announced closed and on the books in the next year, probably by the end of the first quarter of next year. Which will help out obviously for just the total volumes. Only thing I would caution out of all of what I've said is once we buy a bank a couple of banks like that, there's typically some loan runoff even for a good bank. And these are both pretty good credit quality banks. So one of the headwinds for overall next year, not just organic off of today's balance sheet, will be any payoffs we get out of those two acquisitions. I think that's probably a fair summary, David or Tim may wanna add to that. David Zalman: Well, I would just remind everybody that when you're in a market that's very aggressive in terms of pricing and terms, and that's what we have had for some time now, you just simply have to be careful and prudent. And there are still loans to look at out there. We have active loan committees. But we don't wanna make a mistake and end up having a problem with our net interest margin because we priced too low and things of that nature. And we see a lot of that going on in the market. So we just need to be careful and prudent and things will be fine. Kevin J. Hanigan: Yeah. The last thing I probably should have mentioned is it's not lost on you or us. But that the competitive landscape in Texas has taken on some major changes over the last couple of months. And I would expect some of the new out-of-state players who bought banks here to be aggressive. Into this market. Offsetting that aggressiveness, and maybe this isn't as prevalent as it's been, you know, fifteen, twenty, thirty years ago. There's a fair amount of Texas-based businesses that wanna bank with the Texas Bank. So just the fact that you've got an out-of-state competitor taking over a local institution, there'll be more than a handful of clients who say, you know, we're Texans and we wanna bank with a Texas bank, somebody we can look in the eye in terms of the top decision-makers. So I think they'll net-net that probably plays out on a positive basis for us. Yeah. That's a very real aspect. Catherine Mealor: And so how should we think about if because I think you're right. I think the competitive landscape I mean, if you see stress and structure and pricing that you don't think are acceptable today, my gut is just given all the M&A that you've seen in Texas, that's only gonna get worse next year. But I appreciate the comment on Texas, one of the banks with other Texas banks. So that helps that. But in the scenario where we don't see a pickup in loan growth next year, how I mean, I was excited to see the buyback activity this quarter and the new authorization. Like how aggressive do you think you can get on this buyback given where your stock is trading and the slow growth? I mean, is it appropriate for us to incorporate this entire 5% buyback into our estimates over the next year? David Zalman: I'm going let David take that one. I'm going say that's going to price dependent. And my goodness, we sure wish we could have been buying more in the previous quarter. We were blacked out for a good part of the period and when we got S4s out there on acquisitions. So I do expect very soon we'll be active again. David Zalman: Kathryn, I would say that I've read a lot of the analysts' things that came out this morning. I think once the herd gets into a certain motion, they all run in that same motion. They all focus on the net interest income, but the bottom line is our balance sheet, we reduced our balance sheet in size and that primarily came from borrowings that we had at the Fed or Federal Home Loan Bank. If you look a year ago, we were probably borrowing about $4 billion and today we, you know, you might we might have closed at $2 billion, but we probably average about a billion in borrowings a day. So we maybe a billion and a half to billion 8. So we really lowered our balance sheet. The things that every that I don't I guess you're missing. I don't know. Maybe I just need to bring it up. If I told you a year ago, that we're going to increase our earnings by 15%, and we're going to take our net interest margin from 2.95 to 3.24 in one year I think everybody would be ecstatic. Well, that's what's happened. Our earnings from nine months last year to nine months this year has grown over 15%. Our net interest margin went from 2.95 to 3.24. I mean, that's just magnificent. And the beautiful part about that is based on y'all's projections, you have that to look forward to for 2026 and 2027 double-digit growth. So yes, we're very excited about the quarter. And yes, at the low prices that we're at right now, we're going to back up the truck. There's no question. With the earnings we have, and the price that it's at right now is ridiculous. I noticed you've noticed some other bank sales that have gone through like the First Bank deal in Colorado. I mean, that bank is similar to us. I think we're better, however, but a lot of the same good core deposit structures went for 15 times earnings. Anybody take your earnings next year, $6 or something, multiply that times that that's our real price. That's the real value of our bank, you know, $90 to $100 a share. So where we're trading at today is just absolutely ridiculous, and we will be buying and we will be buying strong. Catherine Mealor: Great. Love to hear that. Thank you. Operator: The next question comes from Michael Rose with Raymond James. Please go ahead. Michael Rose: Hey, good morning. Thanks for taking my questions. Maybe just following up on the loan growth discussion, just given the amount of dislocation that we're going to see. And I know it's competitive, but I think one maybe one area that you guys haven't talked up as much over the years and others have is just hiring efforts and hiring more lenders. Bringing more bodies on staff. You guys have a great efficiency ratio. But any thoughts given to being a little bit more active on the hiring front to really bolster that loan growth potential? Because certainly appreciate the margin expansion, the fixed asset repricing, but it's kind of price times volume, right? And I think we'd like all like to see some greater earning asset growth really reap the benefit of that margin expansion. David Zalman: Yes. We're constantly looking at people that potentially can come in and help to grow our bank. I've approved three or four just within the last month that we think have a very good opportunity with us. So that's something we're constantly focused on. Likewise, if we have somebody that's just simply not performing, and enough time has gone by, where that should not be the case. We typically look at those people and try to determine, you know, should they still be with us or not. So there are two sides to that coin. But we absolutely are looking at bringing people in and we have approved a fair number here over the last year really. And some recently. So we're active in that regard. Michael Rose: Okay. Helpful. Kevin, maybe I could if I can just ask quickly the kind of the warehouse question and kind of expectations for the next quarter. It looks like we're going to get a rate cut here in a couple of hours. Just wanted to see what you guys are seeing. Thanks. Kevin J. Hanigan: Yeah. Thanks for the question, Michael. First of all, I have to say after six or seven year run of really hitting the nail on the head on our thought process about a forward look in this space. I missed it this quarter. I said $1.25 billion. We averaged $1.21 billion. So the record is broken. You know, Michael, quarter to date, through last night, we're averaging $1.222 billion. So basically flat to the average of last quarter. Typically, the warehouse is decent, in October, and November and December are relatively weak months. In fact, it wouldn't surprise me if we saw a week or two at below a billion or below $900 million before the year is out. Now, all that's rate dependent, but I would say the quarter, we probably averaged $1.1 billion. Yeah. The only helpful thing you could say, I saw some numbers today, I don't know if they're accurate or not, where we refinancings are up 111% over last year. Simply because right believe it or not, you know, there's another mini refi boom going on. Michael Rose: That's good to hear. I'll step back. Thanks for taking my questions. Operator: The next question comes from Dave with Cantor. Please go ahead. Dave: Hey, good morning, guys. Maybe if I could just start on margin I know that's continuing to trend higher. What's the medium-term outlook on that or the one-year view on that expansion you're looking for? And then maybe the more normalized margin that you expect given your rate outlook. And then if you could just quantify or update the number that you're seeing in terms of fixed-rate loans that are going to be repricing over the next year or two, that'd be great. David Zalman: Can probably start on the margin also, if that's I mean, we as we said last year, we really felt the margin, I think, we gave numbers like we'd end up at 3.25 or 3.30, I think, at year-end. This year, we feel comfortable. I think we've hit the I think we've got really close to what we said right now. We still see margin increasing over the next twelve, twenty-four, and thirty-six months. I mean, sometimes these models that we have, they look too good, so I don't want to give you these numbers because I think that our rates are lower example, like on a money market, if you have a million dollars with us, may be 3%. At our bank, if you're at one of the other banks, we're maybe making 4%. So as interest rates come down, we may not go down as much as some of the other banks go down right up front. I mean, what the exception rates absolutely will go down on those. But the overall rates, we probably won't see as much rate going down. As the other banks are. So but having even said that, time is on our side. It's just that they will go up. It's just maybe not as fast we would like them to go up with their interest rates going up or down. So we still see margin improvement for twelve, twenty-four, and thirty-six months. I mean, it looks really good for us. I mean, there's no question. You've got a $10 billion portfolio of bonds that little over 2%. That's with a three-point something year duration. So as those are maturing, I mean, it's I mean, it's just it'll be a home run for us. Asylbek Osmonov: I agree. And that what we're discussing now, the security and the fixed loans will be tailwind for us that continue to reprice for several years. That's why we see expansion of the margin continue to do. And specific to your question, how much of fixed loans we have. If you look at loans without warehouses, 39% of the loans is fixed-rate loans. Dave: In terms of just what's rolling over the next year or two, any sense for dollar amounts there? Asylbek Osmonov: I think just if you look at it, it's rolling off probably from a repricing standpoint, of course, that you know, floating and variable will be faster than fixed one. But I think it's we'll have a good value volume of repricing it. If you look at them big picture, we have about $5 billion of loans gets repaid or paid down every year that for opportunity to out of that $5 billion about $3 billion has opportunity to reprice because a $2 billion is already at the floating rate. David Zalman: So that's get another two billion of our security. Asylbek Osmonov: Exactly. So that's we have about $5 billion in repricing opportunity between loans and securities. Dave: And I would point out that some of the fixed-rate loans that we think will reprice were made back when loans were made at quite a bit lower rates. 3 and a half to four and a half to 5%. So we'll see what rates are at the time that that repricing occurs. But I expect a pickup in the rate on those loans. David Zalman: So we'll see. I agree. Yeah. It should be pretty decent. Dave: Where are your new loans pricing now? Kevin J. Hanigan: Oh, I'd say between $6.50 and 7 in a quarter. David Zalman: That's correct. Once again, we see some competitive pricing at 5% or even below. We've tried Those we aren't doing. We've tried to stay away from those. Kevin J. Hanigan: That's correct. Yeah. Yeah. I think the worst one we chased is probably six and a quarter. Maybe. David Zalman: If we went that low, it was only because the customer had as much in deposits as we had in loans. But for the most part, we're I mean, we're seeing some people pricing thirty days off for plus two. And, I mean, we just haven't gone to those kind of levels. You know? Dave: Yeah. Okay. Appreciate the color. Maybe just switching to expenses real quick. Appreciated the 4Q guide there. How are you thinking about the step up in that run rate as we get into next year? I know sometimes you've had a little bit of a step up in the first quarter and then you've got merit and other stuff kicking in for 2Q. And then, anything lumpy that you're expecting over the next year or so just in terms of platform enhancements or anything like that that we should be aware of? Thanks. Asylbek Osmonov: Yeah. I think the guidance that what I gave you for the fourth quarter in the first quarter, yes, it usually goes up because of the merit situation. But in longer term, I think I don't see significant increase in the expenses. It's going to be normal if inflationary increase we see throughout. I know we're working on the plus change for next year, and we kinda looked at it in numbers. It provides about additional one and then to one and a half percent additional expense for the run rate I provided. So that's gonna be baked in starting next year. But, overall, I think we have pretty good expense management, and we'll continue to do that next year. Dave: Okay. Great. And if I could just sneak in one more. Just on the M&A picture in general. Obviously, a lot of eyes are on Texas, a lot of big bank eyes are on Texas. And I know you've been a strong acquirer for a long time. You're very well known in the market. As a buyer of banks. But I'm just curious how you guys would feel an inbound call from one of these larger bank CEOs who loves your footprint, your lower cost of deposits, you got stellar credit quality, you know, what would you look for in one of those combinations potentially? And are you starting to see any of that interest come your way at all? Kevin J. Hanigan: You got a future in politics, the way you phrased that. David Zalman: I really think that's what the market's missing. I mean, again, our bank's not up for sale, but at the same time, what is the real value of our bank when you look at the banks that have sold like First Bank Colorado and they're I mean, they're 15 times earnings. I mean, just take that multiple where we're at and what's out there in the market. You can see how underpriced that we are today. So we'll always do what's right for the shareholder. I mean, we probably wouldn't be bullied in one way or another depending on one hedge fund on the stock or another hedge fund on the stock, but we're always gonna do right by the shareholder and we always have in the past, and we'll continue to do that. But I think that the market's really missing the optionalities that we do have. Kevin J. Hanigan: Our scarcity value is increasing. Yeah. Yeah. I mean, we're the second largest bank based in Texas right now. So I mean, it one of the best growing states in The United States. So I just think people are really missing the boat here. Dave: Yep. Totally agree. Thanks, guys. Appreciate it. Operator: The next question comes from Manan Gosalia with Morgan Stanley. Please go ahead. Manan Gosalia: Hi, good morning all. So just a follow-up to your comments that things are looking a little bit frothy on the loan side and competition is only increasing from here and you have to be careful. Is there anything that you can do to drive loan growth within your return parameters? Maybe increasing branches or investing in your product set or hiring more? Is there anything else that can be done here? David Zalman: No. That's out of hiring people and lowering rates. Structurally, we're not gonna bend. But again, it's again, analysts are on one always on one side. They're always focused just on loan growth. I mean, bottom line is, guys, we have an 80% loan to deposit ratio. Don't wanna be a 100% loan to deposit ratio. A lot of our growth depends on our growth on deposits, and that's where your real money is really made. Not in deposits that you're paying 45% for. It's core deposits. And that's why when some people ask, why did you pay so much for this bank compared to this bank? Because banks are completely different. And so deposits are the most important thing. We'll take those deposits as they come in. And we will put those into loans. But you know, we may we may the same kind of return when we were 60% or 65% loan deposit rates as we are now is 80%. But, again, we're focused on it, and we're gonna continue to make loans. But, again, to make loans in a market where it's not profitable, there's too much risk, it's good for the short term because everybody's impressed with the net interest income growth. But if you're a long-term shareholder like I am, I'm not looking one year out or six months out. I'm looking five and ten years out. Asylbek Osmonov: And just give us some statistics. I know Tim mentioned what the average month production was for third quarter was $356 million and our production for the second quarter average was $353 million. But if you just compare what we had a year ago and same periods, the average was in the second quarter of last year was $255 million and the third quarter was $260 million. So if you look at just period to over period, our production up almost $100 million. So the production is there. Like I think Kevin mentioned that some of those real estate, they need to put their money first before they start taking out. So from that statistic, you can see that we are. David Zalman: If you look at the increase, if you look at the amount of loans that we decreased this time, the majority of the loans were in the category of one to four family residential home loans. And, again, people the home prices were higher. Interest rates were higher. Again, we were trying to get out of those more and sell more of those to the market. Where we could keep more of those, and we could you know, we can easily bill our loan to deposit ratio we want, but we're really focusing not just on loan growth or your net interest growth. We're focusing on earnings per share growth. We're focused on capital growth. I mean, we're focused on the whole bank, not just on one particular area. Manan Gosalia: Got it. That no. I appreciate that. But I guess just on maybe on the product side, is there are there any gaps that you might want to invest in there? David Zalman: I think so on the product side. We've never redlined necessarily very many products, if any. We're willing to look at anything that's reasonable. Asylbek Osmonov: So David Zalman: I don't think there's an obvious gap products anywhere. I don't know. I mean, we're really we're we offer just about any type of loan that you could want. I mean, we're one of the biggest ag lenders in the in the state of Texas in The United States, really. We're in construction lending. We're in commercial and industrial. We're there's there's probably enough. We're in middle market lending. We're in oil and gas. I mean, I can go on and off. There's not many areas that we don't touch. So we touch almost all the areas that are out there, actually. Manan Gosalia: Got it. Very clear. And then, maybe a follow-up on the buyback comment. You noted that you would have liked to be more active in the quarter and that you won't because of M&A. And you've obviously spoken in the past a lot about M&A being a strong part of your growth strategy and you're typically in multiple conversations at different stages. And then I guess you also noted that you will be buying back more aggressively at these prices. So should we take that domain that you are pivoting away from an M&A strategy to a buyback strategy in the near term while your stock is at these prices? David Zalman: I think that we'll always look at M&A, but based right now where our stock price is, we're really focused on getting our stock price up and we weren't able to buy. I will admit, I'll say that we just heard during this meeting that we have gotten all of our approvals on the American Bank in Corpus Christi. So we're excited about that. We're excited about putting the two banks in San Antonio and Corpus together. It would definitely give us from Victoria all the way to Corpus Christi, it will give us a dominant market share along what we call the Gulf Of America there. So we're excited about that. But again, our main focus right now will be to get our stock price up. We think it's terribly undervalued. And again, you can never say no to M&A because if it's, you know again, if it's a cash deal, it really doesn't matter. It's only stock that if we give our stock and it's too low away, that's what matters. So we'll still continue to look at all opportunities, but our main focus right now is to get our stock price up. Manan Gosalia: Great. Thank you. Operator: Next comes from Peter Winter with D. A. Davidson. Please go ahead. Peter Winter: Thank you. Kevin, I wanted to follow-up with comments that you made earlier about as you closed the deal with American Bank and Southwest that there'll be some runoff in the loan portfolios to meet your standards. But do you have a sense of how much runoff you'd be expecting from those portfolios? Kevin J. Hanigan: Not nearly as much as we experienced this year with the Lone Star acquisition. First Capital. First Capital. I mean, Lone Star has been fine, I'm sorry. They're both first of all, they're both pretty high-quality credit banks. I mean, we did a deep as we do on all acquisitions, we did a deep deep credit dive on both of these American Bank is gee, it's one of the cleaner banks we've seen, ever. So I think know, it's gonna be muted compared to what we've experienced here more recently. There's always gonna be some. But I think it'll be muted compared to what we have seen in the past. I think Tim and David could probably Yeah. Well, Peter, both both of those banks, did due diligence on both of them. You know, they're I don't wanna say clean as a whistle because there's always issues that come up. But, again, nothing like, you know, on our first capital deal that we did, in West Texas, we probably outsourced over $460 million in loans. We don't expect anything like that with these two deals right here. Nothing like that. So Kevin J. Hanigan: Let's just say I'd be really disappointed if we're talking about a year from now, we lack loan growth due to runoff in those portfolios. David Zalman: And our experience, along that Gulf Coast right there, our experience with Victoria, we paid a lot for that bank. Which we paid a lot for the American Bank at the same time. But both banks are very similar. With very core deposits. And, really, those banks grew. I mean and I don't think there's any question with the core deposits that American Bank has and that market share that we'll own from along that Gulf Of America side down that coast. It'll just be I think it's gonna be a really a good good deal. Peter Winter: Got it. That's helpful. Thank you. And then just, if I could go back to the margin, I mean, clearly, it's been a good story. It's been progressing the way you guys had thought it would. But just I was just curious with the third curve suggesting more rate cuts. Are you still comfortable with kind of a 3.35 NIM in the fourth quarter and 3.40 by the middle of next year? Asylbek Osmonov: Yes. I think those little bit maybe ticked down because the numbers what we provided was that static balance sheet and the no rate cuts. So if you're looking twelve months, twenty-four months, our margin showing that with 100 down being still higher than what we projected for average for this year. So I will continue to grow the margin. It's going to be ticked down a little bit lower. David Zalman: But, again, even even at a 100 basis points down, it may be slower as accomplished, but the twelve months from now, I hate to give these numbers out because then if we're not accurate, but, you know, we're still showing close to what you said, I think, at 3.38. So Mhmm. Peter Winter: And so I'm sorry. Just to follow-up. So when you say Asylbek tick lower, tick lower from the 3.40, Asylbek Osmonov: Yeah. So what we just said on the our model showing 100 basis point down twelve months, we're showing 3.38. David Zalman: We're 3.48 with no in a static market. Peter Winter: Got it. Okay. Thank you. Peter Winter: The next question Pietra as you go out twenty-four months and farther, we do still pick up pretty significantly even with interest rates going down. 100 basis points. Asylbek Osmonov: And that was just to clarify, that was standalone not including American or partners. Right. Correct. Peter Winter: My lost contact. Asylbek Osmonov: Hello? Hello? Are we ready for the next question? Peter Winter: Yes. Yes. Okay. Operator: Great. Wonderful. Our next question comes from Jared Shaw with Barclays Capital. Please go ahead. Jared Shaw: Hi, good afternoon. Maybe just on the margin for the deposit costs, should we or what are you expecting in terms of beta with that broader rate backdrop. Asylbek Osmonov: Yeah. For our model on the deposit betas, that's non-maturity deposit, we use 13 basis points beta. Jared Shaw: Pretty low. Okay. And then looking at the you know, I hear what you're saying about the buyback and appreciate all that. But when you look at the M&A environment here, for smaller deals, the consolidation that we've seen more recently, does that make it easier for you from a competitive standpoint to maybe get some of those deals with fewer competitors or maybe the inverse where there's more eyes on Texas that actually makes it harder? David Zalman: Candidly, we have more deals than we have money. Quite frankly. It's just a matter of what we really wanna do. Jared Shaw: Okay. Thank you. Operator: The next question comes from David Chiaveroni with Jefferies. Please go ahead. David Chiaveroni: Hi, thanks. So wanted to follow-up on the deposit question. Can you talk about deposit competition? You mentioned about the 80% loan deposit ratio. Are you comfortable at that level? And can you talk about the extent to which these kind of out-of-state competitors are coming in and potentially pressing on the deposit pricing front? David Zalman: Yes. I mean, we're at 80%. We probably would go to 85%. Our loan to deposit ratio at that limit, probably stop. We were still focused on core deposits. We don't have any broker deposits. And really when we go out, we really try to go you know, we're really trying to get a total deposit relationship, not just the certificate of deposits to build to build up deposits. And so I mean, that's what we're focused on. We do see the people coming in, especially you know, I may take a different stand because a number of these banks that have bought other banks out in the state they weren't able to get into the state. And because of that, they've raised their interest rates so much on money they pay here compared to where they pay somebody else because they haven't been successful at building market share especially in deposits. I'm almost thinking since now they're making headway into the state and they really have some market share, they may not be under so much pressure to show their other people in the other states that they're having to grow those deals. And I think it may become easier for us quite frankly. I don't know. That's just another that's another spin on it anyway. Asylbek Osmonov: Yeah. And if you look at it, we always had a competition, so it's nothing new for us related to the deposits and I know we well, we have grown this quarter in the core deposits. I mean, that's all relationship, you know, and that's what brings it not just just the rate, but the relationship we have with our customers. David Zalman: We really focus on relationships. I mean, Kevin kind of alluded to it a while ago. I mean, people wanna bank with the Texas Bank. And they and I think where we're at in this state and with the other guys coming in, that the amount of opportunities we have are just it's unbelievable and the kind of customers that we have are unbelievable customers that know, have been around their daddy and their daddy's generation have had businesses and they're coming to us and again, we're getting to handpick those again. We're not we're not here showing you 810% loan growth, but what we are putting on is really quality stuff and really building a really quality organization. David Chiaveroni: Thanks for that. And then shifting over to credit quality, still very strong. We did see the NPA uptick. Can you talk about the drivers behind the uptick? And are there any pockets or areas you're keeping a closer eye on? Tim Timanus: I think I can give you some color on that. Out of the a little over $119 million in nonperforming assets, about $57 million of it is single-family homes. And those NPAs with respect to the homes are a result of pressure that we got from a regulatory standpoint to make loans in minority areas, etcetera. And we did not get the down payments that we would normally want. Etcetera. And this is the result of it. It's not surprising. The good news is there's a market for the homes. It takes a while to go through the foreclosure process and get them back. But we've been able to sell them as we get them back. Some at a profit, some breakeven, some at a very small loss. But the point is we've been able to sell them. So yes, if you didn't have those homes, you could take $57 million away from the nonperforming. But, again, we were required under fair lending. We had to get a certain amount that we can. We would be we would be eliminated from doing M&A. So we were kinda forced into this making loans with no money down, very low interest rates, and even give them money for closing costs. That's exactly right. So it was a regulatory issue. It was a regulatory issue. Tim Timanus: And please don't misunderstand what I'm saying. I'm not implying that we don't have good relationship with the regulators. No, sir. But the facts are what they are. And during the last two or three calendar years, there was very significant pressure from the regulators to address these markets that they felt were underserved. And we understood that. But when you don't require a down payment, and you make loans to people that barely have enough cash flow to make the first payment, you're going to have trouble. And what we see right now is the clear evidence of that. Well, the challenge is all banks, it's not just us, all banks are required to do this. So there's just a certain number of these customers that everybody's trying to get and everybody's fighting for these customers, and that's just one of the things that happened, really. Right. Tim Timanus: Now we have we have discontinued some of those aggressive programs. We discontinued them a few months ago. So we're not putting any more of those on the books. And we'll just deal with what's there and as I say, we're able to sell these homes. I don't think that's gonna change dramatically. I think we'll be able to continue to sell them. So in another year or so, I think that part of the non will be effectively gone. Kevin J. Hanigan: Yeah. And in terms of any pockets we're looking at, we look at the you know, our credit history is pretty good. We look we're looking at the entire portfolio. And as we look across the entire portfolio, I'd say there's maybe one deal we think has got the potential for some stress. David Zalman: Shared national credit. It's shared national credit. We don't have a lot of shared national credits but it's a shared national credit we've got our eye on. It's still performing. Right. It's making its payments, but it's one we got our eye on. And it's $35 million. Right. Outside of that, the portfolio looks pretty good. Right. And I did pull up our shared national total. I think we've got a whopping total of $270 million in Shared National Credit. So it's not a field we play a lot in, and of that you know, of that number, $153 million of that is stuff we agent. Kevin J. Hanigan: So, know, a lot of that is structured and sold by us. David Chiaveroni: Very helpful, thank you. Operator: The next question comes from Ben Gjerlinger with Citi. Please go ahead. Ben Gjerlinger: Hey, good afternoon or good morning. I guess, in Texas. Kevin J. Hanigan: Kansas City, New York? Ben Gjerlinger: Yeah. I'm in Georgia. So south. When you guys think about the two pending deals, I think you said David. Just got regulatory approval while we're on the phone here. Can you find the potential close dates these two? Charlotte M. Rasche: Yeah. I think we're probably looking around fourth quarter this quarter to close probably the end of the year, the American deal. And 2026 for Southwest. Ben Gjerlinger: Gotcha. Okay. That's helpful. Yeah. But financial impact, gonna be more on the next year, not this year. We'll probably roll the American back into the first first month of Right. Next year. Yep. Right. Gotcha. Okay. That is helpful. And then also, like, you've done a really good job of taking a chainsaw to the expense base of the banks that you guys pick up. Is it fair to assume it's going to be kind of business as usual? Is it tracking the savings? Or is there anything kind of long-tailed associated with them? I'm you think about it might bleed into two or three q next year? Asylbek Osmonov: Yeah. I mean, definitely, when you do mergers with other banks, you know, there's always cost savings regardless. So we always strive to get the cost savings just by acquiring banks. And I think it also depends on the system conversion. We're gonna get some benefit early on, you know, because there'll be some departure, but, an additional cost will be like, second half of the year, I would say. But, overall, we'll get some cost savings in 2026, but most all of it, get in '27 and beyond. Ben Gjerlinger: Gotcha. Alright. I appreciate the help. And then just wanted fine-tune the buyback comment to backing up the truck. Does that mean you have to wait until the second one closes and then you could just be there the next day? Or is there something else doing that? David Zalman: You know, I we really we had this, and I think we had an S4 filed and I know there's probably been some other little people shortages with doing some complete thinking that we won't be able to buy back. But I think we should be able to start buying back next week. Next week. Yeah. So we should we should be out there buying. Ben Gjerlinger: Gotcha. I appreciate the help. Thank you, everyone. Operator: The next question comes from Matt Olney with Stephens. Please go ahead. Matt Olney: David, can you clarify your commentary about the current balance of the borrowings? I think it was around $2.4 billion at 09:30, and I thought you I thought I heard you say it was below that. David Zalman: Well, I think on the last day or so, couple days, we put pull if if you look a year ago, we were at with $3.9 or $4 billion. Asylbek Osmonov: Yeah. $3.9 billion, and we ended at $2.4 billion in the 09:30 but we were able to reduce some from that for in October month. So we're running. If you average for the month, you probably near the 2.4. No. No. We're much lower. What do you think the average was probably? For the For that month? But I haven't hear you're looking at a quarter, but, again, we started reducing it. So we started reducing it. As our bonds started maturing, we started we're just reducing our cash instead of buying back, you know, And, again, we'll get we're gonna get back into the bond buying business. Too. There's no question. We're not letting the balance sheet we always carried about $2 billion in leverage, and I think we let it maybe get down a little too far I know I've asked our guys to buy, and they didn't. But we're not going to we're not gonna we're we're we're still gonna keep about $2 billion of leverage on the deal, and we're so we're not going the other way. But my point is a lot of it is you just had a a lot of the the net interest income just came from a smaller balance sheet. We let it get too too small in my opinion. And the comment what we made right. Asylbek Osmonov: Currently, have $1.8 billion borrowing, but like I said, we're going to buy some securities. So we want to carry about $2 billion leverage little bit historically done. Matt Olney: Got it. Okay. Well, thanks for clarifying that. And then on deposit growth, I think the fourth quarter can be a more favorable quarter for deposit growth seasonally. Any color on what you're seeing so far, ex expectations for the fourth quarter? David Zalman: Yes. Again, I think you can read us. We're very transparent what we say. It happens in our we're pretty consistent. Our fourth quarter has always been pretty consistent, and I think you're probably looking at at least another $200-$300 million gain in deposits probably. Yep. I agree. Asylbek Osmonov: Our seasonality of public funds, and we should get it's just a normal big customer deposit. And big customer deposits. From the commercial side. Getting ready for commercial side. Yeah. Yep. Matt Olney: Okay. That's helpful. Thank you, guys. Operator: The next question comes from Janet Lee with TD Cowen. Please go ahead. Janet Lee: Hello. Dialing into deposits a little, so I believe there was about $150 million of run offs from Lone Star acquisition on the deposit side as well through June. Do you expect any sort of deposit run offs from the two acquisitions as well heading into 2026? David Zalman: The American Bank, acquisition is very solid. I mean, their deposit is made up of they're probably as close to us as you could get. So I don't we don't expect anything there. The Texas Partners Bank, their deposit makeup is different. And, probably the difference, because you saw in the prices, they have a big treasury department with a lot of a lot of commercial accounts. That it's just a bigger part of their it's a bigger part of their deposit makeup, and so there is more risk. Again, we don't we're not anticipating a lot, but you never know. It could be. It's not rate driven. It's really based on their treasury product that they have. I think that we have I think our treasury product is as good and probably the guy that's running their treasury department will be end up running our treasury department. So that's good. But again, there's a bigger portion of their deposits are a bigger portion of their deposits are in this in this treasury area, so there is more risk in that. For sure. Janet Lee: Got it. And fee income came in a little stronger than you guide it to before I believe that range was, like, 38 to 40. How do you feel about the fee income? Is that there an updated view on where the fee income could be over the next coming quarters? Asylbek Osmonov: Janet, I think I'm gonna stick to the, you know, the guidance I gave, 38 to 40. I know this quarter, we were a little bit higher, but sometimes we do have one-off items happen. But, you know, if we come in higher than that, that's good. But I would say 38 to 40 the guidance I would still continue for fourth quarter. Janet Lee: Thank you. Operator: The next question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead. Jon Arfstrom: Hey. Thanks. Good morning. Good morning, Jon. Hope I hope I'm last. Just, David, I put back up the truck in my Excel model on the share count on get in. So I guess the question for you is do you have an optimal capital target in mind? For the company? I think one of the valuation issues is the returns have gone down your capital has gone up. So I'm just curious how far down you'd like to take your capital ratios? David Zalman: We were saving a lot of our capital because we had aspirations of the you know, we were bidding on a bigger bank. We didn't get the bigger bank, and we thought we would have needed the cash. As part of the deal. We didn't get it. With our stock being this low, I think we have a lot of room. I mean, if you you can do them for what, 11% plus leverage ratio right now. So Mhmm. I mean, you can do the math yourself and what the earnings we make. Even if we spent $500 million it still wouldn't change the needle very much where we're at. So, I mean, we have a lot of bullets, I think. Jon Arfstrom: Yep. Okay. One of the things If he if he fell down even 8%, you still have three or 4% of capital. I mean, you we got a lot of money. I mean, we really do unless something goes wrong, but we got a lot of bullets. Jon Arfstrom: Yep. Okay. Okay. Well, we'll look forward to that. The and then one other thing I wanted to ask about, you talked about moderation slight moderation in Texas activity. What are you seeing there? Is it a change in tone, or am I misreading that? David Zalman: No. You're good. You know me too long. You've been around me too long. I think when again, when Kevin was talking about the loans, that's fine. You know, normally normally, we see just tons of business out there and you know, coming in. You know, we're just taking care of it. We're not we're not out there trying to underprice something. It's just coming in. We sorta noticed when we have our management meeting the tone in the room from the area managers that were out there. They see a little bit of a moderation from the type of customers we have. I don't I don't wanna say it's from the tariffs or the maybe the change in policies, and they don't know where they're going. But they're definitely feeling that a little bit. Having said that, again, I don't think there's any other place in The United States that you would rather be, but there's definitely a tone of a moderation, I think, right now. But, again, again, the economy is still overall very good. You still see gosh, you got you have JPMorgan. Chase has more employees here than they have in New York City. You just had Wells Fargo open up one of the biggest operation centers in the other side. I think it was Irving. Everybody's moving to this deal. So I say moderation, there is I think there's a slight moderation. I think it'll change. I think what Kevin said earlier, you'll see you'll see a pickup, I think, in probably the first quarter of next year. And so Texas, I think, is still gonna always be good. But, again, compared to where it was, I do feel a little bit of moderation. Jon Arfstrom: Okay. Okay. That's very helpful. Yeah. Yeah. That's helpful. I appreciate that. Thank you. Operator: This concludes our question and answer session. I would like to turn the conference back over to Charlotte Rasche for any closing remarks. Charlotte M. Rasche: Thank you. Thank you, ladies and gentlemen, for taking the time to participate in our call today. We appreciate your support of our company, and we will continue to work on building shareholder value. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Brock: My name is Brock, and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Fortive Corporation's third quarter 2025 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star 2. I would now like to turn the call over to Ms. Christina Jones, Vice President of Investor Relations. Ms. Jones, you may begin your conference. Christina Jones: Thank you, and thank you everyone for joining us on today's call. I am joined today by Olumide Soroye, President and CEO, and Mark D. Okerstrom, Fortive Corporation's CFO. As a reminder, we successfully completed the separation of our precision technology segment, now operating independently as Ralliance, on June 28, 2025. Today's call marks Fortive Corporation's first quarterly results under our new structure. During today's call, we will present certain non-GAAP financial measures. Information required by Regulation G is available on the Investors section of our website at fortive.com. We will also make forward-looking statements, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks, and actual results might differ materially from any forward-looking statement that we make today. Information regarding these risk factors is available in our SEC filings, including our annual report on Form 10-K and the subsequent quarterly reports on Form 10-Q. 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. Our statements on period-to-period increases refer to year-over-year comparisons unless otherwise noted. Our results and outlook discussed today are on a continuing operations basis unless otherwise noted. With that, I'll turn the call over to Olumide Soroye. Olumide Soroye: Thank you, Christina. Let me begin on slide three with a few key messages. Q3 was our first quarter as a new company following our successful spin-off of Ralliance. We are now a simpler, more focused company with a clear strategy, poised to create meaningful shareholder value. Our Q3 results offer a waypoint along our path towards creating exceptional returns for shareholders in the years ahead. Four highlights I would like to call out. First, our teams are executing very well, with laser focus on driving profitable organic growth with the power of our Fortive Business System. This drove solid results ahead of our expectations, including core growth of roughly 2%, adjusted EBITDA growth of 10%, and adjusted EPS growth of 15%. Though we aspire for much better, as we continue executing our growth strategy, we're pleased to see acceleration in the business. Second, we are raising our full-year adjusted EPS guidance. We now expect to deliver between $2.63 and $2.67 per share, reflecting our adjusted EPS overperformance in the third quarter, the impact of incremental Q3 buybacks, and our otherwise unchanged view on Q4. Third, we deployed capital in the quarter in accordance with our new approach, anchored in delivering the strongest relative returns for shareholders. During the third quarter, we deployed $1 billion to share repurchases, retiring approximately 21 million shares or 6% of our fully diluted share count. Finally, the financial framework we outlined at our June Investor Day remains fully intact, and our fully accelerated strategy is now in execution mode. We are focused on delivering benchmark-leading shareholder returns by leveraging FBS to accelerate profitable organic growth, allocating capital intelligently to optimize shareholder returns over the medium to long term, and rebuilding investor trust. It is early days, but we couldn't be more excited for the road ahead. Before we dive into our Q3 results, let me highlight some examples of the progress we are making in executing our Fortive Accelerated strategy. On Slide four, our strategy to drive faster organic growth is built around three core levers: innovation acceleration, commercial acceleration, and recurring customer value, all powered by our amplified Fortive Business System and enhanced by our disciplined capital allocation approach. We made meaningful progress in advancing our strategy in Q3. Starting with innovation acceleration, our new product introduction velocity continues to accelerate as a result of our renewed focus on customer-centric innovation. During the quarter, we had several notable product launches, including ServiceChannel's SaaS, which introduces AI-powered work order insights and streamlined payment solutions. Additionally, Fluke continued its innovation momentum with the GFL 1500 solar ground fault locator. This marks a further foray into the high-growth solar operations vertical and increases customer productivity by reducing troubleshooting time and decreasing hazard exposures. In the quarter, we also launched a new innovation studio in Nashville, Tennessee, and opened a new customer experience center at ASP's headquarters in Irvine, California, both purpose-built to foster collaboration, accelerate innovation, and deepen customer relationships. Turning to commercial acceleration, we further intensified our commercial focus on faster-growing end markets and regions. And though it is early, we are starting to see green shoots in several areas. In our iOS segment, for example, we have begun to put in place a series of commercial initiatives in North America to enhance our focus and deploy more resources towards high-growth verticals like solar operations, distributed energy, data centers, and defense. We are seeing the early signs of impact in North America Q3 performance. We also recently stepped up our efforts in South Asia, including India, as that region continues to see exceptional economic growth. We saw significant acceleration in the region across both segments, and we are confident that our enhanced regional presence will drive strong momentum in this high-growth region in the years to come. Moving on to recurring customer value, we remain focused on increasing recurring revenues. Here again, we are early in our journey and have meaningful runway ahead of us. In the quarter, Fluke continued to make great progress on increasing its percentage of recurring revenue through enhancements to our maintenance software and further expansion of our service plan offerings. And in general, we saw recurring revenue growth continue to outpace our consolidated growth. Finally, disciplined capital allocation is an integral component of our Fortive Accelerated strategy. Our capital deployment priorities for new Fortive include investing in organic growth, pursuing accretive bolt-on M&A, returning capital through share repurchases, and maintaining a modest growing dividend, all with a focus on best relative returns and maximizing medium to long-term shareholder value. Consistent with these priorities, we repurchased about 21 million shares in the third quarter, reflecting our belief in the attractive relative return of share buybacks at the valuations we saw in the quarter. We have also revamped our M&A funnel and process to reflect our different M&A strategy going forward, focused on accretive smaller bolt-on M&A which meet our stringent strategic and financial criteria. With that, I'll turn it over to Mark to walk through our financial results for the third quarter. Mark D. Okerstrom: Thanks, Olumide. I'll begin with slide five. In the third quarter, we delivered total revenue of just over $1 billion, up roughly 2% year over year on both the reported and a core basis. While market conditions remain dynamic, we were encouraged to see growth in both iOS and AHS and modest outperformance versus our expectations in both segments. In iOS, resilient customer demand drove better than expected results at both Fluke and our facilities and asset lifecycle software businesses. In AHS, healthcare customers continue to exhibit caution as they navigate recent changes to healthcare reimbursement and funding policy. However, we saw sequential improvement in demand for healthcare equipment and consumables and continued strength in healthcare software. From a geographic perspective, North America showed solid growth, improving sequentially from Q2, driven by strengthening demand trends for professional instrumentation and healthcare equipment. Europe was down year over year and worsened modestly driven by weakening macro conditions in the region. Rest of world was mixed. Adjusted gross margin in the quarter was down about 60 basis points driven by tariff-related costs partially offset by pricing actions and supply chain countermeasures. Adjusted EBITDA was $309 million, up 10% year over year, with growth accelerating from Q2 levels. Adjusted EBITDA margin expanded approximately 200 basis points to 30%. This strong operational performance was driven by operating leverage, deliberate organizational streamlining, and an overall sharpened focus on corporate cost discipline. We delivered adjusted EPS of 68¢, up 15% year over year, a meaningful acceleration from Q2, driven by growth in adjusted EBITDA, favorable interest expense on lower debt balances, and the positive year-over-year impact of share repurchases. We estimate direct tariff costs net of countermeasures created a roughly $0.01 headwind to adjusted EPS in the quarter. We generated $266 million of free cash flow in the third quarter, and our Q3 trailing twelve-month free cash flow grew to $922 million. Our Q3 trailing twelve-month free cash flow conversion on adjusted net income remains comfortably north of 100%. Moving to our segment results starting with Intelligent Operating Solutions on Slide six. Revenue for the segment grew just over 2.5% on a reported basis, with core revenue growth of 2%, slightly ahead of our expectations. Growth was driven by demand for facility and asset lifecycle software, resilient demand for professional instrumentation despite tariff volatility, and strong growth in gas detection products. At Fluke, we saw an improvement in customer purchasing patterns drive modest growth, with particular strength in North America, partially offset by continued softness in Europe related to macro conditions. While the acceleration is encouraging, ongoing volatility in global trade policy remains a source of uncertainty. Our facilities and asset lifecycle software businesses performed modestly ahead of expectations, supported by strong demand for multisite facility maintenance and marketplace software in North America. However, tighter fiscal policy and constrained funding continue to pressure government demand for our procurement and estimating solutions. Our gas detection business is growing nicely, with strong demand for our hardware as a service model to ensure worker safety, with particular strength in North America and Latin America. Adjusted gross margin in the segment declined by just over 90 basis points year over year to 65.7%, primarily due to tariff cost pressures partially offset by pricing and supply chain countermeasures. Adjusted EBITDA grew 7% to $242 million, accelerating from the more modest growth we saw in Q2, driven by operating leverage and reduced costs associated with flattening and rationalizing segment-level organizational structures. Adjusted EBITDA margin grew to 34.6%, up from 33.3% in the prior year period. Moving to our Advanced Healthcare Solutions segment on Slide seven. We delivered total revenue of $328 million. Revenue grew approximately 2% year over year, just over 1% on a core basis. As we noted last quarter, we continued to see reimbursement and funding policy changes impact the AHS segment, specifically the deferral of US-based hospital capital expenditures on healthcare equipment. However, demand trends in North America improved from Q2 levels, driving sequential improvement in capital performance, as some customers executed on deferred orders for sterilization and biomedical test equipment. Consumables demand also improved sequentially across most regions. Encouragingly, our software products in the segment continued to deliver solid growth, fueled by strong execution and structural advantages from resilient SaaS-based revenue models. Our adjusted gross margin of 58.4% in the AHS segment was similar to last year. Adjusted EBITDA grew approximately 7% year over year. Adjusted EBITDA margin expanded from roughly 27% to 28%, driven by operating leverage, flattened organizational structures, partially offset by modest incremental R&D investments. Turning to Slide eight. As noted earlier, we deployed just over $1 billion of capital to share repurchases in the third quarter, reflecting confidence in our ability to deliver on the core value creation plan represented by our Fortive Accelerated strategy and the attractive valuation we saw in the quarter. We funded these repurchases with a combination of the remaining proceeds from the Ralliance spin-off dividend, cash on hand, and increased commercial paper issuance in anticipation of continued strong free cash flow generation in the quarters ahead. As previously highlighted, our free cash flow on a trailing twelve-month basis was $922 million. Moving to Slide nine. We are raising our full-year adjusted EPS guidance to $2.63 to $2.67 per share. Our guidance reflects Q3 results ahead of our expectations, the impact of incremental buybacks in Q3, and otherwise no change to the view we held on Q4 as at our last earnings call. This outlook also assumes a continuation of the market dynamics we experienced as we exited Q3. It also reflects current or known future tariff rates expected to go into effect through the end of the year, with tariffs net of countermeasures not expected to be material in the quarter. Let me provide a few additional modeling considerations. Based on what we see today, we are expecting overall core growth to moderate in Q4, with AHS core growth broadly in line with Q3 levels and very modest core growth at iOS. We continue to expect a full-year adjusted effective tax rate in the mid-teens and a Q4 tax rate in the single digits due to discrete tax items in the quarter. We also expect a sequential increase in net interest expense in Q4, reflecting our cash and debt levels at quarter end. As a final note before turning it back to Olumide for closing remarks and Q&A, in our first quarter post-spin-off, we took important first steps to demonstrate our steadfast commitment to unrelenting execution on the Fortive Accelerated three-pillar value creation plan that we outlined at our June Investor Day. We have much work left to do, but change is underway, and we are energized by the exciting work ahead of us. I'll now turn it back over to Olumide. Olumide Soroye: Thanks, Mark. I'll close out our prepared remarks with a few reflections from my first quarter as CEO and offer a bit more color on the changes we have catalyzed at Fortive Corporation in the past one hundred days. First, our thesis behind the creation of New Fortive as a simpler, more focused company is showing promising early outcomes. We are seeing the benefits of simplification in our day-to-day operations, enabling us to be notably more customer-centric. With fewer operating brands, we've been able to simplify our organization model and processes. That is freeing up more time across our team to focus on the source of growth: our customers. Personally, I have really enjoyed spending significantly more time with our customers across both segments, as we deepen relationships and uncover additional opportunities to accelerate growth. We have also flattened out our executive leadership team to ensure that business leaders in closest proximity to our customers have a stronger voice at the top of our company. With 100,000 customers across our portfolio, I am energized by the impact our enhanced customer-centric approach will have on our growth trajectory. Second, we are taking deliberate steps to accelerate growth. We are giving our 10 operating brands more growth oxygen and encouraging them to freely and frequently surface the next best organic growth opportunity that may have been underexploited in the past. We have transformed our strategic planning process into a more aggressive growth-focused engine, and we are emerging from our recent strategic planning cycle with a robust pipeline of investable growth opportunities. We are regearing our annual financial planning, forecasting, and governance processes to enable in-year reinvestment into growth. We are making great progress in evolving the mindset, cadence, and tools of FBS to better support growth, not just by integrating our AI center of excellence directly into our FBS team, but also by evolving and enhancing existing tool sets and best practices around innovation, commercial acceleration, and creating recurring customer value. Finally, our new approach to capital allocation is very different from what it was in the past. Our dynamic and disciplined capital allocation approach has one singular purpose: maximizing medium to long-term shareholder returns. We have demonstrated our commitment to this approach in our first quarter as New Fortive. We are pleased with our results this quarter, but we are not satisfied. We are driving hard towards our ambitious agenda and look forward to demonstrating continued and accelerated progress in the quarters and years ahead. Thank you for your continued interest in Fortive Corporation. I especially want to thank our shareholders, our 100,000 customers, and all our Fortive employees around the world who do a tremendous job every day to deliver strong results and build enduring advantages in our businesses. With that, I'll turn it to Christina for Q&A. Christina Jones: Thanks, Olumide. That concludes our prepared remarks. We are now ready for questions. Brock: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1. You may press 2 if you would like to remove your question. For participants using speaker equipment, it may be necessary to pick up your handset. Our first question today comes from Nigel Coe of Wolfe Research. Please proceed with your question. Nigel Coe: Oh, thanks. Good morning. Afternoon, a long day. Thanks for the details. Obviously, you know, the margin performance was for our to our mind the real highlights. And it seems, you know, when I look at your sort of implied four Q guide, it looks like you're not assuming much of a sequential pickup in EBITDA margins. I mean, back into something in the range of about 31% EBITDA margin for the fourth quarter. So just curious, is there any sort of was there a sort of stars aligning kind of quarter on margin and you're not assuming that repeats? Any kind of details there around some of the tariff offsets you expect in 4Q? Mark D. Okerstrom: Hey. Hey, Nigel. How are you? Thanks for the question. So if you think about the overperformance we delivered in Q3, a part of it was revenue performance. As you called out, a big chunk of it was cost. And you can see that show up in the numbers both in unallocated corporate costs and also in the segments. Most of that was actually discrete actions that we took in the quarter really to start to free up resources for us ahead of annual planning. So that we could deploy against some of the initiatives that, you know, we're starting to see as part of the Fortive Accelerated strategy, accelerate growth into 2026. So we do expect to redeploy some of the resources we've freed up in the fourth quarter. There were a few little one-timers, incentive compensation, some increased capitalization of software development that happened in the quarter. We're going to maintain our cost discipline through the fourth quarter to be sure, but we are going to reinvest some of it as we look forward here. Nigel Coe: Okay. That's a good color. And then my follow-on is really around the government shutdown. I think we hit the fourth week today. You called out some government funding pressure within Gordian. Just curious how that's impacting performance in October? Olumide Soroye: Yes. Thanks, Nigel. So the government's business for us is mostly state and local government agencies. So in that sense, the federal government shutdown is not a big factor. Our direct exposure to the federal government is relatively small, just a little bit in our Fluke business and AHS. So it really just hasn't been a major factor for us right now. It's difficult to predict, you know, the duration of a shutdown and second-level impacts of a prolonged shutdown. But we feel good about the guidance based on what we know today. And again, given it's not a big direct exposure to the federal government for us, we feel good about what we've laid out. Brock: That's great to hear. Thank you. Thanks. The next question is from Deane Dray of RBC Capital Markets. Please proceed with your question. Deane Dray: Thank you. Good day, everyone. How are you doing? I was hoping just to circle up on capital allocation. That was a sizable buyback in the quarter. Just kind of give us your thinking about the decision-making on doing buybacks. You know, is there intrinsic value calculation you're doing internally? And then just the setup for M&A because you had been through this moratorium on deal-making leading up to the spin. Where does that stand in priorities? Thank you. Olumide Soroye: Yeah. Thanks for the question, Deane. So we were quite pleased to be able to deploy a billion dollars towards share repurchase in Q3. And that reflected just our strong free cash flow, the Ralliance dividend proceeds, and just the attractive valuation we saw for our shares in the quarter. And like we've mentioned with respect to Fortive going forward, share repurchases will be a big part of our capital allocation option set. So anytime we see conditions like that, we'll continue to do that. To the extent that M&A is still part of a formula, we've been quite clear that we are not looking at transformational M&A. We're looking at smaller bolt-on acquisitions that can accelerate the go-forward growth of our existing businesses. So it's a very different playbook on M&A. We are going to be more balanced across share repurchase and these bolt-on M&A acquisitions that we do. Like we mentioned at our Investor Day, the formula we laid out for shareholder value creation in three years does not require us to do M&A. So from our point of view, we're going to take the path that offers the lowest risk to create value. And that for us does not include big M&A. So we continue to cultivate our funnel of proprietary bolt-on assets that are smaller and can help our existing businesses. But that's how we think about it. We do the analysis to your point of what gives us best relative returns between share repurchase and the M&A options that we have, and in the third quarter specifically, the case was very clear just given where the stock price was to deploy that heavy billion dollars to repurchase. Deane Dray: That's really helpful. And just as a second question, was hoping to get some color on Fluke in the quarter. It's such a good indicator of short cycle demand. So anything about the sell-in versus sell-through channel inventory would be helpful. Thanks. Olumide Soroye: Yeah. No. Thanks, Deane. So we were quite pleased with Fluke in the quarter and having it return to growth. In the quarter, all these fundamental metrics that set up the future looked really strong. We had order growth, POS continues to be really strong, especially in North America and stable in the rest of the world. Book to bill for the year continues to track north of one. Channel inventory outside of North America, we've said all year, has been elevated, but that's been improving over the course of the year. So we're in a much better place than we were at the beginning of the year. And then on top of that, our team continues to accelerate product innovation. We talked about a couple of those in the prepared remarks. And also commercial execution, there's some markets both verticals like data center and defense that are doing really well right now, and also geos like India that are doing very well. The team continues to put a lot more horsepower behind those markets. And then we're driving more recurring revenues at Fluke with maintenance software enhancements and additions to our service plans. So both by reason of how we did in Q3 at Fluke, the underlying metrics of the health of the business, and then the actions the team's doing to really continue to accelerate growth, we feel quite good about the setup for the next three years at Fluke. Deane Dray: That's really helpful. Thank you. Brock: Thanks. The next question is from Scott Davis of Melius Research. Please proceed with your question. Scott Davis: Hey, guys. Hi, Scott. Congrats on the first full quarter. It was pretty clean. Hey, guys. One of your competitors has been getting a lot of attention in the radiation test business, and I haven't heard you all talk about Landauer in a while. Can you get us up to speed on the outlook there and what you're seeing? Olumide Soroye: Yeah. Thank you, Scott. So you're right. You know, there's a lot of excitement in the Landauer business for us. As you know, it's one of the highly recurring parts of our AHS segments, so we like that attribute of the business. And, you know, we've said the recurring part of the company, Fortive Corporation overall, has been growing faster than our fleet average. And Landauer is a great example of that. So it's continued to grow really strongly, and that comes from the fact that our customers really rely on us for this mission-critical radiation monitoring. It's a very stable need for customers. They're looking for really the number one brand that they can trust, and that helps joint commission reviews and other regulatory requirements they have to meet. It'd be much easier to meet. So we see a lot of strength in that business. The thing that I find exciting for us is the work that our team's doing on innovation, and that includes finding add-on services that we can tag on to our existing customer base. We have tens of thousands of customers in that business. And so the idea of thinking about that business like a software business that you can add on to existing customers besides price and expansion to other... Scott Davis: Sorry. You're breaking up. I can't hear you. Brock: Are you there, though? Olumide Soroye: Yes. Can you hear us? Scott Davis: It's breaking up. It could be our phone. It could be you guys. I don't know. I'll pass it on because I don't want to be disruptive to the call. Christina Jones: Brock, are you hearing us okay? Brock: Yes. You're coming through loud and clear, and we'll move on to the next question. Pass it to Julian Mitchell of Barclays. Please proceed with your question. Julian Mitchell: Hi. Good afternoon. Maybe just wanted to follow-up on the demand trends in AHS. Maybe help us understand sort of what's happening in terms of the equipment demand versus consumables. And you mentioned the policy in funding change headwinds. Kind of how have you seen those play out affecting customer demand in the past couple of quarters? Just trying to understand if that headwind is getting worse or it's holding steady and what does it mean as we're going into next year, please? Olumide Soroye: Yeah. Thanks, Julian, for the question. So the AHS segment overall, just maybe to break it down, the software part of the business is really strong, continues to do really well. So we're quite pleased and excited about that acceleration in that part of the business. With respect to capital equipment in the AHS segment, we talked last quarter about, to your point, the reimbursement and funding policy changes and how that's causing some of these US hospitals to defer capital purchases. What we've seen since then is it's been encouraging, which is sequential improvement in demand for healthcare capital in North America, based on just more certainty around legislative conditions that they're operating under. They're still working through the full kind of long-term effects of the OB3 act, but we certainly see improvement in the demand patterns, significantly in September especially, because we have a funnel of deals and we know what things were deferred. And we began to see more and more of those get funded in September, and we expect that trend to continue through the rest of the year. So the sequential improvement in that capital equipment purchase, we quite like. And we see the same sequential improvement in consumables as well. And our biggest markets continue to grow in consumables. So overall, I'd say software doing well, the capital equipment piece, we're seeing sequential improvements, and that's quickening in September and into October as well. And then the consumables continue to be solid. Julian Mitchell: That's great. Thanks, Olumide. And maybe one for Mark, just very much a CFO type question, so apologies for that. But the tax rate outlook, you know, I think this year's sort of overall adjusted P&L tax rate is maybe 14%, something like that. I just wondered, is that sort of a normal run rate in future, kind of best view on the next sort of year or two, any perspectives on that you could provide? Mark D. Okerstrom: Happy to, always happy to answer your CFO question. I think it's a good framework to think about. You know, right now, mid-teens. The pillar two proposals that are out there, you know, there is some risk that to the extent that the US is not excluded from that, which is current thinking, although it's not written into law, that we could see something drift higher. But right now, from what we see, I think mid-teens is a good way to model the tax rate through 2026 at least. Julian Mitchell: Great. Thank you. Brock: Thank you. The next question is from Steve Tusa of Morgan Stanley. Please proceed with your question. Steve Tusa: Hey, good afternoon and congrats on a solid quarter. Good execution. Olumide Soroye: Thanks, Steve. The software business, the Fluke business, what are you guys seeing in the other businesses? I mean, I think you mentioned some of the construction, I guess, related drags. But are you seeing, you know, how are your customers kind of treating your part of the budgets there? From an IT spending perspective, what are you guys seeing there? Olumide Soroye: Yeah. Thanks, Steve. So far overall, we like, we continue to see growth in Fluke, so we quite like that. And the components of that, the ServiceChannel brand's really great pull-through. We talked about Snowbee AI-powered work order insights we add into that platform, which is an expansion for existing customers. They love that. I think for customers, they view Fluke software as a good way to scale the impact of AI because we have real networks built around this business. So the IT spending around that, to the extent that we're helping them capture the value of AI, is really, really strong right now. So we quite like that. And then the Gordian software part, which is really around planning, facility planning software, also continues to do really well. We talked last quarter about the new products we launched, assessment and capital planning. The order growth in that business has been terrific. Separate from the procurement part of Gordian, that's been a terrific story for us from a software point of view. And then, you know, Coriant continues the arc of improvement that we've talked about over several quarters now. So overall, I think just given the nature of what our software does for customers and, you know, the fact that in the grand scheme, it's a small spend with very high return on investment, that helps them on AI monetization and getting real value out of AI use cases. It's been a strong part of our story, and that's why we said the recurring revenue part of the company has been growing much faster than the fleet average. Steve Tusa: Got it. So Fluke grew what in the quarter? Was Fluke above the, like, what was the organic at Fluke in the quarter? In total? Olumide Soroye: Yeah. So Fluke grew in total in the quarter. I can think about it as helpful to the fleet average. Steve Tusa: Okay. Got it. Thank you. Christina Jones: Thanks, Steve. The next question is from Andy Kaplowitz of Citigroup. Please proceed with your question. Andy Kaplowitz: Morning, everyone. Good afternoon. Olumide Soroye: Good morning, Andy. Andy Kaplowitz: So I think one of the primary goals you have or had as you split it to simplify your overall business. So, obviously, the first quarter out of the gate with good margin is a good signpost for that. But maybe talk about where you are in terms of that self-help. I know it's early, but, you know, should we get increasing impact from that simplification as we go into '26? Olumide Soroye: Yeah. No. Thank you. I mean, I think the short answer is yes. If you think about what we've laid out as our plan here, the plan is we have the simpler company in the stand brands, which means, frankly, we can simplify how we run the company, free up more time to spend with customers and to spend on growth. And like Mark mentioned, we've also created space in our P&L, as you saw with the big margin expansion in Q3, so we can actually put some more investment behind this growth idea. So all of that's in motion right now. We'd expect that to keep building momentum for growth as we come out of this year. And then I'd say, secondly, the other thing that's been quite important in this change with the company is the capital allocation strategy. So not only are we going to grow the company faster and the seeds we're planting around products, commercial, and client value, we explained through on that. But we are also going to significantly shift how we think about capital allocation. And you saw that with the share repurchase that we did in Q3 here. And as we go forward, you're going to see that balance continue to play out and show, you know, we're one quarter in or barely a hundred days into the journey, and I would expect that the best is still ahead of us here. Andy Kaplowitz: Helpful. And then could you give us a little more color on what you're seeing in demand by region? I think you mentioned Western Europe maybe downshifted a little. China, like, what are you seeing across your year and markets by geography? Olumide Soroye: Yeah. No. I think you have it generally right. I'd say the star of the show continues to be North America. Really strong performance in North America. I think part of that's the market. Part of that's our team really have pushed hard from an innovation point of view in some of the best end markets, you know, data centers and so on in the US especially. But also, you know, also just the market conditions have been more favorable for us. And then on the other hand, you know, let's say Western Europe, especially, it's been the softest market for us. And that's been the case most of the year. Q2 got a little bit better in Western Europe, but then that didn't really sustain in Q3. So we're not expecting anything to get dramatically better in Western Europe for the rest of the year. So we kind of find that plan that in here, and anything better will be upside for us. And then the rest of the world was just mixed. And generally stable, I would say, China and mixed everywhere else. So North America really did well, Western Europe really soft, everything else in between. Andy Kaplowitz: Appreciate the color. Thanks. Brock: The next question is from Jeff Sprague of Vertical Research Partners. Please proceed with your question. Jeff Sprague: Hey. Hello, everyone. Thank you. Just want to get a little bit better sense of maybe the margin trajectory. First off, can you just elaborate a little bit more? You said there were some one-timers in the quarter, and I don't know if it was a change in capitalization policy or something. Did that all run through corporate? And then essentially, you're saying that you're using that quote-unquote benefit in Q3 to spend for growth in Q4? Just put a little bit more color or detail around that. And correct me if I'm wrong there. Mark D. Okerstrom: Yeah. Sure. Happy to, Jeff. So there were a few one-timers in the quarter. There were two primary drivers: one was just increased capitalization rates at some of our software companies as they were building new products that were not yet deployed into live production. So that was one impact that basically lowers R&D and then ultimately will come back in the future as that's amortized in. The second was that we did have some adjustments to incentive compensation. And that was a good guy as well. Those items hit a combination of the segments and the corporate costs. The expectation, even though we are actually making direct cost reductions to actually fund growth, is that overall OpEx will step back up in the fourth quarter. As we don't repeat some of these one-timers, as we start to pull in some of the investment ideas that we've got as part of the strategic planning exercise and annual planning exercise that Olumide laid out. But we're going to maintain this discipline, and we expect to still have a strong margin profile. But overall, OpEx should pop back up. Jeff Sprague: I'm trying to triangulate between what you gave us and making an educated guess on interest expense and everything and the share count. It looks like you're sort of guiding segment-level margins, I don't know, kind of flat-ish in Q4 on a year-over-year basis. Is that correct? Mark D. Okerstrom: I think you're in the zone. You're in the zone. You're going to get year-over-year base out of the corporate or year-on-year expansion out of the corporate cost. But you're broadly in the zone. You'll see some pressure in gross margin, particularly in iOS. But then it's largely offset sort of below the gross margin line. Jeff Sprague: Right. Right. Okay. Thank you for that help. Appreciate it. Brock: The next question is from Joe O'Dea of Wells Fargo. Please proceed with your question. Joe O'Dea: Thanks for taking my questions. Wanted to just get a little bit more color on comments around giving brands more growth oxygen, which sounds like an exciting initiative. You know, we saw the Q3 R&D down, but maybe that's a little bit more non-repeat. I'm just curious in terms of what exactly is encompassed in sort of resourcing the growth oxygen for your 10 operating brands and how to think about the timing of that sort of flowing through to organic growth kind of impact? Olumide Soroye: Yeah. No. Thanks for that. So maybe just describe what it is that we've done. So what we've done in the first hundred days here is we've gone through our strategic planning process with each of our 10 brands. And the nature of that is really digging deep to find the best ideas for organic growth acceleration. And maybe we've under-leveraged so far. And it may be really compelling enhancement products for customers. It could be commercial capacity expansion in attractive markets like data center or India. It could be expansion to add-on services or software offerings for customers that we just haven't had the space in our P&L to get to. So we went through a process to really assemble all of those ideas across our brands. And I'm just incredibly impressed by the slate of pragmatic and actionable ideas that came out from that process. So we now have this funnel of terrific ideas that we're getting after very aggressively. And what we've then done is to say, look, we are going to be very disciplined in assessing which of those have the highest confidence and the best return potential. And for those ones, we'll make space in the P&L. That's what we mean by growth oxygen, to fund those and to get them done. So some of the margin expansion we got in Q3 that we talked about, we are going to save some of that to invest over the course of Q4 here to really think about it as a surge in getting those great ideas executed faster. So as we go into '26, they're having a lot of impact. Keeping in mind that some of them are short time to impact things like commercial capacity adds, some of which are marketing demand gen adds. So we feel quite good about the setup and the space we've created in the P&L to get after this and really give these businesses more, as I call it, growth oxygen than maybe they've had historically. When we've been really tight across the board, but we're just really being intentional in planting seeds that will power the growth. The case that we've made is faster growth, and so we're planting the seeds for that. Joe O'Dea: And then on organic growth, composition and sort of thinking about the price and volume piece and volume kind of slightly down in the quarter. Is it the setup that you think the volume decline rate is actually a little steeper into the end of the year? Is that primarily comps? And then just any color on where you see the best opportunity for volume to get a little bit better, maybe areas that you're watching most closely? Olumide Soroye: Yeah. So again, a few ways to think about that. One is we like what we're seeing from pricing this year because I think in many ways that's a reflection of the value of this brand. And some of it has been the benefit of tariffs and covering that. But underneath all of it, it's been an affirmation that we can get price in this business. So we expect that to continue. And the exciting thing for us is a lot of the growth ideas I talked about are really about volume. And I would say across our businesses, we see real upside from volume and how you think about our biggest brands in Fluke and the AHS segment. Those are areas where we have very specific ideas that can help with volume growth over the next year here going into '26. So we certainly expect the price strength to continue to be a big contributor to our growth. And the volume piece of the math will get better over the course of our journey here in the next year to three. So that's what we would expect. Joe O'Dea: Thank you. Olumide Soroye: Thanks. Brock: The next question comes from Chris Snyder of Morgan Stanley. Please proceed with your question. Chris Snyder: Thank you. I wanted to follow up on some of the Q4 commentary. And I think you guys said you expect organic growth to moderate in Q4 relative to Q3. I mean, is that just a function of a more difficult comp? Or did some of the Q2 disruption get pushed into Q3 revenue? So maybe that was a little bit overstated versus demand? Any color there would be helpful. Thank you. Mark D. Okerstrom: Sure. Happy to answer that, Chris. You know, there are a few things that are happening. One is that in Q4, we do have a little bit of a tougher comp. If you look at the script commentary for last year, you know, we talked about some pull forward from Q2 into Q4. Because it was particularly acute in the iOS segment. There was, I think, a little bit of a snapback in Q3 in terms of just some of that $30 million coming back. I would just say, though, overall, the trends that we're seeing across the iOS segment and the AHS segment are broadly consistent, you know, they're encouraging. I think as Olumide said, we've got lots of optimism for better volume growth as we step into 2026. But we do have some timing-related impacts that are sort of shifting things from Q2 to Q3 and then... Chris Snyder: Thank you. I appreciate that. And then maybe just to follow up on AHS. You know, from the outside looking in, you know, it's very difficult, you know, to kind of have a sense for, you know, the performance versus the healthcare policy and funding challenges that could be coming or maybe leaving the market? You know, based on the policy. So I guess you know, it seems like you guys think AHS will have another pretty solid quarter here in Q4, but you know, I guess, what gives you guys confidence that, you know, the North America healthcare spend, you know, can be supportive or resilient, you know, through a kind of a choppy, hard to predict policy backdrop. Thank you. Olumide Soroye: Yeah. No. Thanks for that. I mean, overall, we like the AHS part that's set up here. So think about it, you know, this time last year, the AHS segment grew 9%. Organic growth in '24, 6% for the year overall. And so we know what the capacity of this business is. Despite the choppiness of 2025 with all the healthcare-related policy changes, our businesses continue to do the right things for our customers. The depth of customer loyalty, customer support, and I've experienced this personally just being out with a lot of our customers in that segment, is incredibly strong. So we like our setup. We like what we're doing with respect to innovation. We like what we're doing with respect to kind of the commercial engagement with customers and recurring value that we're adding to those customers across all our brands. So that piece we really like. And then if you think about the fundamental kind of spend and demand profile of healthcare in the US, whatever is going on in the end, it still comes down to the basic fact that we've got aging demographics, we've got increasingly sophisticated healthcare options and intervention options for these aging demographics, a lot of which have, you know, two or more chronic conditions. And we continue to have a shortage in provider capacity. That means the kinds of solutions that we bring to drive productivity and safety are going to be incredibly supported by this tailwind over the next three to five years. So irrespective of the choppiness of policy decisions in '25, we like what we're doing on innovation, on commercial, and recurring value. And we like the underlying sustained secular trends that make this healthcare and especially the industrial part of healthcare that we focus on a good market to be in. So that's, you know, that's kind of where we forecast is play for what's going to create value beyond quarter-to-quarter noisiness in the space. We really like the business, and we think we're well set up. Chris Snyder: Thank you. I appreciate that. Brock: Thanks. The next question is from Jamie Cook of Credit Suisse. Please proceed with your question. Jamie Cook: Hi. Good afternoon, I guess. A couple quick questions. One, acceleration, like, all these opportunities to embed any of that in your guidance. So just wondering if there's opportunity for upside, you know, on the top line as some of these initiatives go through. And then just my second follow-up question, the $63.6 million in other on the adjusted operating profit. What, I mean, that's usually trends, I guess, in the low thirties. Can you just break apart, like, what was in that number and then what's implied for the fourth quarter? Thank you. Olumide Soroye: Great. Thanks for the question. I'll take the first part and then I'll help Mark take the second one. So, you know, the way we think about it is we laid out at our investor day in June our financial framework for the two-year period 2026-2027. And that, you know, the premise of that is the company we now have is going to be three to 4% organic growth, and then after 2026-2027, get better than that. And then we'll have, you know, margin to 100 basis points, and then adjusted EPS growth. That's a high single-digit plus growth. So that, you know, that financial framework benefits from all of these Fortive Accelerated initiatives. That's what gives us confidence that that financial framework remains intact. And so that's where you're going to see the impact of it. With respect to the guide for this year, we feel good about the way we've reflected the macro conditions and all the forces at work across the three areas we've talked about and on tariffs and healthcare spending and state and local government spending. And that's all reflected in the guide for this year. But the way to think about our Fortive Accelerated strategy and the impact of that is it really is what gives us complete confidence in the financial framework that we laid out for 2026-2027. And then I'll let Mark touch on the second part of the question. Mark D. Okerstrom: Yeah. I think, Jamie, we'll get back to you about it. I think you're referring to that other operating income in the AHS segment. So just give us a bit, and we'll circle back with you on that. Maybe we can go to the next question. Brock: The next question is from Joseph Giordano of TD Cowen. Please proceed with your question. Joseph Giordano: Hi. Good afternoon. This is Chris on for Joe. You'd called out the growth, the double-digit growth in recurring revenue. And you noted that it was outpacing the overall average. Where do you see recurring revenue potentially ending up as a percent of total in the longer term? And what are some key levers that you have in both segments to sustain that above corporate average trajectory? Olumide Soroye: Yeah. Thanks for the question. So we like the recurring revenue percentage continuing to go up, and we've deliberately not set a ceiling on our high dose. So we expect it to continue to grow with no limits on what's possible over time. The second thing I'd say is, you know, if you think about the pieces of our company today that are still not recurring, and then you think about how quickly those can change, we still do have some incredibly powerful professional instrumentation offerings at Fluke. That's the biggest chunk of our business that's nonrecurring. Now that business was almost 0% recurring ten years ago. And if you go back five years ago, it was probably five, 6% recurring. Today, it's 15% recurring. So the biggest lever for us to keep driving recurring revenue is continuing to attach more recurring things at Fluke. And, you know, we also have some examples from businesses that were mostly transactional, like in industrial, scientific, ten years ago, and we've shifted those to more hardware as a service recurring offerings. And again, that gives us a little bit of a template of some of the things we could do for some of our offerings at Fluke as well. It's shifting them to more of a hardware as a service offering. So that's probably the single biggest bucket of revenues that will move the needle the most as we shift more of the company towards that. Towards recurring. Now we're going to be intentional, it's one of our three pillars for the accelerator that is driving recurring customer value. Mark D. Okerstrom: Great. Sorry. Operator, maybe I'll just circle back on Jamie's question. That incremental expense was predominantly related to separation-related stock compensation matters. So fair market value adjustments as well as the acceleration of certain executive compensation associated with the transition leadership. Brock: Thank you. The next question is from Andrew Buscaglia of BNP Paribas Asset Management. Please proceed with your question. Andrew Buscaglia: Hi. Good afternoon, everyone. Brock: Good afternoon. Andrew Buscaglia: You know, you guys, there's a lot of noise on the margin side, Q3 to Q4, but I'm looking high level into '26. How volume depends margins, and can we count on some of these savings helping you expand in a lower volume environment? And then another question is on any update on are there incremental stranded costs we'll see fallout in '26, or where do we stand with that side of the story? Mark D. Okerstrom: Yeah. Thanks for the question. You know, at this point, I would just turn your attention to the financial framework we laid out at investor day. You know, which was again three to 4% revenue growth, 50 to 100 basis points of adjusted EBITDA margin expansion, and high single-digit plus adjusted EPS growth. We're in the middle of annual planning right now, and really, we're just trying to strike the balance between driving the appropriate amount of margin expansion along with accelerating growth. And we'll be able to give you a little bit more color on that, obviously, on our next call. You know, in terms of stranded costs, we're almost there. You know, we took some other actions as you saw in the third quarter. There's some stock comp related stranded costs that will be sort of working out. A lot of that sits in the segments. But we're almost there. We'll probably, you know, six to twelve months, we'll have the rest of it out. And as a reminder, I think we said we had $25 million that was out, and there was $25 million left to go. Probably half of that remaining for us to take out over the course of the next six to twelve months. Brock: Okay. Great. Thank you. Andrew Buscaglia: You're welcome. Brock: This now concludes our question and answer session. I would like to turn the floor back over to Olumide for closing comments. Olumide Soroye: Thanks, Brock, and thank you all for joining us. We really appreciate your interest in Fortive Corporation. We could not be more excited about the journey we're just starting here. And it's still early. We realize that some of you know us and some of you are new to us, but we are incredibly excited. And we have a simple playbook here. We've got a great portfolio. We believe we're going to drive faster, profitable organic growth from this portfolio. We are going to continue to be very disciplined in terms of leverage down the P&L and our cost discipline. We have FBS helping us through that. And our capital allocation approach is going to be intelligently positioned to balance share repurchase and smaller bolt-on M&A. And we believe that that formula and us doing what we said we'd do on that and building trust and maintaining trust will do incredible things for shareholder value creation in three years. So that's exciting for us. We hope it is for you as well. Thanks for joining. I will see you next time. Brock: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.
Operator: Thank you for holding. Your conference will begin in two minutes. Thank you all for your patience. Welcome to the third Quarter 2025 Phillips 66 Earnings conference call. My name is Breeka, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Sean Maher, Vice President, Investor Relations. Sean, you may begin. Welcome to Phillips 66 earnings conference call. Sean Maher: Participants on today's call will include Mark Lashier, Chairman and CEO, Kevin Mitchell, CFO, Don Baldridge, Midstream and Chemicals, Rich Harbison, Refining, and Brian Mandell, Marketing and Commercial. Today's presentation can be found on the Investor Relations section of the Phillips 66 website along with supplemental financial and operating information. Slide two contains our safe harbor statement. We will be making forward-looking statements during today's call. Actual results may differ materially from today's comments. Factors that could cause actual results to differ are included here as well as in our SEC filings. With that, I'll turn the call over to Mark. Mark Lashier: Thanks, Sean. Before we begin the call, I'd like to take a moment to recognize Jeff Dietert, our Vice President of Investor Relations since 2017. After a long and successful career in the energy sector, Jeff announced his decision to retire at the end of this year. On behalf of the entire management team, I want to extend our deepest gratitude to Jeff for his invaluable contributions to the company. We wish him all the best in retirement. During the quarter, we continued to execute on our strategy and delivered strong financial and operating performance. Refining's results demonstrated our commitment to world-class operations. Midstream, along with marketing and specialties, delivered another consistent contribution providing a strong foundation for our capital allocation framework. Chemicals generated solid returns despite a challenging market, operating above 100% utilization. Year to date, adjusted chemicals EBITDA is $700 million, reflecting the unique feedstock advantage of our assets. During the quarter, the Dos Pico's two gas plant became fully operational and the first expansion of our Coastal Bend pipeline was successfully completed. These milestones enabled us to achieve record NGL throughput and fractionation volume. Since quarter end, we processed the final barrel of crude oil at the Los Angeles refinery. We sincerely thank our Los Angeles refinery employees for their exemplary dedication to safely operating the assets as we progress the idling process. Earlier this month, we also closed on our acquisition of the remaining 50% interest in the Wood River and Borger refineries. This transaction simplifies our portfolio and enhances our ability to capture operational and commercial synergies across the value chain. The further integration of the Wood River, Borger, and Ponca City refineries will create a system that offers opportunities to capture margin across our assets. An example is the recently announced open season for Western Gateway. This refined products pipeline will ensure reliable supply to Arizona, California, and Nevada from Mid Continent refineries. This proposed project is one of many opportunities that will drive greater shareholder value. Aligned with our focus on continuous improvement and dedication to operational excellence, we're excited about the future. Rich will now provide more context on our progress and the future in refining. Rich Harbison: Thanks, Mark. Slide four highlights another strong quarter for refining, a clear reflection of our commitment to operational excellence. We achieved 99% utilization, the highest quarter since 2018, and above industry average. Our year-to-date clean product yield of 87% is a record, underscoring our ability to maximize value from every barrel processed. Our third quarter adjusted cost per barrel of $7.07 was impacted by $0.40 per barrel due to a $69 million environmental accrual related to the Los Angeles refinery. Since 2022, we've reduced our adjusted controllable cost by approximately $1 per barrel. We have built our improvement strategy on five pillars of excellence: safety, people, reliability, margin, and cost efficiency. Our greatest asset is our people. Training them well and sending them home safely each and every day is our top priority. Reliable operations improve nearly every metric. Our team is focused on a world-class reliability program that will sustain our strong operating performance. We are seeing excellent progress in utilization and uptime, and we're not done yet. We've made some tough but impactful decisions that are paying off as we lower our cost structure and improve our flexibility and optionality to capture changing market conditions. Excellence in all five pillars maximizes earnings and value creation. Moving to slide five. Since early 2022, refining has been on a journey. We have been making structural changes to the portfolio and organization that will continue to drive long-term shareholder value. We've rationalized our refining footprint while strengthening our position in the Central portal. The full ownership of the Wood River and Borger refineries creates additional high-return organic opportunities. We've also transformed the organization by centralizing support functions and operating the assets as a fleet, versus independently. We have a list of low-capital, high-return projects in the queue going through our standard review and approval process. The ones we've already executed have improved yields, product value, and flexibility. We've increased our optionality to switch between heavy and light crudes and between finished product mixes. I look forward to implementing the next phase of organic growth opportunities. Lastly, we're focused on driving efficiencies which will further improve our cost profile. We're targeting an adjusted controllable cost per barrel to be approximately $5.50 on an annual basis by 2027. We are positioned well for the future. Now I will turn the call over to Kevin to cover the financial results for the quarter. Kevin Mitchell: Thank you, Rich. On Slide six, third quarter reported earnings were $133 million or $0.32 per share. Adjusted earnings were $1 billion or $2.52 per share. Both reported and adjusted earnings include the $241 million pretax impact of accelerated depreciation and approximately $100 million in charges related to our plan to idle operations at the Los Angeles refinery by year-end. We generated $1.2 billion of operating cash flow. Operating cash flow, excluding working capital, was $1.9 billion. We returned $751 million to shareholders, including $267 million of share repurchases. Net debt to capital was 41%. We plan to reduce debt with operating cash flow and proceeds from the announced fourth quarter European retail disposition. I will now cover the segment results on slide seven. Total company adjusted earnings increased $52 million to $1 billion. Midstream results decreased mainly due to lower margins, partially offset by higher volumes. These results include $30 million of additional depreciation related to the retirement of assets associated with our Los Angeles refinery. Chemicals improved on higher margins and lower costs, which were largely driven by a decrease in turnaround spend. Refining results increased on stronger realized margins partially offset by environmental costs associated with the idling of the Los Angeles refinery. Marketing and specialties results decreased due to lower margins, primarily driven by more favorable market conditions in the second quarter. In renewable fuels, results improved primarily due to higher margins including inventory impacts and international renewable credits. Slide eight shows cash flow for the third quarter. Cash from operations excluding working capital, was $1.9 billion. Working capital was a use of $742 million primarily due to an inventory build. Debt increased primarily due to the issuance of hybrid bonds, which was partially offset by a reduction in short-term debt. We returned $751 million to shareholders through share repurchases and dividends and funded $541 million of capital spending. Our ending cash balance, including assets held for sale, was $2 billion. Looking ahead to the fourth quarter on slide nine, in chemicals, we expect the global O&P utilization rate to be in the mid-nineties. In refining, we expect the worldwide crude utilization rate to be in the low to mid-nineties. Turnaround expense is expected to be between $125 and $145 million. The utilization and turnaround guidance reflects 100% ownership of the Wood River and Borger refineries and removal of Los Angeles. We anticipate corporate and other costs to be between $340 and $360 million. Now we will move to Slide 10 and open the line for questions. After which Mark will wrap up the call. Operator: Thank you. We will now begin the question and answer session. As we open the call for questions, as a courtesy to all participants, please limit yourself to one question and a follow-up. If you have a question, please press star, then one on your touch-tone phone. If you wish to remove from the queue, please press star then 2. If you are using a speakerphone, you may need to pick up the handset before pressing the numbers. Once again, if you have a question, please press star, then 1 on your touch-tone phone. Steve Richardson from Evercore. Please go ahead. Your line is open. Steve Richardson: Great. Thank you. Regarding WRB, I'm interested if we could just dig a little further there. Very clear what looks to be a really attractive acquisition price, and you've got a clear synergy target out there. But could we talk a little bit about beyond this inside and outside the fence line, some of the other benefits and just address what a 100% ownership of these facilities opens up in terms of some of the organic growth that Rich mentioned? Mark Lashier: Sure, Steve. I think this falls in the category of our strategy and action. Several years ago, we identified that the Mid Continent's central core was core to our business, and we would focus and make strategic decisions around that. Since then, we've made the decision to idle LA and redevelop the land there. We announced our increased ownership of WRB, that you referenced here. And now we push that on with the open season of Western Gateway. Now the first step is that really it opens up the frontier to integrate more freely WRB, Ponca City, and Border together into one system that creates a lot of optionality, a lot of opportunity. And I'll let Rich and Brian dive into the details on that. Rich Harbison: Alright. Thanks, Mark. I'll start and then pass it over to Brian there for the commercial side of the business. So, you know, when I think about this, Steve, you know, we've added 250,000 barrels a day of processing capacity for us. And what is our most competitive portfolio in the Center Mid Continent area there as you indicated, we got it at a very attractive price. Not diving into the cost synergies, but really, this deal opens up some organic growth opportunities that will allow us to increase our crude processing optionality and flexibility. With our previous arrangement in the JV, we were somewhat locked into a desired crude slate and investments to open up that flexibility were generally not looked upon favorably. So now we have the opportunity to really open up this flexibility inside this system as well as on the product slate side of the business too. So we see lots of opportunity there, which will help us increase our market capture opportunity. But most importantly, from my perspective, it's our ability to operate Wood River, Borger, and Ponca City as a regional system. Actually interconnected with a very good pipeline system operated by our midstream assets. And this will allow us to really optimize the use of intermediate products between the sites. And what that leads to is higher utilization of these downstream units, these units downstream of the crude operation. And that will also allow us to increase utilization of these conversion units and make additional products. All that leads to more commercial opportunity, and I'll kick it over to Brian to expand a little bit on that. Brian Mandell: Hey, Steve. From a commercial point of view, we have currently a cross-functional team looking at synergy opportunities, everything you can think of, and currently have 30 plus initiatives in the pipeline. We're generating new initiatives every single week maybe just to give you a few examples of some flavor for what we're looking at. We've been able to improve our integrated model between Wood River and Ponca City on butane blending and optimize the two plants which are highly integrated with our midstream assets. Another example is we've updated our variable cost economics on proprietary pipelines to incentivize shipping on Phillips 66 assets versus third-party pipelines. We're utilizing some of the marine assets that were previously dedicated to WRB for other higher netback service. And also, we're using Borger and Wood River Coke and blending it with coke from other refineries to generate more volume to be placed in the anode coke market. So those are just a few examples. It's early days. A lot more opportunity to go. Kevin Mitchell: Hey, this is Kevin. Just one other point of clarification I'd like to make because I think there's been a little bit of confusion out there. In terms of impact on capital. So we increased our guidance on capital budget to $2.5 billion or approximately $2.5 billion from what was previously $2 billion, and that has been attributed to WRB. That's a little bit of an overstatement of the impact. The reality here is if you look at 2025, the capital budget was $2.1 billion. WRB capital budget at a 100% level was $300 million. And so our net addition is $150 million relative to that. And that $300 million is a reasonable run rate to assume. And so, really, we're saying that $2.1 billion goes to $2.4 billion on a 100% consolidated basis, but we already had 50% of that uplift reflected in our operating cash flow because of the way that flows through the distributions from the equity method accounting. So I just wanted to put some clarity around that point. Steve Richardson: Appreciate the additional color there, particularly on the CapEx. If I could just quickly follow-up and fear of sounding like I'm leading the witness. But fair to assume that a lot of these benefits we just talked about, both on the refining side and the marketing side, are capital efficient and we're gonna see some of those benefits relatively near term. I mean, it's the one point we'd like to probably bring is when do we start seeing some of those things? Mark Lashier: Yeah. I think you will see capital-efficient additions there. There are capital opportunities. It'll add to Rich's list of low capital, high return opportunities, but the kind of synergies we talked about and the commercial opportunities that freeze us up those things are happening as we speak. Steve Richardson: Wonderful. Thank you. Operator: Thanks, Steve. Theresa Chen from Barclays. Please go ahead. Your line is open. Theresa Chen: Hello. Thank you for taking my questions. I wanna dig deeper into Western Gateway. Now that we are we can change into the binding open season. Can you talk about the rationale behind this project and why it's important for Phillips 66? How does it stack up versus one of competing pipeline projects? And if built, how do you think this pipeline will change? How do you flows as well as margin capture for your Central Corridor assets? Mark Lashier: Yeah. Theresa, that's a great question. When you step back and think about our mission to provide energy and improve lives, and when we looked at the evolution of refining capacity out west, impacting both California as well as Arizona and Nevada. And we saw an opportunity along with the alignment of Wood River, Ponca City, and Borger to really make something special happen. And in essence, the ability to bring our midcontinent strengths, midcontinent advantages to the West Coast, Saint Louis all the way to Santa Monica. And we believe there's great opportunities there. Less refining capacity in California, growing demand in Arizona and Nevada, all those things combined to get us interested in this opportunity. Brian and Don can dig into the details of those and address the specifics of your question. Don Baldridge: Sure. Thanks, Mark. And, Theresa, we do think it's a unique and compelling opportunity. And if you think about just the framework of the project, our gold line really operates like a supply header that's gonna be able to access the Mid Continent refineries bring that volume to help fill the Western Gateway pipeline. It's gonna take product along the new pipeline all the way to Phoenix, you know, that will help satisfy that market, that area. And then the balance of that volume being able to go all the way to Colton, California where it can access the broader California and Nevada market. We think that's a compelling opportunity. It certainly early days in the open season, or having a constructive and active conversation with interested parties. So more to come on that. I think the project and how we have it set up is something that's resonating quite well with the market. Brian Mandell: And maybe just from a commercial perspective, you know, the way I think about it is PADD five is gonna look very similar to PADD one. Where you have a short market, you have a pipeline that brings in domestic volumes like Colonial does to PADD one, and then you have barrels coming from overseas, waterborne barrels as well. So it'll be set up very similar to that market. And as you know, a pipeline is the most reliable way to move volume won't be susceptible to dock restrictions or lack of logistics, demurrage, or weather issues. And assuming only our pipeline gets built, we estimate probably about half of the volume will end up in the Phoenix market with reversal of Kinder Morgan and the rest will end up in California, which makes sense as Mark mentioned, as you see, there were closures of California refineries. But California will continue to be a waterborne import market, and at Phillips 66, we'll continue to import barrels by the water. And from our commercial perspective at Phillips, the pipeline will allow us to move products, as Mark said, from our Mid Con refineries for likely better than Mid Con netbacks, and all our Mid Con refineries can make Arizona grade gasoline and California grade gasoline. So we see the pipeline as a great opportunity for California, for Arizona, for Nevada, and for all the potential shippers. Mark Lashier: Yeah. As far as the comparison of our project to OneOak's project, I think they have different target markets or target sources, Gulf Coast versus Mid Continent. And I think that the ultimately, the market will determine if one or either of the projects go forward. So we believe we've got a strong ability to bring midcontinent volumes all the way to California in with Kinder Morgan really provides a lot of strength for this option. And we have full faith that we'll move forward with this. Theresa Chen: Thank you for that comprehensive answer. And as a follow-up, from a cost perspective, what kind of CapEx should we anticipate for Western Gateway given the substantial greenfield component? And how will the cost be split between the partners since Kinder is contributing its existing pipeline infrastructure? Don Baldridge: Sure, Theresa. So the partnership is fifty-fifty with Kinder Morgan. And so that'll be at the end of the day. But how the balance works. And then in terms of the overall CapEx, you know, we haven't disclosed that number. And part of that is because as we talk through with shippers and different supply connections, we're still working through, you know, what some of that connection cost might entail. And how all that will flow from a volume standpoint. And that will drive some of the infrastructure needs and capital requirements. But safe to say this is a consistent midstream type return investment that we're looking at in concert with Kinder Morgan. Kevin Mitchell: And probably also worth highlighting that the capital spend wouldn't be in the next couple of years either. You're sort of looking at 2027, 2028, 2029 time frame. So no near-term impact on capital budgeting. Theresa Chen: Thank you very much. Operator: Neil Mehta with Goldman Sachs. Please go ahead. Your line is now open. Neil Mehta: Yes. Good morning, Mark and team. Wanted to keep on pushing on this midstream point. And you've talked about $4.5 billion in EBITDA by year-end 2027 as the run rate. Do you annualize Q3? You're close to $4 billion. And so maybe you could just talk about bridging that $500 million and if oil prices languish, how sensitive is the EBITDA to that? And so giving us confidence around that incremental $500 million would be great. Mark Lashier: Absolutely, Neil. I'll kick it off and then turn it over to Don. But you know, first of all, I think you have to look at our track record. We've grown that NGL business from $2 billion to $4 billion over the last several years. And as you noted, we're just under a billion dollars this quarter. So the $4 billion is in line of sight. This is all the result of the concerted effort based on our strategy we aligned on several years ago with our board. To establish this wellhead to market presence in NGLs. And we've done disciplined, accretive, inorganic, and organic things to do that to get to where we are today. And we see the next increment another $500 million largely from organic. I mean, we've got line of sight on organic opportunities. The inorganic opportunities were facilitated by noncore asset dispositions, so we've been able to reallocate capital and free that up. And most importantly, the organic opportunities quite often are unleashed because of the inorganic opportunities. So this has all been a relentless pursuit of higher ROCE in the midstream business as well as building competitive on top of competitive advantage. And I'll tell you that it was a great visit. We had the Sweeney last week. We've done some things around the fracs there. The operations have been incredible. And the operators pointed out that they found our fifth frac. We have four fractionators at Sweeney. They found enough capacity through some debottleneck projects they've done. So in essence, they've added an additional frac through very low capital opportunities. So much like refining, we're looking at ways to be more efficient, to grow more aggressively, in midstream and more accretively. And Don's got another list of opportunities that he's gonna go after. Don Baldridge: Sure. Thanks, Mark. And definitely the platform that we have developed over the years, it just lends itself to a lot of organic growth opportunities. And that's what's really driving this growth from $4 billion to $4.5 billion. A lot of those projects are publicly announced and are in execution phase. If I look at the gas gathering and processing business, we got plant expansions in the Permian with our Dos Pico gas plant that came on just a few months ago. That's it will fill up by 2026, and then Iron Mesa gas plant that we announced, it's under construction. That'll come online in early 2027 and fill up. So our footprint, you know, that plus the commercial successes as well as the higher NGL content in the production, that's really driving a lot of the volume growth that's coming through our system. That's, again, all fee-based type margin. So very limited sensitivity to the underlying commodity price. That volume drives what happens downstream in our NGL pipeline business. You know, we just completed the first phase of our Coastal Bend expansion. We're running that full. We've got a next phase of capacity, a 125,000 a day of additional capacity will come on later in 2026. As well as the restart of our Powder River pipeline that will pull in barrels out of the Bakken. So those volumes that capacity, and the volumes that will flow through there, again, help drive this earnings growth that will take us to that $4.5 billion run rate by 2027. So we've got a well-defined organic growth plan that we're executing. The other thing I would just say is that now our asset footprint definitely is in a position where it creates additional growth opportunities that are high return, low capital, that we continue to pull together and execute on. So really see, like, we've got some great momentum within this part of the business and are executing it on a day-to-day basis. Neil Mehta: Thank you, Don, and thank you, Mark. So the follow-up is just crude and transit. A lot has been made of the 1.4 billion barrels that appear to be on the water. But today's DOE is the view that they aren't finding their way into US shores or into a lot of OECD pricing nodes. And I wanna make get your perspective of or do you guys have visibility to that crude actually manifesting its way over here? And if not, what do you think is driving that you think it's the sanctions, whether it's Iran, Venezuela, and now Russia contributing to that difference between what appears to be a visible build in inventory on the water but not on land. Brian Mandell: Yeah. Neil. It's Brian. Hey. We do see a very large build on water, a barrels. It's a function of what those barrels are, and it's not clear if those are Russian barrels and they don't get to end users. They may sit there for a while. If they are other barrels maybe Saudi barrels or OECD barrels that will get to market. And that will probably put pressure on Saudi OSPs. And benchmark crudes. And so we're kind of waiting to see what those crudes are, and it's not it's not clear. But it is clear that there is a lot of crude on the water now. Neil Mehta: Okay. Thanks, Brent. Operator: Justin Jenkins from Raymond James. Please go ahead. Justin Jenkins: Great. Thanks. I guess one of the common questions we get from longer-term investors is on the debt side, the pathway to your 2027 targets. And Kevin, you touched on it a bit in your remarks, but maybe I'd ask if you could give your thoughts on the bridge to that $17 billion debt target by '27? Mark Lashier: Hey, Justin. This is Mark. I just wanna context it a little bit that we've clearly been using both our balance sheet as well as asset dispositions to drive the inorganic transactions as well as the organic opportunities midstream as well as in refining while sustaining our commitment to return at least 50% of our cash from operations to shareholders. And so we've been able to do that quite effectively. We're making a more proactive shift now towards intently focusing on the debt level and then that debt reduction is a clear priority, and Kevin is well prepared to walk you through the math going forward. Kevin Mitchell: Yeah. Thanks, Mark. So we still have that same $17 billion debt target. That has not changed. You will have noticed that in the third quarter, our debt level increased to $21.8 billion. Now that increase was a combination of some debt issuance and some short-term debt reduction. But also had a corresponding increase in cash balance. So on a net basis, we were essentially flat during the third quarter. But as we look ahead to the next over the next the fourth quarter and the next couple of years, and you look in the at the third quarter, actually, the second quarter, pre-working capital, generated $1.9 billion of operating cash flow in both periods. You think about WRB coming into the equation and I'll use this number partly to keep the math simple, but if we're at $8 billion in operating cash flow annually, you can you know, we're still committed to returning 50% of cash operating cash to shareholders. That's $4 billion, which would be split evenly between the dividend and the buybacks. That leaves $4 billion that's available. The capital budget of $2 to $2.5 billion per year as we talked about earlier, leaves somewhere in the order of $1.5 to $2 billion per year available for debt reduction. That's 2026 and 2027. Obviously, margins will do what margins do, and so we don't have complete control over all of that. That's a reasonable construct to think about this. In the fourth quarter of this year, we will have the proceeds from the Jet disposition, but we also had just funded the WRB acquisition in those two kind of offset but we'll have a sizable working capital benefit. In the fourth quarter, somewhere in the order of $1.5 billion will come back to us, maybe slightly more so between $1.5 billion in the fourth quarter of this year and then the $1.5 to $2 billion potentially in each of 2026 and 2027 gets us comfortably to that $17 billion level by the '27. And that doesn't include any potential additional dispositions of noncore assets which just provides upside and additional flexibility. Justin Jenkins: Perfect. Appreciate that detail, Kevin and Mark. I guess my second question on the refining macro and maybe tilt to that cash generation side of things. Does seem to fit your portfolio pretty well with high diesel frac and expectations for wider diff. Maybe just your overall expectation on how cracks play out and crude diff play out into 2026? Brian Mandell: Hey there. This is, Chris O'Brien again. On the crude diffs, you know, we expect to see light heavy spreads start to widen. During Q4 and into Q1. It's been somewhat delayed, I think, surprising many of us. But the heavy crude has been slower, as I said. With additional OPEC barrels moving into China's SPR. And staying in the East in general, and then just the geopolitical concerns heading market volatility around Russia, Iran, and Venezuela? In The US Gulf Coast through Q3, the Canadian heavy crude became more attractive than high sulfur fuel oil. Which caused refiners on The US Gulf Coast to run more Canadian crude, and that supported differentials. But that we as we've entered Q4, we're starting to see some impact from additional OPEC crude and a kind of relative weakening, although still strong of the high sulfur fuel oil. Additionally, the WCS production increased by 250,000 barrels in Q3 and we were gonna expect another 100,000 barrels or more in Q4. And as more Canadian volume comes online along with the winter diluent blending, we're seeing the WCS diff weaken by about a dollar in Q4 versus Q3. And Canadian production is expected to increase next year as well with several projects coming online and also from winter diluent blending. So in 2026, WCS curve is off another dollar from Q4 as additional crude hits the market, including Middle Eastern crude, we'd also expect to see Middle Eastern OSPs to fall and put additional pressure on heavy crude. And as you know, we're a large user of WCS. So watching the WCS differential continue to widen will be a benefit to us. Justin Jenkins: Thanks, man. Operator: Doug Leggett with Wolf Research. You may proceed with your question. Doug Leggett: Hey. Good morning, everybody. Guys, utilization rates blew out quarter record, I believe, since 2018, I think you said in the release. When we were running around Sweeney with you guys, I asked I forgot the gentleman's name who joined you from Chevron recently. So what are you doing differently on how you think about plan turnarounds, the habitual ones every four to five years is that changing? And should we think about your go-forward capacity utilization, your ability to manage that if you like, as averaging higher over time. The reason I asked the question is because Valero had a similar situation. And between the two of you, you've just basically offset the closure of Lyondell, Houston. So we're trying to understand if our utilization is a new normal for not just you guys, but for the industry. Rich Harbison: Hey, Doug. This is Rich. You know, the gentleman you were talking to is Bill. He's the refinery manager down there at Sweeney, and that was a good visit. I'm glad you mentioned that. It was a good opportunity for us to show off an asset there that highlights one of our core strategies, which is integration with the midstream and also CPChem operation there as well. You know, when I think about your question and how do I answer that, it's to me, it's a journey that we have been on. And, you know, you don't sustain utilization rates like this if you're making quick and short-term decisions. These have to be long-term end-of-sight, visionary, type direction that you're moving a large set of assets to. You know, of course, we started that with a cost and margin, but we also simultaneously were running an improvement, out opportunities and initiatives around our reliability programs. And those reliability programs are essential to this sustainability component. To it. And that to me is what culturally has continued to improve over the last two to three years on this journey as we've marched down this path. And also on the margin front, which is a journey that we started a couple of years ago, and that was really centric around starting to fill up our downstream processing units behind the crude. First, you gotta fill the crude unit up, and then you gotta fill the downstream units up. Those directly result in clean product yield. Which is where, you know, most of their earnings are flowing into the organization. So I think with that commitment to reliability, world-class reliability program that we're executing. As well as the fundamental change in our cost and margin outlooks. At each of the sites gives me a high level of comfort that we will be able to sustain this level of performance going well into the future. Doug Leggett: That's really helpful. I threw the AI, words out to Valero and it bumped their stock up, I think. So maybe you could say AI helping you manage your utilization. So my follow-up, a very quick one for Kevin. Kevin, on that same trip, we had an opportunity to have dinner with the guys and you sadly, were not there to take this question on the chin. And the question basically is, if you're a relatively enterprise volume, what I mean by that is you've got a lot of long-life assets. However, you think about mid-cycle, a little bit of growth in midstream in the context of the overall company, but relatively static enterprise value. Seems to me that the easiest way to basically boost your equity value is to reduce your net debt. Simple math. Equities enterprise value minus net debt. So why is net debt reduction not part of the cash return formula? Raise the formula, include net debt. Why not? Kevin Mitchell: Well, it's I mean, you're absolutely correct. That everything else stays the same, a reduction in debt. Translates into an increase in equity value. And you can choose to look at debt reduction in that light. I mean, what we do is take a very sort of consistent view that most others in the space do, which is the cash return to shareholders is the dividend plus the buybacks. And at the same time, as part of our capital allocation framework, we've got debt reduction as a key part of that. We actually have this debate internally when we have traditionally thought of capital allocation being how much is returned to shareholders, dividend and buybacks, and how much is reinvested in the business. In terms of the capital program. And now we've got this additional dynamic of debt reduction, at which bucket does it fall into. We tended to just break it out separately on its own. But you are absolutely correct that there is a clear value proposition for equity holders through debt reduction and we do see it the same way in that context. It's really then down to the semantics of how you, how we communicate that. Doug Leggett: Great. I appreciate the answer, Kevin. Thanks. Operator: Manav Gupta with UBS. Please go ahead. Your line is open. Manav Gupta: I want to really thank Jeff Dietert over the years. I've thrown a lot of stupid questions at him. He's been very patient in answering all of those. So thank you, Jeff. You will be missed a lot. My first question here, sir, is on the chemical side. The indicator, and I understand it's an industry indicator, seemed relatively flat. The earnings jumped materially. Now I think some part of it was the Port Arthur non-downtime, but was it also a function of you using a higher ethane blend than what probably the indicator is in showing? That's what I concluded, but I wanted your opinion on it. And if you could also talk about when can we get back to, like, mid-cycle chemical margins? Mark Lashier: Yeah. Just for the record, Manav, I've never fielded a stupid question from you, so I think I can speak for the rest of them. You ask insightful questions, and this one's very insightful. You partially answered it. You know, CPChain's chain margins increased about 9.5, 9.7¢ per pound. IHS was flat. There's really three drivers there. We had higher high-density polyethylene margins due to lower feedstock cost. So our blend of feedstock is different than the blend used in the IHS Marker. We're, as you noted, more heavily weighted to ethane. I think the most heavily weighted to ethane, and that provides a very resilient advantage. Also, in the second quarter, CPChem had some planned downtime at Port Arthur, some unplanned downtime at Cedar Bayou. They had some turnarounds as well. And so when you flip all that to the third quarter, those things go away. That was beneficial. And also, the warm burns, other people had unplanned downtime in the third quarter and CPChem was able to take full advantage of that because of the short in the market. And so we see you know, the chemicals world is still over but I would say that what happened in the third quarter with that quick uptick in margins when there was a little bit of tightness created that's a really good sign. You know, CPChem because of its cost position, is gonna they generated year to date $700 million of EBITDA. They should that's our half, not just CPChem, our half of their EBITDA. They'll be up around a billion dollars, and this is the bottom of a very protracted cycle. And so they are doing quite well. They're able to jump in when others falter. They're running at above a 100% when others are rationalizing. There's gonna be a lot of asset rationalization going forward. You're even hearing news out of Korea about the potential for rationalization. Europe's already well down that path, and so I think when you start seeing margin upticks when people have outages, that's a good sign. We're not calling this down cycle over. We think it's gonna be a long slog forward. But I think there'll be more shakeout when CPChem starts up their two large world-scale the definition of world-scale, frankly, assets both here in The US and in Ras Laffan, Qatar and that will even, I think, potentially force out other high-cost producers. And so they're gonna be moving from strength to strength. And the long-term prospects are quite good for CPChem. Manav Gupta: Thank you for the detailed response. My quick follow-up is here, sir. Initially, when you did the epic deal, I think now you call it Coastal Bend, there was a little bit of a pushback but now things are really coming together. The line has already had one expansion, and I think one more phase is planned. So help us understand where is the epic acquired assets EBITDA at this point on a quarterly basis and then what would it become once the full expansion happens? If you could just run us through that math. Thank you. Mark Lashier: Yeah. Thank you for highlighting that, Manav. Again, the inorganic opportunities that we've done in midstream have always opened up more organic opportunities. And so I think that it's important to continue to look at our track record of what we do. We're not buying inorganic opportunities just to get bigger. We're buying because it opens up a new playing field. It creates more opportunity that perhaps the incumbents couldn't realize. And that is the case in Epic, and we're quite pleased with Epic and everything that's going on around that. And, you know, Don can fill in the details of what's coming next. Don Baldridge: Sure, Don. And in terms of just looking back since we closed on the epic transit in April, you know, compared to the acquisition plan, we are meeting to even exceed what we expected from the assets. That's really a testament to the synergy capture around the operations and commercial around that now Coastal Bend pipeline. It certainly has been a really nice add in the Gulf Coast for us. The Corpus Christi presence. Combined with what we have at Sweeney. And as you mentioned, we turned on the first phase of the expansion here in August. We're running that pipeline full. Again, that's a sign that we've had the volumes available on the system. That's why we acquired the system and expanded it because we needed the capacity. We're filling it up as we turn it on. We've got another expansion that'll come on later in 2026. And most all that volume is already on the ground and flowing on third-party pipes that will move over or it's a volume that's gonna come from the GNP expansions that we've already announced. So we're executing on the acquisition plan as we advertised and really pleased with the results and the follow-on opportunity that we're seeing with having that as part of our portfolio. Manav Gupta: Thank you. Operator: Jason Gabelman with Cowen Inc. Please go ahead. Your line is open. Jason Gabelman: Yeah. Hey. Thanks for taking my questions. The first question is a portfolio one. You've obviously concentrated your footprint in Central Corridor talking a lot about synergies with your midstream footprint. As you think about your East Coast and West Coast refining footprints, do you still view those as core? I mean, there are some good assets there. But obviously not as well integrated. With what you're doing in midstream and chems. So how do you think about the importance of those regions within the overall business? Mark Lashier: I think there's a couple of key things to think about here. It's that clearly, we have a core strategy around the integration of our Mid Continent or Central Corridor refineries there. They have the greatest crude flexibility. They have lots of optionality. That doesn't mean that we're ignoring our remaining coastal refineries. You think about Ferndale, we've already talked about it. Transitioning to produce California carob and its value is increasing as refineries refinery capacity in California tightens up and so we're not gonna kick out assets that are creating good value but we are going to focus more intensely on the integration in the Mid Continent and Central Corridor. Likewise, Bayway, when you think about the Atlantic Basin, we've got opportunities to integrate between Bayway and Humber. We can move streams back and forth to optimize there and to enhance the profitability and the reliability of both of those assets. And there's some very, very strong opportunities there that we're continuing to look at. Jason Gabelman: Okay. Great. That's very clear. My follow-up is on the renewable fuel segment and obviously results saw a meaningful improvement quarter over quarter. You mentioned some impact from selling credits and I think there was something about selling product out of inventory in there. So wondering if you could just elaborate on what drove the increase quarter over quarter, how much of that is kind of underlying versus some timing impacts? Thanks. Brian Mandell: This is Brian Jason. Let me just talk about Q3, and we'll talk a little bit about what we're seeing in Q4 and beyond. But in Q3, the renewable margins were actually worse if you took a look at just the margins. But we did a lot of self-help in Q3. We reduced costs. We improved our logistics, particularly to get in more domestic feedstock. We sent more of our renewable products to Pacific Northwest where fossil basis was stronger. We got a lot of value from some new pathways that we got. We doubled SAF production. And then as you pointed out, we had the timing of the European credits. In Q4, we'll have some timing impacts as well. But in Q4, margins are improving with weaker soybean prices and relatively stronger credit values. We think the industry will continue to run at about the same rates as they did in Q3 given the turnaround activity. The European market will continue to attract renewable products. We've been sending renewable products in that direction both in Q3, and we continue doing that. We also anticipate continuing to increase our SAF production in Q4, and we've seen strong interest from SAF buyers. And finally, the new pathways that I mentioned will give us some additional flexibility. But in the end, we still need more clarity on federal and state policy. For example, the guidance on the RVO policy, including reallocation of SREs and wind generation on foreign feedstock, and even more clarity on the European policy. Kevin Mitchell: And Jason, it's Kevin. Just one other clarification. That inventory comment, that was a variance relative to the second quarter. There was no net benefit in the third quarter from inventory. It's just relative to what we saw in the second quarter. So there's that's not a direct impact. Jason Gabelman: Yep. That's a helpful call out. Thanks, guys. Operator: Brian Todd with Piper Sandler. Please go ahead. Brian Todd: Yeah. Thanks. Maybe a couple back on refining. Throughput was obviously, you know, much higher than anticipated in the quarter. But margin capture, the still probably still a few headwinds that we see that existed in the third quarter. Can you talk about maybe some of the headwinds in the third quarter and how those might be trending or improving into the fourth quarter? And then maybe as a follow-up, a few years ago, as part of your strategic priorities, you talked about a goal of driving margin capture improvement of 5%. Can you talk about where you are on that progress you've clearly made improvements on clean product yield. But where do you think you are on that journey? And what are some of the things that you may be working on over the next couple of years that we should keep an eye on on that front? Rich Harbison: Hey, Ryan. This is Rich. Let me start and then Brian can clean up anything else in the market front there. But you know, as I think about it, maybe the best way to approach this is a regional conversation. In the Atlantic Basin, market capture this quarter was 97%, pretty solid. Quarter over quarter, that was really a difference in turnaround activity in that region. But we did see improved market cracks and some inventory impacts that were really offset by some higher feed costs as well as some lower product differentials in the region. The operations of the plants were quite good though. Utilization for the region was sitting at 99%. And, you know, and on our journey to improve, you know, we had a clean product yield in that region of 88%. So very solid performance in that area. And we think that's a lot of that's supported by a project that we initiated at Bayway that increased the native gas oil production and it's allowed us to fill up that cat and really, we're seeing positive returns on that. In the Gulf Coast area, market capture was a little bit lower at 86%. And, really, the headwinds on this one were we saw that, in the marketplace. Utilization for the region pretty solid at 100%. And the clean product yields at its typical 81% for that area, which may seem a little low on clean product yield, but I'll just remind everyone that at Lake Charles, we produce a gas oil that is sent over to Excel that impacts the overall clean product yield for the facilities. Central Corridor 101% market capture. Very solid. Again, you know, that's one of our highest performing regions. The headwinds there, lower product differentials again, and those were offset by some improved market cracks. But that differential, the common theme you're hearing here, the octane value, as well as the jet to distillate differential. Again, for the 103% on the utilization front. And 90% clean product yield. So you can see how those assets are running and performing quite well. And then, of course, one of our headwinds for the core was in the West Coast that 69% market capture. And that's primarily driven by the wind down of the Los Angeles refinery and the impacts associated with that. So you'll we had that impact in the third quarter. You'll see that impact continue into the fourth quarter. Where we will have wind down expenses but yet no barrels to offset that. In the profile. So we'll provide some clarity on that when we report in on the fourth quarter. Utilization was reasonably well on the West Coast at 88% and of course, they're very complex refineries, so they're playing product yields up there too. Brian Mandell: And the only thing I would add was now we're seeing we saw, as Rich mentioned, jet under diesel. Now those regrades have flipped and across all pads Jet is over diesel, which will be a tailwind for us, and octane spreads have firmed as well. With weakening naphtha to crude and so that's also will be a tailwind for us as well. Brian Todd: Great. Thank you. Operator: Philip John Lewis with BMO. Please go ahead. Your line is now open. Philip John Lewis: Thanks for taking the question. On Western Gateway, how important is Phillips integration between midstream and refining and designing and executing this project. And then separately, what's your level of confidence around regulatory permitting risk? And any different dynamics here to keep in mind between the greenfield pipe and the reverse in the California? Mark Lashier: Yeah. So we have a team that looks at integration opportunities that has from refining, commercial, midstream, all looking at where can we capture the most value, create the most optionality. And this opportunity jumped right out of that kind of collaboration. And it was a home run. And so we see opportunities both on the refining side, we see commercial opportunities, and certainly midstream is the glue that pulls it all together. So Don, I don't know if you have anything on the regulatory side. Don Baldridge: Yeah. Other than, yeah, the feedback that we've gotten initially from folks in the various states as well as in the federal has been encouraging and positive. We're obviously in the early days of going through the open season and firming up any of the route nuances as we look at the new build. But we feel very positive in terms of the ability to get this project done and to follow on just to what Mark said. I think, you know, from an integration standpoint, this is a project that Phillips 66 is uniquely positioned to help facilitate and drive as a really a compelling industry solution to market access for the Midwest refineries as well as satisfying a supply deficit in the West. So really feel good about where we stand and the opportunity set in front of us. Mark Lashier: I've had conversations with key people at the federal level as well as the state level in California. California, and they are enthusiastic about this. I think the opportunity to leverage Mid Continent energy dominance through infrastructure. They can come online fairly quickly. It's very attractive. At the federal level in California. Is looking for ways to provide energy security and this does that. So when you get both of those sides to the table in a positive way, I think that's a strong vote of confidence for the project. Philip John Lewis: Okay. Great. And recognizing Chemicals ran really well in the quarter, just going back to industry capacity rationalization, wanted to get your sense on the China anti-involution policies and just how meaningful do you think this could be to help bring balance back into the market? Mark Lashier: Well, I think you've seen it in refining. In China where the teapot refineries is the same kind of concept. We're hearing from our chemicals folks that they're looking at drawing a line in the sand around old in less efficient assets to make room for what they're doing around their crude to chemicals thing. So I think that watch that space. I think that will result in rationalization of assets, maybe even as young as only 10 or 20 years old. Operator: Thank you. This concludes the question and answer session. And I will now turn it back over to Mark Lashier for closing comments. Mark Lashier: Thanks, Raj. Great questions. We remain committed to our strategic priorities. Consistently strong operational performance across our assets, disciplined investments which deliver attractive returns, a strong balance sheet, and a commitment to returning capital to shareholders. Thank you for your interest in Phillips 66. If you have questions or feedback after today's call, please reach out to Sean or Owen. Operator: Thank you. This concludes today's conference. Thank you all for your participation and you may now disconnect.
Operator: Good morning, and welcome to the Ionis Pharmaceuticals, Inc. Third Quarter 2025 Financial Results Conference Call. As a reminder, this call is being recorded. At this time, I would like to turn the conference over to Mr. Wade Walke, Senior Vice President of Investor Relations, to lead off the call. Please begin, sir. Wade Walke: Thank you, Chuck. Before we begin, I encourage everyone to go to the Investors section of the Ionis Pharmaceuticals, Inc. website to view the press release and related financial tables we will be discussing today, including a reconciliation of GAAP to non-GAAP financials. We believe non-GAAP financial results better represent the economics of our business and how we manage our business. We have also posted slides on our website that accompany today's call. With me on the call this morning are Brett Monia, our Chief Executive Officer; Richard Geary, our Chief Development Officer; Kyle Jenne, our Chief Global Product Strategy Officer; and Beth Hougen, our Chief Financial Officer. Also joining us are Eugene Schneider, Chief Clinical Development Officer, and Eric Swayze, Executive Vice President of Research, who will join us for the Q&A portion of the call. I would like to draw your attention to Slide three, which contains our forward-looking language statement. During this call, we will be making forward-looking statements that are based on our current expectations and beliefs. These statements are subject to certain risks and uncertainties, and our actual results may differ materially. I encourage you to consult the risk factors contained in our filings for additional detail. Brett Monia: Thanks, Wade. Good morning, everyone, and thank you for joining us on today's call. The third quarter was a watershed moment for Ionis Pharmaceuticals, Inc. as we made important progress advancing first and best-in-class medicines for several serious diseases, including in our core focus areas of neurology and cardiometabolic diseases. Our first independent launch for Tringolsa, the only FDA-approved treatment for familial chylomicronemia syndrome, or FCS, continues to build strong momentum. This performance reflects Tringolza's compelling clinical profile, strong launch execution, and the significant unmet need that we are addressing. Based on this performance and confidence in our continued success across the business, we are raising our 2025 financial guidance, including TRINGOZA revenues, which Beth will review in more detail shortly. Tringolza also recently received European approval, and we are pleased that our partner Sobe expects to begin bringing this transformative medicine to patients across Europe in the fourth quarter. In August, the FDA approved Donzara for Hereditary Angioedema, or HAE, marking our second independent launch. This is an important milestone for people living with HAE and for Ionis Pharmaceuticals, Inc. I am especially proud of the launch execution by our commercial team, which Kyle will further highlight in a few moments. In September, we reported positive top-line results from two pivotal programs from our wholly-owned pipeline, both of which were groundbreaking in their own right. Olazarsen in severe hypertriglyceridemia, or SHTG, showed highly significant reductions in triglycerides and became the first medicine ever to show a reduction in acute pancreatitis in this population. And in neurology, Zilgarnason showed the first-ever disease-modifying effect in Alexander disease, a rare and often fatal neurologic disease. These results reinforce the strength of our science and position Ionis Pharmaceuticals, Inc. for two additional independent launches next year. Together, these two programs, along with Tringolza and Donzara, represent significant breakthroughs for patients and the potential for multibillion-dollar revenue for Ionis Pharmaceuticals, Inc. Complementing our rich wholly-owned pipeline is our partner pipeline, which continues to progress very well. By 2027, we anticipate four key launches from our partner pipeline targeting both rare and highly prevalent life-threatening diseases. We expect these partnered programs will further expand the impact of Ionis Pharmaceuticals, Inc. discovered medicines and meaningfully increase total revenue for Ionis Pharmaceuticals, Inc. With the strong momentum across our business, including our first two independent launches underway, an advancing wholly-owned late-stage pipeline, and a robust partnered portfolio, Ionis Pharmaceuticals, Inc. is well-positioned to deliver transformative medicines for patients year after year, driving sustained growth. And with that, I'll turn the call over to Richard. Richard Geary: Well, thank you, Brett. We are making excellent progress across our pipeline, reinforcing Ionis Pharmaceuticals, Inc.'s ability to deliver on our mission of bringing transformational medicines to patients for years to come. Just last month, we reported positive top-line results from the Phase III CORE and CORE II studies of olisarcin in people with SHTG who had triglyceride levels substantially higher than 500 milligrams per deciliter despite being on standard of care lipid-lowering therapies at baseline, putting them at risk of life-threatening acute pancreatitis. In these pivotal studies, olesarsen demonstrated highly statistically significant and clinically meaningful mean reductions of up to 72% in placebo-adjusted fasting triglycerides at six months, the primary endpoint of these studies. In these studies, olesarsen also significantly reduced acute pancreatitis events, making it the first and only treatment to achieve this positive outcome in people with SHTG. Olisarcin achieved a highly statistically significant 85% reduction in adjudicated acute pancreatitis events. It's important to remember that the main goal of triglyceride management in SHTG is to prevent these AP events, and olicersin is the first medicine to demonstrate it can do just that. We believe these unprecedented results position olicarsen to meet the substantial unmet needs of people with SHTG, a large patient population in great need of more effective triglyceride lowering to reduce the risk of potentially fatal acute pancreatitis. In terms of next steps, we're looking forward to presenting additional data from the core and core two studies on November 8. Following that, we are on track to submit our sNDA in the US by the end of the year, with additional global filings expected next year. And as Kyle will highlight, launch preparations are already underway, and we are moving with urgency as we look to deliver olicarsen to people with SHTG next year. Turning our attention to zilgarnirsen, our medicine to treat Alexander disease, an ultra-rare leukodystrophy that profoundly impacts patients and families who today have no approved disease-modifying therapies. With the positive phase three results in hand, we are on track for another independent launch next year, and we expect this to be the first of numerous additional independent launches from our leading neurology pipeline. In our phase three study, zilgarnirsen achieved statistically significant and clinically meaningful stabilization on the primary endpoint of gait speed. This is an assessment of gross motor function, as measured by the 10-meter walk test. At week sixty-one, silvenirsen showed a 33% mean benefit in gait speed versus control, with a favorable safety and tolerability profile. Zilgrenosen also demonstrated consistent benefit across key secondary endpoints. These results represent the first time an investigational medicine has shown a positive disease-modifying impact in Alexander disease. We plan to submit a new drug application to the FDA in 2026, and we are also initiating an expanded access program in the US. Turning to ION 582, our investigational medicine for Angelman syndrome, the newest addition to our late-stage pipeline. Angelman syndrome is a serious, rare, neurodevelopmental disorder that causes profound and lifelong physical and cognitive impairments estimated to affect more than 100,000 people. Earlier this month, at our innovation day, we shared additional twelve and eighteen-month data from the long-term extension portion of the HALO study. Results from this study showed consistent and durable improvement in expressive communication over eighteen months, exceeding what is seen in natural history while maintaining a favorable safety and tolerability profile. Improvements were also observed across multiple other functional domains, including cognition and motor function, suggesting meaningful disease-modifying potential for ion 52582. As a reminder, the primary endpoint in our Phase III REVEAL study is expressive communication, reflecting what families have reported matters most to them. And just last month, the FDA granted ION 582 breakthrough therapy designation, recognizing the encouraging results from the phase one two HALO study and the significant unmet need. Enrollment in the phase three registration study is progressing well, and we remain on track to be fully enrolled next year, with data in 2027. With multiple data readouts and regulatory milestones expected this year and next, our advancing pipeline underscores the strength of our science and our commitment to addressing unmet needs in people with serious diseases. With that, I'll turn the call over to Kyle. Kyle Jenne: Thank you, Richard. With our first independent launch gaining momentum, a second now underway, and two more anticipated next year, our commercial team is focused on flawless execution to bring these important medicines to patients. In the third quarter, Trangosa continued to exhibit strong momentum as we reported $32 million in net product sales, reflecting a nearly 70% increase in revenues quarter over quarter. Our patient identification initiatives are proving effective. The breadth and depth of unique physicians prescribing Trinvolta continue to expand through the third quarter, underscoring the positive experience of both clinicians and patients. This demand also spans a broad mix of specialties, with cardiologists and endocrinologists representing nearly 70% of prescribers and lipidologists and internal medicine providers making up the balance. This favorable provider mix will support awareness and familiarity when we expand into the broader SHTG patient population next year, assuming approval. Access and coverage have also remained strong. To date, the coverage mix for patients on TRINGOZA is approximately 60% commercial and 40% government. Importantly, both clinically diagnosed and genetically confirmed patients have continued to obtain coverage through a growing number of formal policies or via the medical exception process. We're proud of Tringola's early momentum, but we know we're still in the early innings. The vast majority of the estimated 3,000 people living with FCS in the US remain unidentified. As a result, we're continuing to focus on our patient-finding efforts and HCP education. Our customer-facing team has reached over 3,000 physicians, and over 30,000 HCPs have been targeted through our omni-channel capabilities, further increasing awareness of FCS, expanding patient identification, and educating on the potential benefits of Trangolza treatment. Backed by an experienced and high-performing team, we are well-positioned to continue to take advantage of our first-mover position to bring Trincalza to patients in need. Building on our early success in FCS, we are preparing for a launch in the severe hypertriglyceridemia patient population. SHTG represents a large patient population, many of whom struggle to manage their triglyceride levels with current treatments. In the US alone, more than one million people have high-risk SHTG, defined as individuals with triglyceride levels above 880 milligrams per deciliter or above 500 milligrams per deciliter with a history of acute pancreatitis or other comorbidities. With a significant first-mover advantage and groundbreaking positive Phase III data in hand, as Richard just outlined, we believe olezarsen is well-positioned to address the unmet needs of patients with severe hypertriglyceridemia. Our commercial team is making excellent progress as we prepare for an expected launch next year. To unlock the potential of olanzarcen in SHTG, we plan to initially target approximately 20,000 HCPs in the US who are high-volume treaters of high-risk SHTG patients and expand this outreach even further via our omni-channel capabilities. Our commercial strategy leverages the strong foundation we have built with healthcare providers already prescribing Trinvolza, many of whom manage SHTG patients. At the same time, we are broadening our reach to additional prescribers who treat SHTG patients. To support this effort, we are expanding awareness through targeted disease education and continued investment in our commercial infrastructure. With key field leadership now in place, we plan to scale the Trangosa field force to approximately 200 representatives ahead of launch. At the same time, we have begun engaging payers to ensure broad patient access at launch. We believe there is strong recognition of the value in treating SHTG, given the potential to reduce the risk of life-threatening triglyceride-induced acute pancreatitis and the cost associated with treating these patients. Now turning to Donzara. The approval of Donzara marked a major milestone for Ionis Pharmaceuticals, Inc. And our team is energized and focused on executing a successful launch. We've built a top-tier commercial organization with deep experience in allergy and immunology, including in HAE. Within ten days of approval, we shipped our first prescriptions, and the first patient self-administered their initial dose. We're pleased to see strong early adoption of Donzara, with patients switching from prior prophylactic or on-demand therapies, as well as treatment-naive patients starting on Donzara. And the initial feedback from both physicians and patients has been very encouraging, with clear early excitement around Donzara. Notably, we are already seeing repeat prescribers. The US prophylactic HAE market is well established, yet many patients remain dissatisfied with their current therapies. Approximately twenty percent of patients switch treatments each year, highlighting the ongoing need for better treatment options. While educating patients and physicians and supporting from existing therapies will take time, we believe Donzara, with its differentiated profile and focused launch strategy, is well-positioned to meet this unmet need. As with Trangolza and FCS, we are committed to providing appropriate and comprehensive support to the HAE community, including ensuring broad and timely access for patients who need Donzara. We have established differentiated patient assistance and financial support programs. We are offering a free trial program, which allows patients, in collaboration with their healthcare providers, to determine if Donzara is the right fit for them. For eligible commercially insured patients, out-of-pocket costs can be reduced to as little as $0. With this foundation in place, we are confident in the anticipated trajectory of Donzara as we work to transform the treatment landscape for patients with HAE. Now turning to zilganeursen for Alexander disease. Zilganeursen could deliver the first meaningful advance for patients and caregivers, as there are currently no approved disease-modifying treatments. This program represents another important opportunity to extend our commercial capabilities. We will build on Ionis Pharmaceuticals, Inc.'s long-standing partnerships with the neurology community and patient advocacy groups to support awareness, diagnosis, and access. At launch, our focus will be on ensuring continued access for clinical trial participants to zilganeursen, expediting access for diagnosed patients, and improving identification of new patients, including enhanced genetic screening. Additionally, we will be working to ensure treatment availability at appropriately equipped centers. With preparations well underway, we are confident that zilganeursen can provide a first-in-class disease-modifying treatment option for patients and caregivers and opens the door to further strengthen our foundation as we advance our leading neurology pipeline. Our experienced commercial organization is already delivering strong results, as reflected in the early momentum of both Tringolza and Donzara. Building on this success, we remain focused on maximizing the full potential of these therapies while preparing to execute two additional launches by the end of next year, expanding Ionis Pharmaceuticals, Inc.'s reach to even more patients in need of our medicines. With that, I will now turn it over to Beth. Beth Hougen: We delivered another strong quarter driven by continued commercial execution and disciplined financial management, which enables us to raise our financial guidance once again. Our results reflect accelerating revenue growth with strong contributions from our marketed medicines and sustained progress across our pipeline. We remain focused on executing our strategy, advancing our late-stage portfolio, and maintaining the financial strength that enables us to invest in future growth. In the third quarter, we generated $157 million in revenue, representing a 17% increase year over year. For the first nine months of this year, revenue totaled $740 million, an increase of 55% compared with the prior year. As you heard from Kyle, the Tringosa launch continues to perform exceptionally well, earning $32 million in product sales, representing a nearly 70% increase over the second quarter. Royalty revenues increased by approximately 13% to $76 million in the third quarter, anchored by meaningful contributions from both SPINRAZA and WAINUA. As planned, total non-GAAP operating expenses year to date increased 9% year over year, highlighting our commitment to disciplined investment and driving operating leverage. Our sales and marketing expenses increased year over year, driven by our investments in the US launch of Trigolza and Danzara. R&D expenses decreased year over year as several of our late-stage studies recently concluded. Importantly, we continued to strategically fund our advancing pipeline, with more than two-thirds of our total R&D expenses funding our late-stage programs. Based on this continued strong performance and fourth-quarter outlook, we are once again increasing our 2025 financial guidance, our third consecutive increase this year. We now expect to generate between $875 million and $900 million in total revenue for the year, an increase of $50 million versus our prior guidance. Our guidance reflects meaningful contributions from our commercial portfolio, including continued strong performance of Trincosa. We now anticipate TRINGOZA product sales between $85 and $95 million for the full year, also an increase from prior guidance. Given the timing of approval, we expect ANZERA will provide a modest revenue contribution this year, with a greater impact beginning next year. We now expect an operating loss between $275 million and $300 million for the full year. This improvement includes our planned acceleration in investments to support commercial preparations for olanzarcen and zilganeursen following the strong Phase III data and anticipated launches next year. Additionally, we now expect to end the year with a cash balance of more than $2.1 billion, highlighting our strong balance sheet that will support continued to drive accelerating growth. Our third-quarter results demonstrate strong execution across our business. With two product launches now underway and more on the horizon, Ionis Pharmaceuticals, Inc. is well-positioned to deliver transformative medicines to patients in need and achieve our goal of cash flow breakeven by 2028, driving long-term value creation. With that, I'll turn the call back over to Brett. Brett Monia: Thanks, Beth. The third quarter was marked by strong execution and accelerating momentum across our business. With two independent launches underway, continued pipeline progress, and key regulatory milestones achieved, we are delivering on our strategy. The commercial organization continues to perform very well. The TrINGOLZA launch is strong, and the approval of Donzara for HAE marked another important milestone, with encouraging early feedback from physicians and patients. And positive phase three results for olanzarcen SHTG and zilgarnirsen in Alexander disease are paving the way for two additional independent launches next year. Together, these achievements strengthen our foundation for long-term growth. With a deep pipeline, outstanding execution, and a clear path to achieve cash flow breakeven in 2028, Ionis Pharmaceuticals, Inc. is well-positioned to deliver transformative medicines for patients and accelerating value creation for shareholders. Now before we move to the Q&A, I'd like to take a moment to recognize and thank Richard Geary for his tremendous impact on Ionis Pharmaceuticals, Inc. over the past thirty years. With his retirement at the end of this year, this will be his last earnings call with us. Richard has been a driving force behind our innovation, leading dozens of development programs and guiding six transformative medicines through regulatory approvals and to patients. His leadership, vision, and unwavering commitment to patients have been instrumental in shaping Ionis Pharmaceuticals, Inc. into the company we are today. On behalf of the entire Ionis Pharmaceuticals, Inc. team, I want to thank Richard for his remarkable contributions and his dedication to improving the lives of patients around the world. And with that, we'll now open the call up for questions. Chuck? Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been addressed, and you would like to withdraw your question, please press star then 2. And at this time, we'll take our first question. Excuse me. Will come from Miss Jessica Fye with JPMorgan. Please go ahead. Jessica Fye: Hey, guys. Good morning. Thanks for taking our question. Was hoping you could talk a little bit about how we should best think about the shape of the launch curve for olanzarzan in SHTG. And I guess what I mean by that is kind of like in terms of the, you know, physicians you're targeting and the number of patients they cover, you know, do you perceive that there's, you know, pent-up demand or almost like a warehouse effect where you see rapid adoption the way we have in this obviously, much, much smaller FCS setting. Or if not, you know, what is the right way to think about the shape of that ramp? Thank you. Kyle Jenne: Yeah. Thanks, Jess. This is Kyle. It's a great question. First, I'll just mention that there's strong interest in trying to expand the use of Trangosa and interest in ezolasarcin in the SHTG patient population. An ongoing question that we get from HCPs as we're interacting with them today. Our current target population of HCPs is about 3,000 that we're reaching with our existing Salesforce. We're going to expand that to reach approximately 20,000 HCPs. Those 20,000 HCPs are covering approximately 360,000 patients that have SHTG. Some of those are high-risk patients, meaning above 880 or above 500 with a history of AP. Many of those patients are currently on standard of care treatments. So they're on fibrates and fish oils and statins and PCSK9s and other background therapies. So what we are expecting is that if those patients are on standard of care treatment and they're not getting to goal today, that there will be interest in using olanzarcen in that population, you know, based on the phase three data that we generated in core and core two. So that will be the beachhead in which we approach this. And, you know, we expect strong uptake based on the interest and what we've learned about the market thus far. Jessica Fye: Thank you. Operator: The next question will come from Gena Wang with Barclays. Please go ahead. Gena Wang: Thank you for taking my questions. So maybe I will also ask one is olefsacen, core and core two data. Since you have updated you we already have a top-line data. Anything that will be concerning regarding, say, the acute pancreatitis, events? You know, if it's I I I know the rate ratio is a super impressive, but, you know, you did have approved two studies. Would that be anything will be you know, we should be pay attention to? Would that be well balanced between the core and the core two? Regarding the, acute pancreatitis events and also any any other things we should be pay attention to. So that was one question. And the second, high level, I know you give peak revenue potential for Donzara over $500 million. Do you have a view regarding say, Alassane and also Alexander? Disease. Brett Monia: Okay. Let's try those three questions, you know. Let's try to go through them quickly. But thank you. So I'll start with the then I'll turn it over to Kyle for Dunsera and Alexander disease. So we're very much looking forward to presenting the detailed data at American Heart Association in a prestigious weight-breaking clinical trial session on November 8. None don't nothing to be concerned about. The AP data is groundbreaking. And I think that people are gonna really be impressed when we share the detailed data on the AP. Outcome, including the repeated how rapid protection is against acute pancreatitis and how durable those effects are. Remember, this was a pre-specified statistical plan analysis of core and core two purposefully because we want to ensure the maximum powering for the a positive outcome, which was proven to be a very, very smart thing to do. Core and Core two have been published on their bay the baseline demographics. And what you see the baseline demographics is that there's a higher triglyceride, median amount in core versus core two, and that reflect that will reflect acute pancreatitis events in the study too. But you'll see all that data at the and there's nothing else to be concerned about. We're very much looking forward to it. Again, brown results, and the will be a great venue. We're also encouraged that with, where we are in the review process for publication, no guarantees. But we're hoping for a simultaneous publication, with the presentation. If we can get that done and then all the deep that we can't get to in the presentation will be in the publication. So stay tuned for all that. Looking forward to it. Touch on Donzera and and Alexander? Kyle Jenne: Yeah. I'll just touch on, peak sales for each of the programs. Peak sales for Donzara, as you referenced, are expected to be greater than $500 million. For olezarsen, our first anticipated blockbuster, launch, we are expecting to be greater than $1 billion. And for Alexander's disease, is greater than $100 million are the expectations. Gena Wang: Thank you very much. Operator: The next question will come from Mike Ulz with Morgan Stanley. Please go ahead. Mike Ulz: Good morning, and thanks for taking the question. Maybe just a follow-up on ozarsen and SHTG. Just curious if you have any updated thoughts on pricing. I know this is an area where you're doing some extra work, so just curious if there's anything there to to share or if not, you know, when we might expect a little bit more clarity on on the pricing. Question. Thank you. Kyle Jenne: Yeah. Thanks, Mike. This is Kyle again. The work is ongoing. We do have the core and core two data, the s data, and we've got a lot of work to go through with our information related to, ER visits, hospitalization rates, number needed to treat, which is some information that will come out at as well. So there's still a lot for us to, to pull together. The the research will, will kick off, and we expect to have additional information next year for us to be able to make some decisions around in terms of final pricing recommendation. I think what some early signals continue to tell us and is consistent with the research that we've done in the past, is that this is a market of greater than 3 million patients and that payers are going to look at this market in terms of their total exposure to potentially covering olazarsen in in an SHTG indication of greater than 500 milligrams per deciliter patient population. So we're still doing that work, and we will announce the final price, upon the approval of the SHCG indication similar to how we've done with the FCS indication as well as the HE indication for Donzara. Mike Ulz: Great. Thank you. Operator: The next question will come from Yaron Werber with TD Cowen. Please go ahead. Yaron Werber: Great. Thanks so much. Congrats on a really nice quarter and a hopefully, it should be very good next year as well. Couple of questions. Number one, just for when you're looking at when we're looking at the data, should we be expecting that it's the reduction in AP is gonna be principally in patients with a history of AP, is there a chance that you're gonna show potentially a prevention of new events in patients that are did not have AP events in the past then secondly, you know, some of the other companies in the HAE space are actually beginning to talk that there's considerably more patients in The US market. They're think some are mentioning as many as eleven thousand patients, and seventy five percent on prophylaxis. I know you're mentioning seven thousand. Maybe can you can you help us kinda maybe understand the difference a little bit? Thank you. Brett Monia: Sure, Yaron. Thank you for the question. I'll Kyle will address the, you know, market research and the prevalence in HAE in The US. Regarding a HAE, mean, Ah heart association meeting, So, again, I wanna get ahead of details, Yaron, but what I'll what I can say is this. You know, all of the research has been done over the decades has indicated that the higher the triglycerides, the more AP events that you're gonna get. In in in a in a study, and that's exactly what we've seen in our study. So the higher the triglycerides, the more AP events you're gonna get. In in the study. And that and that, you know, will correspond to the the data that we present at or just gonna be in the in the patient's not only with a AP above eight eighty, also consistent with research, if you've had an AP prior event, you're chances of having another one is higher. So that is consistent with with the data that we will present at So you're gonna see a lot of you're gonna see more events in the high risk patient population as you would expect. So there's no surprises there. That's actually very comforting because that means that all the work that we've done, all the research we've done is holding up. And triglycerides are driving these AP events. Kyle Jenne: Yeah. In terms of the the prevalence in The United States, we're still working off of the seven thousand estimated patients in The US. That's, the information that we've documented and been able to work from up to this point. You referenced that about seventy five percent of those patients are on a current prophylactic therapy today. And so this is a switch market, that's really the market that we're focused on is moving patients over that, could be doing potentially do better on, on a on a therapy with a profile like Donzara? And, there are some patients that were on demand therapy patients only that have added Donzara up to this point. And, we'll also get newly diagnosed patients as your reference. But, yeah, we're not I'm not aware of an 11,000 number. We're still working off of the 7,000 population that, has been addressable up to this point. Brett Monia: And and, Yaron, I'd like to come back to your first question too. You know, at one point I I didn't make that I think is very important is to remember that the AP data that we have generated in core and core two is after only twelve months of treatment. Right? So, you know, when you think about a cardiovascular outcome trial, when you're looking at outcome data, it's years of treatment. This is only twelve months, so, we expect there to be even more AP events eventually in all segments of the SHCG population. With longer term observation, longer term treatment. So this is a relatively short study, which is makes our results even more remarkable. Operator: The next question will come from Gary Nachman with Raymond James. Please go ahead. Gary Nachman: Thanks and congrats on all the progress. So Trungosa accelerated really nicely in the third quarter. Are most of those additional FCS patients coming from? So how many physicians are prescribing right now? And maybe describe the percent genetic versus clinical that are diagnosed And and based on your full year guidance, you you have that acceleration slowing. A bit in the fourth quarter. Is there any good reason for that? Could you explain that? And then just on the olanzarcen filing, for severe high trigs. Any chance you can get a priority review for it especially if it's gonna be lowering the cost of the drug significantly I mean, you're still working through that, but it it would be a significant drop. So I don't know if if that's an argument that could be made to get it on the market. Sooner. Thank you. Brett Monia: Gary, I'll take the second question first, and Kyle could address the, you know, the your question about Trin Golza. So our assumptions right now are as a standard review. Supplemental NDA by the end of the year, ten month review. However, we will do, we we will pursue all avenues to potentially bring this medicine to the market as quickly as possible. So stay tuned for that, but right now, we're assuming it a ten month review. We don't see any reason why it it couldn't be considered for for other you know, other other paths forward with regulators. Kyle Jenne: Yeah. In terms of the FCS patient population, there are a couple of things that we've been doing. Number one is identification of patients and you move them through the diagnosis and then, the prescription. We focused on those highest prescribing, SHTG physicians, the first 3,000, right, that we've been working through throughout the balance of this year, I mean, we've also supplemented that with some of our marketing and our omni channel capabilities to drive more disease state awareness and an understanding about the need to treat patients with high triglycerides, and specifically how to assess and diagnose FCS. The clinical, scoring tools either the North America FCS scoring tool or, the Mulan criteria, are also driving the clinical diagnosis ability for these HCPs. So they're looking for these patients. They know these patients are in need. They wanna get them out of harm's way of acute pancreatitis. And they're using the available tools and resources to either, you know, clinically confirm or genetically confirm these patients. The other thing I'll mention is on the payer dynamics, the policies are getting put in place to where, it's a streamlined process for HCPs to be able to prescribe. Once they've made the diagnosis for FCS. So I won't get into specific numbers around, age or the split between genetic and clinical confirmation, but, you know, what's going well is disease education is improving, the awareness of of, the need to treat continues to go up. And, Trangosa is performing very well when HCPs are using it and they're looking for more appropriate patients order to treat with Trinvolza because of the performance of the drug. Oh, for Q4, it it's I don't wanna say it's Q4? a slowdown. We we took a look at a couple of things. One thing is is duration. It's ten weeks as opposed to thirteen weeks because we've got the holidays in there. And then also, don't know the seasonality yet, if there's some implications here at the end of the year because this is our first full year. Of, of the Trangosa launch. So, you know, we're just making sure that we're taking into account some of the unknowns as we're considering the guidance for the quarter. Gary Nachman: Alright, great. Thank you, and, best of luck to you, Richard, on your retirement. Operator: Thank you. The next question will come from Jason Gerberry with of America. Please go ahead. Jason Gerberry: Hey, guys. Thanks for taking my questions. Just two for me. Ahead of Cardio Transform next year, I just wonder get your latest thoughts How do you maybe maximize the benefit of the data in combination with tafamidis if it if it hits stats to the disproportionate benefit of epilentersen, and that there isn't sort of a free riding effect that happens for your competitor, as it pertains to sort of the validated, you know, benefit of of of silencers and stabilizers together. And so that's question one. And then just question two, into and the and the update on NNT, Just wondering if you can contextualize as we think about the NNT both in the all comer and the high risk group, You know, if if obviously the NNT is more compelling in the high risk group, that's a small proportion of the overall population, how important that is? Is that to the overall kind of value proposition in the eyes of payers from your perspective? Brett Monia: Thanks. Thanks, Jason. You know, on Cardio Transform, as you know, it's the largest study ever conducted in TTR cardiomyopathy I mean, by far. And we will have the largest amount of data for combination usage as well as monotherapy usage in the study. And, you know, the the combination usage is a key secondary endpoint. In the statistical plan. A cardio transform and, as well. So know, how important, how valuable that will be once we launch eflandersen in TTR cardiomyopathy is to be seen, to be determined. Obviously, the mechanisms are highly complementary in theory. And we expect to see added benefit over over monotherapy in the study, but that remains to be seen and proven. But if anyone is gonna be able to show a benefit of combination usage, and and for that to drive value and and resulting in driving value for, you know, the commercial opportunity for Ephrontera, and it'll be it'll be this program. I don't wanna comment on whether that provides, you know, tailwinds for other competitor programs and those sorts of things. We're focused on on EfwamTersen, and we think we the right trial design. We have the right drug. And we're very much looking forward to the data in the second half of of of next year. We will be sharing some data on n n in different subgroup populations in SHTG at and and if we can get a simultaneous publication as well. I think the results are are are gonna be strikingly positive in both groups or in all the subgroups that we've looked at. But I don't wanna get ahead of that data at this time, Jason. As far as the value for payers, I'll I'll leave it to Kyle to comment on that. Kyle Jenne: Yeah. I I comment on the totality of the data and how the evidence is stacking up for core and core two and how that will will be interpreted by the payers, Reductions in triglyceride levels to the magnitude that we're seeing of up to 72%, for example, on top of standard of care. So these are patients that are being treated already that aren't getting to goal, that aren't getting out of harm's way. Of AP on the current standard, and by adding olazarcin, you're seeing significant reductions in triglycerides. An eighty five percent reduction in acute pancreatitis is, you know, really incredible to see. And payers, I think will will will react accordingly when they see that data. Hospitalizations and ER visit data the NNT data will just add value and will complement that. It'll talk about some of the subpopulations, but overall, I think that the the quality and the totality of the data here is what's gonna drive payer engagement and and, you know, effective reimbursement here. Keep in mind that the the focus here is to is to prevent a first AP attack from ever occurring. And, HCPs understand that, the guidelines represent that, And HCPs are trying to treat the goal, and they just can't with the current existing therapies that are out there. The other thing that I'll mention is these are fasting triglyceride levels. And you're gonna have postprandial spikes in these patients you know, even if they are between five hundred and eight eighty. That increases their risk of having an acute pancreatitis event. So that whole story and the comprehensive nature of the data that I just just talked through, I think, is gonna be the value sorry, in the proposition for the payers. Jason Gerberry: Thanks, guys. Operator: The next question will come from Yanan Zhu with Wells Fargo Securities. Please go ahead. Yanan Zhu: Great. Thanks for taking our questions and congrats on the quarter. Maybe a couple of questions, one on DONGSYRA launch. One on Winua. Can you give more color a little more color on the early prescription for for Downsera? Are these from switching patients or newly diagnosed patients? And if it's switching patients, any pattern of the previous therapy. For Weinua, there's also a sizable bump in in the polyneuropathy revenue. Looks like twenty five percent. Is that due to the growing of the market via newly diagnosed patients, or is that reflecting you taking share? And any updated metrics, like, new to brand numbers? Thank you. Kyle Jenne: Yeah. I'll start with, with the Donzara launch. First, it it it's going very well as were highlighted in the the opening comments. Both HCPs and payers, the feedback has been very positive. The commercial team has executed extremely well. Getting product into channel, getting the first prescriptions in, getting those patients onto treatment and patients self-administering, with Donzara. So the the launch is going very well. It's very early. Right? I mean, the PDUFA was August 21. You know, we're you know, a month month or so into this launch. So I I don't wanna provide too many details or specifics at this point in time, but but I'll just share with you that the receptivity by HCPs has been very strong. The profile of the drug, the data to support it, the label, and, specifically the switch data. Has been very valuable so that they can understand that they can move these patients over safely, and effectively and get them started on Donzara and have a positive experience there using our Ionis Every Step patient support program. So I think all signals are are very positive. We are seeing switches from, all of the currently approved prophylactic treatments. We're seeing, Donzara added to on-demand treatments where patients weren't on a prophylactic treatment. And then, you know, we're seeing newly diagnosed patients as well. So I won't get into the details on the splits, but all signals are very positive so far with the early signs of the launch. Brett Monia: And then the bump in Whenua? Revenue? Kyle Jenne: Yeah. The bump in Waynua revenue. Again, so this is a growth market. And, you know, as we've said all along, it's it's about new patient identification and that's predominantly where the demand is coming from in the third quarter for Wenua. The product's performing very well, in terms of quality of life, improvements. Access is going very strong in terms of coverage. The majority of patients paying $0 out of pocket. You know, we do expect continued growth with the identification of new patients, especially in the centers of excellence. Where these amyloidosis centers are using Waynua, very broadly for the polyneuropathy indication. And, I I think we just continue to be encouraged by AstraZeneca's execution around the launch and their focus on the program. Yanan Zhu: Great. Thank you. Operator: The next question will come from Miles Minter with William Blair. Please go ahead. Miles Minter: Hi, thanks for taking the question. First off, Richard on his retirement. Thoroughly deserved. The question is on hepatic fat fraction data in in the core studies, and if you can comment on that and if we'll see it. I've just been getting some questions considering you've got, you know, robust serum triglyceride reductions there, whether you're shunting, you know, maybe too much to deliver at any one time and it's accumulating there. You know, also acutely aware that you have the wait live for a day to presented that actually showed reductions in hepatic fat fraction. So any sort of color on that, metric would be helpful. Brett Monia: Yeah. Miles, I don't wanna get ahead of the presentation because you know, that is a secondary endpoint, so it'll be it will be covered in the presentation. And and publication. So, yeah, I we're gonna present we're gonna do a deep dive at on the primary endpoint of triglyceride lowering, including both doses through twelve months, time courses, no that kind of thing. You'll see the durability of triglyceride reductions, You'll see, details on the acute pancreatitis, which is secondary endpoint, and you'll see all the data, you know, listed out on all the secondary endpoints, including hepatic fat fraction. We'll also talk a little bit about the NNT that we touched on in the earlier question. So I don't wanna get ahead of that. Let's we'll sit we're just a couple of weeks away from and let's just leave it there. Miles Minter: No worries. Thanks. Operator: The next question will come from Luca Issi with RBC. Please go ahead. Luca Issi: Great. Thanks so much for taking my question and then Richard, congrats on a fantastic run, and all the best on your next chapter there. If maybe if I can circle back on severe hypoglycemia, Kyle and Beth, You have obviously a billion dollar plus peak revenue revenue opportunity for the drug. Is that conservative? The reason why I'm asking is because if the TAM is truly a million patients, the price is $20,000 patients, which seem consistent with your commentary, that all implies, like, 5% penetration at peak, which, again, feels a little conservative to me. So would love to to hear you talk about some of the assumptions that went into that $1 billion plus number that you have articulated. Then maybe sticking on severe hyperglycemia, what's the latest thinking on whether you're gonna file just the eighty milligram, which is obviously same bill as approved in FCS versus filing both the 50 and the eighty milligram. To give, you know, docs more options to kind of tailor the dose based on the need of the patient's call there, much appreciated. Thanks so much. Brett Monia: Yeah. Thanks, Luke. I'll take the easy question. We're filing on both doses. Both doses look great. And, we believe that dosing flexibility in the hands of cardiologists, endocrinologists, lipid specialists will be very well received. Once we get to the market. So that's that. And, with respect to, peak sales, Kyle Jenne: Yeah. Luca, I mean, you know, I I keep referencing that this is a it's a prevalent patient population. Right? Greater than three million patients. The high-risk SHTG patients, you've got approximately a million of that that you were just referencing as well. I I think we still have some unknowns here around, the payer dynamics We also have some unknowns around pricing dynamics. In order to to factor into these, these assumptions. You know, what we felt comfortable with, I think, going into into this, and have been consistent all along is greater than a billion in peak sales is where we've landed up to this point. We're continuing to assess the market. We've got a lot of good learnings from FCS as well in terms of how the launch trajectory has gone here. We're doing more market research to understand, HCP and and payer and patient perceptions, around the SHTG marketplace. And, you know, we will provide, you know, updated information as as we learn more and feel more comfortable and confident with, the way the information comes together. But, it's greater than a billion dollars is where we feel comfortable today. Luca Issi: Nice. Thanks so much, guys. Operator: Your next question will come from Jay Olson with Oppenheimer. Please go ahead. Jay Olson: Congrats on all the progress. I'll add my best wishes to Richard as well. Beth, I know you commented a little bit about this on your opening remarks, but with your strong balance sheet, could you share your priorities for capital allocation, especially with regards to any external versus internal investments. Thank you. Beth Hougen: We're happy to. We we do have a strong balance sheet, very healthy cash balance, and expect with the increased guidance that we'll maintain that. As we go into next year. Continue to execute on these launches as well as the oligosarcin s a and zilgarnirsen launches next year. Our capital our top priority for capital allocation is for internal growth. We think that that there's tremendous opportunity in our pipeline and behind these existing marketed products and the ones coming to market here shortly. So we will continue to prioritize growth for capital allocation. We'll do that with discipline as we've done historically, but that's what you where you should expect to see us using our balance sheet. Jay Olson: Great. Thank you. I think we have time for one more question. Operator: Our last questions for the day will come from Mitchell Kapoor with H. C. Wainwright. Please go ahead. Mitchell Kapoor: Hey, for taking the questions. Just wanted to ask with an impressive 90% rolling into the open label extension in the SHTG trials, can you name some of the more prevalent drop out reasons and whether there's any reasons that we should be cautious going into a launch. Because of some of those? Brett Monia: Thanks, Mitch. And I'm going to let Rich answer the final question of this earnings call. Any any any reasons be concerned with dropouts in the core core two studies? Richard, anything you wanna highlight? Richard Geary: Yeah. So first, I would say the dropout rate was about half what we expected from the beginning. Very well tolerated medicine. I would there isn't actually any one issue that that led to discontinuations. They they varied across the study. Some of them had to do with personal reasons, moves, vacations, different things that needed to be taken care of. Pregnancies, etcetera. But there were and so I I can't point to, like, a main reason. And for that reason, I'm very bullish on this medicine in terms of its, tolerability and safety. Mitchell Kapoor: Excellent. Thank you all very much, and congrats, Richard. Brett Monia: Thanks, Richard. Thanks, Mitch. Thanks, everybody, for joining us and participating in our call today. We really do look forward to building on on the remarkable momentum that we've achieved this year so far and for and for years to come. And sharing additional updates along the way. Just as a reminder, the detailed data from the Landmark phase three core and core two studies for olanzarcen, will be presented in s h for SHTG will be presented during a late-breaking session on November eighth. At We encourage you to listen in. To our webcast. Until then, thanks for participating, and everybody have a great day. Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, ladies and gentlemen. Welcome to the Trican Well Service Third Quarter 2025 Earnings Conference Call and Webcast. As a reminder, this conference call is being recorded. I would now like to turn the meeting over to Brad Fedora, President and CEO of Trican Well Service Limited. Please go ahead, Mr. Fedora. Bradley P. Fedora: Thanks, everyone, for joining us. As usual, first, Scott, our CFO, will give an overview of the quarterly results, and then I'll provide some comments with respect to the quarter, the current operating conditions and our outlook for the rest of this year and early next year. And then we'll open the call for questions. Various members of the executive team are here in the room today and available to answer any questions that may come up. So I'll now turn this back to Scott. Scott Matson: Thanks, Brad. So before we begin, I'd like to remind everyone that this conference call may contain forward-looking statements and other information based on current expectations or results for the company. Certain material factors or assumptions that were applied in drawing conclusions or making projections are reflected in the forward-looking information section of our MD&A for Q3 of 2025. A number of business risks and uncertainties could cause actual results to differ materially from these forward-looking statements and our financial outlook. Please refer to our 2024 annual information form for the year ended December 31, 2024, for a more complete discussion of business risks and uncertainties facing Trican. This document is available both on our website and on SEDAR. During this call, we will refer to several common industry terms and use certain non-GAAP measures, which are more fully described in our Q4 2024 MD&A. Our quarterly results were released after close of market last night and are available both on SEDAR and our website. So with that, a brief summary of our quarterly results. I'll draw some comparisons to the third quarter of last year, and provide a bit of commentary about our activity levels and our expectations going forward. Trican's results for the quarter compared to last year's Q3 were generally stronger as overall operating activity came in a bit higher in spite of continued pressure on commodity pricing. Oil pricing, in particular, was hit hard as we moved through September, which led several customers to either delay or shelf projects in oilier plays. Combined with some timing shifts on natural gas-related activities, this took a bit of the wind out of our sails on what was shaping up to be a very strong quarter. Brad will comment a little bit about our outlook on Q4 later. Our revenues for the quarter at $300.6 million compared to the $221.6 million we generated in Q3 of 2024. Adjusted EBITDA for the quarter was $59.5 million or 20% of revenue compared to adjusted EBITDA of $50.2 million or 23% of revenues generated last year. Just a reminder that our results include the contributions from Iron Horse from the date of acquisition through September 30. I would also note that our results include $2.5 million of transaction costs related to the acquisition that were expensed in the quarter. Adjusted EBITDAS for the quarter came in at $66.9 million or 22% of revenue, up from the $53.1 million or 24% of revenues we generated in Q3 of last year. To arrive at EBITDAS, we add back the effects of cash settled share-based compensation recognized in the quarter to more clearly show the results of our operations and remove some of the mark-to-market impact of movements in our share prices between the reporting dates. And you'll note that this number was larger this quarter at $7.4 million compared to an average of about $2.3 million over the last 4 quarters, again, due to the movement in our share prices versus June 30. And this is a very good example of why we always focus on EBITDAS when we have conversations versus EBITDA as those numbers can vary pretty significantly period-to-period. On a consolidated basis, we generated positive earnings of $28.9 million in the quarter, that's about $0.15 per share, both on a basic and a fully diluted basis. Trican generated free cash flows of $35.4 million during the quarter. Again, our definition of free cash flow is essentially EBITDAS less nondiscretionary cash expenditures, maintenance capital, interest, current taxes and the cash settled stock-based comp piece that I talked about earlier. You can see more details on this in the non-GAAP measures section of our MD&A. And again, I would note this figure is impacted both by the transaction costs that I talked about and stock-based comp I quoted earlier. CapEx for the quarter totaled $18.9 million, again, a split between maintenance capital of about $13.5 million and upgrade capital of $5.4 million. Again, that upgrade capital was dedicated mainly to the electrification of our fourth set of ancillary frac support equipment and ongoing investments to maintain the productive capability of our active equipment. From a balance sheet perspective, we exited the quarter with positive noncash working capital of about $209 million. As of September 30, we had net debt of $130.6 million, comprised of loans and borrowings of $139.1 million, offset by cash of $8.5 million. Our debt at September 30 was primarily related to the acquisition of Iron Horse and some normal working capital investing activities during the quarter. And a couple of points to note that September 30 debt number translates into just over half a turn of leverage using our trailing 12-month EBITDAS figure, which does not make us uncomfortable given our outlook for the rest of this year and into early 2026. And also a portion of this is already unwound, and we would expect our debt position to trend down as we move through the end of this year and certainly into next year. With respect to return of capital, we repurchased and canceled about 100,000 shares during the quarter and closed out our 2024-2025 NCIB program. We completed that program on October 4. And under the program in total, we repurchased 13.2 million common shares at a weighted average price of about $4.27 per share. On September 30, we announced the renewal of our NCIB program, which will allow us to purchase up to 18.4 million common shares, representing 10% of our public float as at the time of renewal. This program is scheduled to run from October 5, 2025, through October 4, 2026. And finally, as noted in our press release, the Board of Directors approved a dividend of $0.055 per share, reflecting approximately $11.7 million in aggregate payments to shareholders. The distribution is scheduled to be made on December 31, 2025, to shareholders of record as of the close of business on December 12, 2025. And I would note that the dividends are designated as eligible dividends for Canadian income tax purposes. So with that, I'll turn things back to Brad. Bradley P. Fedora: Okay. Thank you. And I'll just remind everybody that my comments will include Q3 2025 and forward-looking observations for Q4 and 2026. So please refer back to Scott's disclaimer. Overall, the quarter, it went well. We obviously -- we had a great September -- July and August and then we had a bad September. It's actually one of the worst months of the year for us. But all -- that's just a reflection of work got pushed out of the month into the next month. And that's our business. We don't focus too heavily on the exact timing of the work. I know we live in a quarterly world, but from a business perspective, that doesn't get us too fast. It just got moved. The work didn't go away. So it's not -- it wasn't a concern of ours at all. And as I'll talk later, it's going to boost our Q4. We're very fortunate to have our customer list. They continue to level out throughout the year. We don't expect that this year is going to be any different. I know there's a lot of talk about budget exhaustion into Q4. We typically don't experience that, and I don't think we're going to experience that this year either. There is a little bit of pricing pressure going on just as some of our competitors don't have busy Q4s. There's a lot of jostling to fill the board, and that always reflects pricing down. And of course, the rig count is down slightly from last year. Again, those I think, are temporary situations. We still expect to have a good 2025 and certainly a good Q4. We remain gas focused, I'd say, corporately, overall, where about 75% of our work is based on natural gas plays. I know a lot of those plays are liquids-rich, but we're very excited about what we think is going to be a great year in 2026 for gas prices. So it's one of the reasons why we continue to be so optimistic in the context of a lot of -- sort of mooning and complaining about current environment. A lot of the cost inflation has slowed very significantly. We're actually seeing cost reductions on some of our inputs. A lot of the tariffs that were proposed didn't happen or have been reversed. We've seen fuel surcharges come off. So that's helping sort of offset some of the pricing pressure we're getting, and we're still able to maintain pretty reasonable margins given a more negative price environment. We are experiencing lower Northeast BC work. I don't think that's any secret to anybody that follows the rig count, but it's getting made up for work in the Duvernay. And so -- which is very fracturing intensive. It's very similar to what's happening in Northeast BC. So all 4 divisions when we think about market share and the customer list that we have, we've got the 2 frac divisions, the cement division and the coil division. All 4 of them are running really well, and we're really happy with our business plan and how it's unfolding. One thing I did want to point out because just reading some of the analyst notes is we exited the quarter with about $135 million of debt, but we also had about $218 million of positive working capital. So it's a timing issue. I don't want anybody to focus on this debt number because it's already come down substantially since month end. And this debt at this level does not concern us at all. I mean we'll likely pay it down, but that will depend, frankly, on what's available to us from an investment perspective. But certainly, debt in the 100 range does not concern us one bit. In the frac division, in the Trican frac division, it's still going very well. We're viewed as a technical leader in the industry, electric equipment, efficient operations, our engineering, our lab group are working towards or we continue to evaluate 100% natural gas solutions. We're evaluating all of the solutions. And so I think we'll come up with the best one. We continue to add customers in the Montney and the Duvernay in the quarter if frac intensity continues to increase, making the logistics -- our logistics department, which is the largest in the industry, that much more valuable. We're focusing on technology improvements. We will be testing all of the available 100% natural gas pump technologies. And I think we'll choose the one that we think provides the best service at the lowest cost, and we continue to expand our last mile logistics. I would expect that we will add 100% natural gas fleet mid-2026. On the Iron Horse frac division, we're very happy with the acquisition that we made. We still view this as a combination of 2 best-in-class businesses. The transaction closed August 27. And so we only had 1 month of Iron Horse in our Q3. And it's -- as we talked about in our MD&A in our outlook section, obviously, Q4 for Iron Horse is lower than we had hoped or expected or even modeled when we purchased the company. But that's just oil price related. We think it's temporary. A lot of their oil projects were canceled or kicked down the road until next year. We don't buy businesses for 1 quarter performance. We buy it for the next sort of 10 years. So very happy with that business. They're still seeing sort of more pinpoint completion designs in all of their plays. The annual frac with fracking through coil or around coil, I should say, is still going to be the main completion technique. And even in the older plays that there are things like the Viking, stuff like they're still seeing sand volumes and stages increasing. And they have a very, very busy Q1. So that division is going well. On cement. Again, we're very happy with the performance of this division. They've always been viewed as a technical leader in the industry. We have the best equipment, the lab, the blends, the operators. We've actually added rigs to our portfolio despite an overall year-over-year rig count decline. They continue to leverage operating efficiencies and initiatives to reduce downtime, which has enabled them to increase margins in what would be an overall sort of slightly down market. We've developed blends to target the heavier oil basins. We're aligned with all the right E&Ps, all the busy E&Ps. Our market share in plays like the Duvernay is as high as 80%. In the Montney, it's over 50% in the overall basin, our market share has grown has grown year-over-year. So very, very excited about what's happening in that division. The coil division as well has really started to show its potential. Really pleased with how that has gone. I know we've talked about the coil division for the last several years about focusing on this and making sure that this division performed in line with the rest of our company. And I think that's finally starting to happen now. Q3 was one of the best quarters in the coil division or was one of the -- the coil division's best quarter. It had lots of operational excellence delivered with less than 1% nonproductive time, which is a real achievement to the people running that division. Our portfolio of customers consists of the top operators in the basin. We set horizontal and total depth records this year in Canada, and that sort of extended reach operations has allowed us to add customers in the Montney and the Duvernay. So we're very happy with what the next sort of 12 to 18 months looks like. And they started to generate financial margins in line with the other divisions. So very happy with how that's worked out. I'll just talk about the Q4 and touch very lightly on next year. We still believe our premium service offering in all of our divisions continues to be valued by customers, and I think that shows in our financial results. We're, of course, watching oil and natural gas prices. There's always potential for projects to get delayed or canceled or changed into next year. But we -- and we expect that our customers like us are taking a fairly defensive stance in their fall budget season just based on the volatility we've had on oil prices, especially. But we still think 2026 will be better than 2025. Our customers are still talking to us about equipment availability in the next few years. Well, that's a very good sign. The LNG Canada facility has continued to ramp up its export volumes. It's now exporting in the range of about 1 Bcf a day. Natural gas prices have recovered significantly in the last month. We expect them to get better this winter and into next year. The Duvernay, as we've talked about, continues to be a busy play, very, very fracturing intensive. We were very thoughtful about the long-term development of this play and actually designed a Tier 4 spread around the Duvernay that pumps at higher pressures, higher -- longer pump times. So our equipment is better able to withstand sort of the abuse that, that play gives the average pumper. So it's reduced our R&M costs even though the pumping rates and pressures are so high. And the Q4 to date has been great. We're still forecasting 2025 to be fairly level loaded between the quarters. And especially in a year like this where we've had so much work bumped out of September into October and November. We expect Q4 is going to be very good. Like when we -- when I read some of the analyst notes, I think this might be being a little underestimated about how busy we are in this quarter. It's likely to be better than Q3 and possibly could be one of our best quarters of the year. So we're not seeing a sharp decline in activity in Q4 like maybe some of our competitors have seen or had planned for. And nothing's changed from our focus. It's very much Montney, Duvernay. Obviously, the Iron Horse division focuses on the oiler plays. And as oil prices stabilize and start to gain a little momentum, those plays will get very, very busy very quickly. So just on -- I'll touch on a few other things, one being tariffs. I know we've talked a lot about tariffs in the past. And actually, as it's turned out, tariffs were put on sand and coil. Both of them have been removed. And actually, the tariffs that were paid -- and sorry, I'm talking about the retaliatory tariffs put on by the Canadian government. In both cases, any tariffs that were paid are -- they're telling us they're going to refund them, refund the money. So we're not really seeing retaliatory tariffs being a big issue in our life. A lot of the cement products are made locally. So that's not an issue. And we're not seeing any tariff pressure on things like chemicals yet. It will affect overall steel prices, of course, from the tariffs that were put on by both the Canadian and the U.S. governments, and that will affect the price of parts and pumps and things like that going forward. But it certainly isn't working out to be as big an issue as we had feared at one time. And there's various industry groups that have done a really good job of lobbying the Canadian government to make sure they're not sort of putting unfair retaliatory tariffs on our business in places like where we don't have a Canadian alternative. So sort of -- I would say we're very happy with how that's worked out. On the sand logistics side, we focus on this every call, and we're going to continue to focus on this because this is certainly becoming more and more of an issue every year. There's about 8.5 million tons of sand pumped in Canada this year. And some analysts are estimating that this could get as high as sort of 12 million to 15 million tons by 2030. And so when you think about all the sand that needs to move around the basin, whether it's on rail or on truck, this certainly has turned into a logistics challenge, which, of course, we see as an opportunity for profitability. And so we hope these predictions are correct, and we're making moves in our last mile logistics to make sure that we're positioned as having the premier provider of sand from the transload facility to the well site. And there's a lot that goes into it. You think about some of these locations, they're pumping sort of 50 to 100 railcars of sand over a period of 48 to 72 hours. And that means having a 40-ton B train truck show up every 10 minutes on location. So if you can schedule that correctly, you can run that efficiently. That's an efficiency that our customers certainly value, and we expect to provide to them in the future as the sand volumes grow. So we view this as a real area of focus and actually may be a focus of our M&A in the next few years as well. On the technology side, I would say things are sort of progressing as we had expected. We're reviewing the cornerstone of our technology strategy is 100% natural gas fueled operations in all of our divisions eventually. But right now, we're mostly focusing on frac. We're evaluating all of the technologies available to us from a 100% natural gas pump perspective, which will allow us to pick what we think is the best -- the most practical technology so that we can provide our customers with 100% natural gas solution. And like I had said earlier, I expect we'll be providing this by mid next year. So back to the long-term outlook, certainly, nothing's changed from our view. Even though you go through little bumps like we're going through now with commodity prices, it doesn't change the long-term outlook of the industry in Canada. We still think it's a great place to be. We're going to continue to invest in it. We view the Canadian -- the Western Canadian Sedimentary Basin is a very attractive place to develop and grow our business. The Montney is increasingly becoming recognized as the premier play in North America. LNG Canada is going well. We fully expect that, that will go from 1 Bcf to 2 Bcf eventually to 4 Bcf a day in the next few years. So -- and there's other facilities as well that are coming in behind it. So we think the LNG export off the West Coast of Canada is great for the business. All of the plays that will fill that capacity are extremely pressure pumping intensive. So we think it's a great place to grow our business. And on the -- what's our return on capital strategy. I think, again, nothing's changed there. We continue to generate what we think is industry-leading free cash flow, and we maintain a conservative balance sheet. I would say our views on debt has changed just given how stable this business has become compared to prior cycles. So we're not afraid to have a little bit of debt on the balance sheet. And we do subscribe to a diversified return of capital strategy, which is a combination of a sustainable and hopefully growing dividend with the combination of the NCIB. And since we put the NCIB in 2017, we're over 51% of the shares purchased, which is amazing to think about that in the context of the industry. And we flex the NCIB up and down in the context of other investment opportunities. And -- so we'll continue to do that. We'll very likely have a very low base level of NCIB, but we're not afraid to really hit the gas or maybe even pull back for a while depending on what else we're seeing and what's happening in the market. Again, we're not afraid to use our bank lines if we find attractive investment opportunities, just like we did with the Iron Horse deal. They wanted all shares. We wanted to pay them all cash. We sort of sought it off somewhere in the middle, but hopefully, we can use our bank lines in the future. We're -- and our corporate priorities remain unchanged, build a resilient, sustainable and differentiated company, invest in high-quality growth opportunities. Hopefully, they're organic, focus on the logistics side of the business, provide a consistent return of capital for our shareholders through the dividend and the NCIB. So I think, operator, I think we'll stop there, and we'll go to questions. Operator: [Operator Instructions] And your first question today will come from Aaron MacNeil with TD Cowen. Aaron MacNeil: Brad, you mentioned you expect '26 to be better than 2025. I know you also referenced this in your prepared remarks, but we started to see CapEx cuts this quarter, most notably with Whitecap. We're just kicking off earnings, so presumably more producers could follow. I guess I just -- I'm wondering at a high level, what your assumptions are for year-over-year changes in Montney and Duvernay activity and how you think pricing will evolve over the next year? Bradley P. Fedora: Yes. Like I don't think we're going out on a limb. I mean we just had 24 months of the worst gas prices this basin has ever seen on an inflation-adjusted basis. Now we've got LNG line maintenance is done. We're talking about sort of a much more balanced or even a negatively balanced gas market in North America as more LNG comes online in the U.S. Our customers have very sophisticated marketing programs. They're not just sitting around relying on AECO or Station 2 gas. But now that sort of all of the pieces are in place, I just don't see how we don't have higher gas prices next year. And this is a gas basin, as everybody knows. So higher gas prices mean better economics. When our customers have sort of 3- to 9-month payback on wells, how do they not drill those. So -- and of course, everybody takes a defensive stance in their budgeting, just like we do. We take a very defensive stance at this point. But I think there's upside, and I think it will come next year. And that's from an activity perspective. Who knows what's going to happen in the pricing environment? I mean, we all know what I think about how undisciplined this space is and irrational this space is. But when we talk to our competitors, they're blunted for Q1. So are we -- I don't see how prices go anywhere but up from here. So -- and even if they don't, I mean, we'll figure out how to make a little bit more money with efficiencies. So I'm not expecting big year-over-year changes that we would see 15, 20 years ago. That's not what I'm saying. But sort of 3% to 5% increases in activity, we can work with that. And I just don't see how that doesn't happen given that we've come out of the worst 24 months imaginable from a gas price perspective. We're going into a much more constructive gas market, North American-wide. I think that will just reflect in more activity going forward. Aaron MacNeil: Yes. And again, I wasn't trying to challenge your outlook. I was just more curious if you've had any specific conversations with customers that would indicate that activity was going up year-over-year, but... Bradley P. Fedora: Yes, we do, Aaron, I'm sort of challenging myself on my assumptions because I seem to be the only one that seems to think like this right now, which is either a really good sign or a really bad sign. But yes, we do have conversations with customers that I would say are more bullish than maybe what gets put in print. Aaron MacNeil: Got you. Okay. And then just as a follow-up, I wanted to sort of better understand the new natural gas-fired frac spread. It sounds like it's going ahead, but is there any scenario that you would maybe pump the brakes? And then what sort of contract structure and duration should we expect? And maybe as another follow-on, how should we think about capital spending next year, assuming that, that investment goes ahead? Bradley P. Fedora: Yes. I would think our capital spending will be in line with the past. We're very careful not to overcapitalize the space. Even though we have, by far, the largest market share in Canada, we don't operate in a bubble. And so we're not just going to flood the market with equipment, even if it is from a technology perspective, the best. But we've been a leader in new technology development over the last -- or since COVID, say. And I don't expect that's going to change. We've had incredible success with our electric backside or all of the ancillary equipment. Our customers continue to demand our electric blenders, very well designed, great performance, great from an R&M perspective. And so the last piece of that puzzle was the evaluation of all of the available 100% natural gas pumps, and it's all of the manufacturers. It's natural gas -- conventional natural gas engines, turbines, it's electric. We took, I would say, maybe a frustratingly long time to evaluate everything. But I think we have a pretty good understanding of what's available in the pros and cons of the various technologies. So I think we're in a really good position to sort of pick a horse at this point. And we're always working on R&D projects in the background. We've got to -- I mean, one of the challenges with natural gas pump engines is they want to run at constant speeds, which, of course, is not great when you're trying to increase rates and pressures and stuff like that. So -- in conjunction with a partner, we've developed a variable speed transmission that we want to try. That would go really well with natural gas engines, and it would allow us to pump more efficiently and actually spin off energy into our electric backside. So there's little things like that, that we're always working on that we may not always be able to talk about. But we'll -- we want to provide our customers with 100% natural gas solution, but we want to make sure that it's a sustainable solution for us as well from a returns perspective. And I think all too often, people jump head first into the latest, greatest equipment design without sort of thinking thoughtfully about, hey, how do you provide your shareholders with a return at the same time as you're providing your customers with a valued service. Aaron MacNeil: And so just not to needle you too much on this, but on the contract duration, do you think you can go? Bradley P. Fedora: Sorry. Yes. We don't talk in too much detail about contracts with our customers, and we have various discussions with various customers, but you would expect that the -- we're very fortunate to have long-term customers that have been with us for years. They will, of course, get first dibs on any technological developments we make. Operator: And your next question today will come from Keith MacKey with RBC Capital Markets. Keith MacKey: Just like to start out with Q4, if we could. Can you maybe just work out some of the pieces here of how you think Q4 will unfold? Certainly, you did kind of high 50s for EBITDAS in Q4 of 2024. Relative to that, how do you see Q4 of this year playing out, recognizing that there's been some work moved from Q3 to Q4, but then also some of the Iron Horse oil-related work has gone away. So how do you see kind of all those pieces playing together? And obviously, there's always a holiday season that makes things less busy as well? Bradley P. Fedora: Yes. we -- if anything can happen, like we didn't see September coming. Frankly, we had a whole bunch of stuff on the board. And then boom, you wake up one day and it's been moved. And that's our business. You have to be prepared to roll with the punches like that. So we were -- we actually didn't realize a month like September was going to turn out like it did until sort of mid-September. So I'm a little hesitant to talk in absolutes here. But if we don't beat last year's Q4, I mean, that would be very, very surprising. And I would think we would beat it by a fairly reasonable amount. And like I said in my prior comments, this could be one of the best quarter -- this could be the best quarter of the year for us. And so again, I think we've gotten a little too focused on what happened in September as an indication of what's happening in the business. That isn't the case for us. Things get moved around, water availability issues, budget issues. I mean, we're built to absorb those changes. And what we gave up in Q3, we think we're going to gain in Q4. So I'm not going to give you any more color than this, but we expect Q4 to be good. Keith MacKey: Maybe you could just talk a little bit more about the sand logistics commentary. Certainly, more sand per well and more wells over time means you need a lot more sand in total. Can you just talk about kind of where the sand is coming from these days? Are we seeing more local sand versus imported sand? I know there was a trial on damp sand in a little while ago with one of your competitors. Can you just talk about some of these trends and where you think the market ultimately goes and where the opportunity is for Trican? Bradley P. Fedora: Yes. Those are all good questions. So out of the 8.5 million -- about 8.5 million tons of sand that gets pumped in Canada, about 5 million of it comes from the U.S., so Northern White Tier 1 sand. The other 3 million, say, comes from the Canadian mines. It's hard to predict how this works out because, I mean, the issue with sand is everybody wants to pump more of it. But of course, it's expensive. So everybody is always looking for the lowest price alternative from a sand perspective, and then you have to measure that against the crush strength of the sand that you're putting into your wells. And so that has brought up this wet sand issue. The idea behind wet sand is you have lower quality, less sorted, less clean sand. And as a result, it hasn't been sorted, hasn't been washed, it hasn't been dried. And so you can have it for less money, you can truck less of it due to the water content, of course. But the idea is that hopefully, the reduction in sand quality is made up for in the reduction of price. And from what we understand, and we are not experts in what happened at either one of these 2 trials. But we -- as what we understand, they didn't go that well. But I think people will continue to experiment with it. It's obviously a lot harder to deploy wet sand in Canada versus Texas when we have 6 months of winter. So you can't move wet sand around if it's frozen. And there's sort of operational issues on location as well with wet sand in the winter. So it's probably not ever going to be a massive substitute for what's happening today. But I think people are going to continue to experiment with lower cost alternatives and we hope to be there with our customers as they do that. But one thing that is certain is sand has to get moved from A to B, and we're really good at moving sand from A to B. And we have the largest trucking fleet. We will continue to grow that. We'll continue to make investments in storage and transloads if we think they're strategic. But at the end of the day, moving sand from A to B can be a good business if you do it well, and we think we do it well. So that's something that we're going to continue to focus on. Operator: And your next question today will come from Joseph Schachter with SER. Josef Schachter: Two questions for me. The first on the ERP platform and using AI, how do you see that integrating? Is it a multiyear thing? You're talking about spending $10 million this year, putting it through under the G&A. Is it going to affect manpower? Is it going to affect the software side that upgrades? How does this affect and benefit you? And how does it affect and benefit the customers? Scott Matson: Yes. Interesting question, Joseph. So I mean, fundamentally, we need to modernize all of our systems and get ourselves into the next level. That will then help us facilitate more aggressively moving into things like AI and machine learning, analyzing pump data, preventative maintenance schemes, all those kind of things, which is a great benefit to us as we move forward. But you're correct that, that should translate into efficiencies from an operations perspective, potentially cost side as well. So it's a long-term process, as you would know. There's lots of conversations about utilizing AI and use cases, but you've got to first have good solid quality, clean data for a period of time to be able to run any of those use cases. So before we start talking about AI efficiencies and improvements going forward, we've got to get the base level data clean, scrubbed and into a reliable form. And that's really what our platform is driving us towards. So yes, this is a bit of a multiyear exercise. As we move forward, there'll be internal efficiencies that we would hope to gain and that insure -- in turn should benefit our customers as well. Josef Schachter: So this will be an ongoing conversation issue? Scott Matson: Sorry, I missed that. Josef Schachter: This will probably be an ongoing conversation issue as you make headway there? Scott Matson: Yes. It will be something that we'll continue to talk about and keep forward in our discussion so that you get a clear picture of where we're going. Bradley P. Fedora: And Josh, it's Brad. Like the AI, the potential of AI is limitless, right? And it's -- even in a business like ours, who knows what this could do for us from a -- we collect millions and millions of data points on the pumps and the engines every day. And so what do you -- what can AI do with that data? And we certainly hope it will help reduce our R&M costs. Is AI one day, do we have better programming to help our sand logistics get more efficient? Does that help us run the frac? And so we're currently not running it manually, but we have people controlling the computer systems that run the frac. And so maybe AI or the software will run it a little bit more efficiently than we're running it. And so we're always looking for opportunities to get better with technology. We just got to pick our spots and be aware of the fact that we're not that big of a company, right? We're big enough that we need to invest in this. But at the same time, we got to be careful that we don't waste money on it as well. And I can assure you we will be very thoughtful if we -- when we deploy capital on technology. We'll be looking to get an immediate return for the investment. Josef Schachter: Super. Another area to pursue, you mentioned on the last call that when you bought into Iron Horse that you had equipment in the legacy business that might fit because of it's not up to the current standards needed for the big jobs. Are you moving equipment there? Are they using it or upgrading it so that they'll be busy with it in Q1, as you mentioned, that you expect them to have a very busy quarter in Q1? Bradley P. Fedora: Yes, exactly. We've got equipment going back and forth from them to us and us to them as we speak. So one of the big advantages of a transaction like this is you get to spread the equipment around to where it's going to be most impactful and most efficient. Josef Schachter: Okay. And do you have much in the yard still from the legacy equipment? Or is more of it going to Iron Horse? Bradley P. Fedora: Well, there's always stuff kicking around the yard, Joseph, don't get me started here. Yes, there's still stuff there. But that's fine. That's -- we have actually done -- and prior to COVID, the prior team had also done a really good job of cleaning up really old equipment, and we've continued on with that. And so I think we're -- we've done a really good job of making sure we don't turn our operating bases into these old boneyards of equipment that will never see the light of day. We've -- I think we've done a pretty good job of getting rid of a lot of the stuff that will never go back to work. And so anything that we have parked on fences today is something that we think could go to work at any time. And we work very hard. If we don't believe that the equipment can't go to work, we work very hard to get it sold. Operator: And your next question today will come from Tim Monachello with ATB Capital Markets. Tim Monachello: Most of my questions have been answered, but I have a few follow-ups. Just around the nat gas fleet that you're contemplating for 2026. What's the lead time on that? And when do you think that might be entering the fleet? Bradley P. Fedora: I didn't quite catch all that, Tim. What is the... Tim Monachello: Sorry, the lead time -- lead time... Bradley P. Fedora: All of this equipment has a 6- to 12-month lead time on it. It doesn't matter what you order these days. Companies like whether it's Cat, Cummins, NOB, et cetera, they -- it's all a long lead time. So we don't expect this fleet would hit the field until next summer, probably at the earliest. Tim Monachello: Okay. So that capital investment decisions already made like you're going forward with it? Bradley P. Fedora: Not necessarily, no. Tim Monachello: Okay. That's helpful. And I assume that, that would have to come with some customer commitment behind it? Or would you do that on spec? Bradley P. Fedora: It will likely come with a customer commitment, but we typically test our investment thesis on if the customer commitment went away, would you still want to own it. And so the answer to that is sort of yes to both. But yes, it will likely have a customer commitment, but we wouldn't bring it on if we didn't think we could sell it if the customers get sold or change their mind or whatever. Tim Monachello: Okay. That's helpful. Then a follow-up on Keith's question around profit. Any market dynamics, have you seen any changes in terms of customer in-sourcing behavior or willingness or desire to in-source the logistics side of sand in Canada? And if so, how do you move around that? And what does it mean for margins and stuff? Bradley P. Fedora: Yes. Definitely, we've seen the trend to more self-sourced sand from our customer base. And that's why we're focusing on making sure that we can make some of that back on the logistics side. So it's one of the reasons I'm saying it's going to be a focal point for the business. There's nothing we can do about the trend other than try to make sure that we're included along the value chain somewhere. And there's corkage fees and things like that. But... Scott Matson: But as we mentioned earlier, I mean, that logistical piece of moving x number of tons from A to B is no small task, right? And so that's something that Trican has got expertise in and has developed over time, and we continue to push forward on. So keeping engaged on the transportation side of things is a bit of a hedge against that motion. Bradley P. Fedora: Yes. Tim Monachello: Does that come to pass in any of your customers' programs currently? Or is that something that's more contemplated for in the coming quarters? Scott Matson: It's going to continually happening as we move forward. So there's a mixture today of customers that self-source various items, including whether it's sand or chemical or others. So it's just a continued trend as we move forward. Tim Monachello: And have you had any pushback on corkage fees or trying to capture margin in logistics rather than... Bradley P. Fedora: We get pushed back on everything. Tim Monachello: Makes sense. But are you able to push it through ultimately? Bradley P. Fedora: Sometimes. I mean most of our customers, like it's -- everyone is different. We're very fortunate that our customer base wants us to be sustainable. And they -- I would say they have a very good understanding of our company economics and what is required to make sure that we're going to be able to provide new technologies and top-tier service. And so we're very fortunate to have the customer and we've had them for 10, 20 years in some cases. So the relationship is very good and lots of the elements of the business are well understood by them. So we'll get through this, and we'll continue to make money. Tim Monachello: Okay. That's helpful. Just looking at the acquisition allocations, it looked like Iron Horse didn't come over with much working capital. But the working capital investment in the quarter, I assume, being fairly elevated included funding working capital for Iron Horse. So I'm just curious like with that onetime impact, if you could help quantify what the working capital investment related to Iron Horse was in the quarter? Scott Matson: Yes. I probably won't get into that much detail, to be honest, Tim. Iron Horse did come with a chunk of working capital in it. I would say that funding requirement was not massive. And so most of the working capital build was really a result of a strong July and August, right, that then translates into an elevated balance as you come through September. So I'm not giving you as much detail as you'd like, but a portion of it, sure, but the majority of it would be activity based. Tim Monachello: And maybe I missed this in Joseph's question, but how long do you expect this ERP integration to last? And what do you think the 2026 investment in that is going to be? Scott Matson: Yes. We don't -- we would have an ongoing spend as we move through 2026, and we'll be able to give you a bit more guidance on cadence as we get into the year. But we're scheduled to flip the switch midway through the year and then get to sustainable factors at the end of that year, and then we've got to make another decision as to whether we continue forward on different parts of it. So there'll be a chunk of spend in '26 as well. Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Fedora for any closing remarks. Bradley P. Fedora: Thanks, everyone. Thanks for your interest and joining -- taking time to join the call. The management team at Trican will be around for the rest of the day. So if there's any follow-up questions, don't hesitate to reach out, and we should be able to take your call very quickly. Thanks. Operator: This brings to a close today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.
Operator: Welcome to the BioInvent Q3 Report 2025 presentation. [Operator Instructions]. Now I will hand the conference over to the speakers CEO, Martin Welschof; and CFO, Stefan Ericsson. Please go ahead. Martin Welschof: Yes. Welcome, everybody, to our Q3 report presentation. And as usual, Stefan and myself will go through what has happened during that time period. Stefan will cover the financials. I will do the rest. And without any further ado, I will start the presentation. Our forward-looking statement. And I would like to start with a quick summary what has happened, events in the third quarter as well as the events after the end of the period. And obviously, one very important events during the third quarter was our prioritization in the portfolio to really focus on the two lead programs, all the resources doubling down on the two most advanced programs, 1808 and 1206, and I will come back to a little bit more details later. And then the other thing was that there was a change in the Board. So Vincent Ossipow, who is with us for many, many, many years, stepped down for priority reasons. And I think this is a very normal change. And as I said, he has been with us almost 10 years. So then the events after the end of the period. So the most important thing, and we probably will discuss it also later a little bit more in detail, BI-1206, we started the Phase IIa trial in advanced or metastatic non-small cell lung cancer and uveal melanoma, and this is a first-line study. So super exciting. So this is basically based on the good data that we have generated in heavily pretreated patients. We showed that data to Merck and they agreed that we could go in the combo trial in first-line non-small cell lung cancer and uveal melanoma. So very, very exciting. Then we had some data presentations, so the Phase I clinical data for BI-1910, our TNF receptor 2 agonist for the treatment of solid tumors, will be presented at SITC in 2025. And then together with Transgene, we presented translational data and updated clinical results on the armed oncolytic virus program, BT-001 that was at ESMO this year. So coming back to our prioritization. So what you see here on this slide is the portfolio, and that's still our portfolio. So we think what we're doing is, of course, now we prioritize the two lead programs, and that was -- makes a lot of sense because those 1808 and 1206 are now in advanced clinical studies, which means Phase II. Those are two assets that are active in liquid as well as in solid tumors, first-in-class and the other programs on 1910, our second TNF receptor 2 program as well as 1607, our second anti-Fcgamma 2b program. They are now paused and then the BT-001 program in solid tumors, which is basically the oncolytic virus containing our anti-CTLA-4 antibody, is continued based on investigator-initiated trials. So we are really now focusing and doubling down on 1808 and 1206. And on this slide, you have a summary of what I partly already have said. So in August 2025, we announced the decision that we will focus on our two most advanced programs, BI-1206 and BI-1808. And what I always say, this is obviously an unfair competition, because 1910,1607 might be also interesting, but they're much, much more early. They're still in Phase I, dose escalation. And of course, 1206 and 1808 are already in Phase II. So the earlier clinical programs, as I already have said, will be paused after a [ wind-down ] period to complete the ongoing trial activities, because we want to pause it in a way that we can reuse it either ourselves or with a partner. And also the underlying research activities are now streamlined to better support the 2 lead clinical programs, 1206 and 1808. So this slide then would show you the prioritized portfolio where we then have basically 1808 and 1206, as I already said. So 1808 is our anti-TNF receptor 2 program, which is running as a single agent as well as in combination with pembrolizumab in solid tumors and T-cell lymphomas. And BI-1206, our lead anti-Fcgamma IIB program is running in combination for non-Hodgkin lymphoma with rituximab and acalabrutinib and in solid tumors with pembrolizumab. And there, I already mentioned that this trial has been kicked off where we're focusing on first-line non-small cell lung cancer and uveal melanoma. Then BT-001, as I already said, continues development in an investigator-led Phase I/II trial in collaboration with Transgene. Just for completeness, on the right-hand side of this slide, you see our partners. So whenever we use pembro, we do this under a supply and collaboration agreement with Merck. And whenever we use acalabrutinib, this is under a similar agreement with AstraZeneca. And that, of course, is something very interesting, because those are two potential partners that are already sitting at the table in a way. And then, of course, the last name, this is our long-standing partner in China, CASI. They have exclusive rights for 1206 in China, Hong Kong, Macau and Taiwan. So a little bit more then in detail around the programs, just to recap where we stand. So as I already mentioned, 1808 is developed in T-cell lymphoma as well as in solid tumors as a single agent as well as in combination. Here on this slide, this is the data that we presented in June this year. Basically, the monotherapy showing really promising strong efficacy in CTCL and PTCL. We had 100% disease control in nine evaluable patients, complete responses, partial responses and stable disease. And of course, it's important to remember or to remind everybody that these patients are heavily, heavily pretreated. But we also have then on top of that, two available patients in PTCL, which is an even more severe form of T-cell lymphoma, where we have one partial response in one patient with stable disease. Important to note that the treatment is well tolerated with very mild to moderate adverse events. So basically no toxicity issues. And also very importantly, immune activation was observed early on with depletion of regulatory T cells and the influx of CD8 positive T cells into the skin lesions, which is very, very important. And then to remind everybody, so we have Orphan Drug Designation for T cell and Fast Track designation for CTCL. So what is next? This will be actually additional data already this year, additional Phase IIa data. I think we guided the market that this will come next year, but we have good progress, and we will have already an update this year. Then going into the other parts of the 1808 program, which is the solid tumor study. We have established single-agent activity, which is really something exciting, because antibodies against TIGIT or LAG-3 never have done this. So we saw complete responses, partial responses, and we had actually 11 out of 26 available patients that showed a response. And obviously, again, here, very, very heavily pretreated patients. And again, I emphasize this is single-agent activity. Very good safety profile. And then what we also -- and that was presented at ASCO and what we also presented at ASCO in June 2024 is some first activity or data that we had in the combination, which, of course, was a little bit later since we start with -- started the single-agent clinical development first and then followed on with the combination with pembro. And here, we already guide the market. So the Phase IIa pembrolizumab combination data in solid tumors, there will be also a first data point or the second data point actually after then the ASCO in 2024 this year. So basically, for 1808, there will be an update on monotherapy for CTCL and as promised already the update on the combination with pembrolizumab in solid tumors, both this year. Then I switch to our anti-Fcgamma IIB program, BI-1206 that we develop in non-Hodgkin's lymphoma and in solid tumors. And start with the data that we presented also this year. That is the combination with acalabrutinib and rituximab. We had 100% disease control in the first 8 patients out of 30 patients in the complete trial and complete responses, partial responses and stable disease, a good overall response rate. And again, also this treatment has been well tolerated with no safety and tolerability concerns. And of course, it's important to note that 1206 is subcutaneous. So that means we have a very convenient and safe profile of this combination and which is a highly competitive option in the evolving non-Hodgkin lymphoma treatment landscape. We have Orphan Drug Designation and also here, we have an update, because we guided the market that will come out with a next data set during the first half of next year, and that will already happen this year. So also very, very exciting, which means that is already the third update that will come to in addition to what we already had guided the market for. So then on the other side, the solid cancer study, you might remember the data that we have shown. So very strong also data targeting patients that do not respond anymore to anti-PD-1 or anti-PD-L1 and that were patients that have received two or more -- two and three, so two or more IO treatments. We saw complete responses and partial responses. We showed that data to Merck, and they agreed that we can move into first line. And that's what we have started already. So there was a press release a week or two weeks ago. And we're focusing on advanced metastatic non-small cell lung cancer and uveal melanoma, and we are focusing on sites in Georgia, Germany, Poland, Romania, Spain, Sweden and the U.S. And here, as we have guided already the market, so we will have a first glimpse of the data during the second half of next year. Then very briefly on CTLA-4, even though that is not our core, but at least since it happened, so that was presented at ESMO. We could show that the BT-001 inject in combination with pembrolizumab was well tolerated, showed positive local abscopal and sustained antitumor activity in injected and non-injected lesions, long-lasting partial responses were observed and the overall data support further developments across a range of solid tumor types to improve responses to cancer immunotherapies. And the next step here is that the evaluation of BT-001 via the investigator-led trial in early-stage setting, what I already have mentioned. And then I hand over to Stefan for the financial overview. Stefan Ericsson: Thanks Martin. Okay. I will present the financial overview for Q3 and the 9-month period, January to September. All amounts are in SEK million, unless otherwise mentioned. Net sales were SEK 3.3 million in Q3 2025 compared to SEK 12.8 million in Q3 2024. That decrease is related to the production of antibodies for customers was SEK 9 million lower in 2025. Net sales for January to September 2025 were SEK 223 million. For the same period in 2024, net sales were SEK 23 million. That's an increase of SEK 200 million. The increase is mainly related to the $20 million payment when XOMA Royalty acquired future royalty rights to mezagitamab. Prior to that, a $1 million milestone was received in the collaboration with XOMA. Operating costs increased from SEK 120 million in Q3 2024 to SEK 137 million in Q3 2025. That's an increase of SEK 17 million. We had quite higher costs in BI-1808 and higher cost in BI-1206 and somewhat lower cost in BI-1910. And we also had higher personnel costs in Q3 2025. For January to September, the increase of operating costs was SEK 77 million from SEK 369 million in 2024 to SEK 446 million in 2025. During the period, we had quite higher cost in BI-1206 and BI-1808 and higher costs in BI-1910 and personnel costs in 2025 were quite higher compared to 2024. And the result for Q3 2025 was minus SEK 129.2 million, and the result for January to September was minus SEK 207.1 million. Liquid funds and current investments end of September 2025 amounted to a total SEK 690 million. And based on our current plans, we are financed into Q1 2027. Over to you, Martin. Martin Welschof: Thank you, Stefan. So then at the end, I would summarize again the key catalysts for the remaining 2025 and 2026. I think I mentioned it already, but I think it's always good to go over this again, and you see it here on this slide since there has been some changes, because originally, we guided the market that we will have for 1808 in solid tumors, a data update in combination with pembrolizumab. But in addition to that milestone, we also will update on 1808 additional Phase IIa single-agent data this year as well as additional Phase IIa data with rituximab and acalabrutinib for 1206 in non-Hodgkin's lymphoma. Otherwise, then for next year, so we'll have then the Phase III data with pembro in [ TC/TCL ] for 1808. And then there will be then, of course, additional triplet data, so for BI-1206 in non-Hodgkin lymphoma in combination with rituximab and acalabrutinib. And then in the second half, we'll have the first data update regarding 1206 first line in solid tumors, and that will be the first readout that will be during the second half of next year. So I stop here and open up for questions. Operator: [Operator Instructions] The next question comes from Sebastiaan van der Schoot from Kempen. Sebastiaan van der Schoot: There appears to be a lot of data still coming in 2025. And I just wanted to know whether you can provide a little bit more color on the different readouts. Maybe starting with the triple regimen for 1206. I noticed on the slide that said disclosed data on the first 8 out of 30 patients total. Does that mean that we will get an update on the total patient on 30 with the next one? And how long will the follow-up be for that particular readout? Martin Welschof: Yes. So for that -- Sebastiaan, for that program, BI-1206, that's in combination with acalabrutinib and rituximab. So basically, we have now more patients. We'll have an update on the overall response rate. We'll have an update on the complete response rate. So basically, an update on the study as it's going at the moment. Sebastiaan van der Schoot: Okay. Got it. And could you also provide a little bit more color on the 1808 readout in CTCL for the combination of pembrolizumab in tumors, like how many more patients will we get? Is it going to be like a handful? Or is it going to be a substantial update? Martin Welschof: For the -- so 1808, I'm just repeating because you were interrupted actually because there's some background noise where ever you are, Sebastiaan. So for 1808, this is, of course, monotherapy in T-cell lymphomas, right, so not combination. And because the combination will be next year as already guided. So this is an additional update that we have. And as you might remember, so the single-agent part or dose escalation has been done, and that will be basically then a further analysis on that data and update where we are with the different complete responses, partial responses and stable diseases. And then also quite some interesting information on the translational side. Sebastiaan van der Schoot: Okay. Got it. Thank you so much Martin. Operator: The next question comes from Richard Ramanius from Redeye. . Richard Ramanius: I just continue where Sebastiaan left off. And could you remind us about the next steps for both BI-1808 in T-cell lymphoma and BI-1206 in normal lymphoma in 2026? Martin Welschof: Yes. So basically, I start with 1808 first, as I said to Sebastiaan. So the single-agent part, the dose escalation, et cetera, has been done, so that is finished. What we have already have started is also the combination with pembrolizumab. And the reason why we do this is just to see whether it can be even better. So as you remember, so the data, the single-agent data is very impressive. But nevertheless, we also wanted to test the combination. And that is currently ongoing and the update on that data will then be at some time point next year. And then for 1206, the update that is coming now is basically a further progress of the study. And then next year, we will, of course, then finish the 30 patients. And then it depends on the data a little bit where we move, but we already had discussions with the regulators, such that we potentially could do at some time point a pivotal study. But as you know, so this is something that we want to do in a collaboration. So basically, what we're doing is to finish really up the 30 patients that will happen during next year and hopefully, with a very strong overall response rate plus a very high rate of complete responses, and we are quite optimistic that we can achieve that. Richard Ramanius: And I was thinking about your potential license partners. You're going to get some data in the triple combination now and somewhere in early 2026, while the data in combination with pembrolizumab in non-small cell lung cancer and uveal melanoma will be one year later. So what -- hypothetical question, what if AstraZeneca is very interested, what are the options for MSC Merck then? Martin Welschof: Yes. It's a very interesting question. Obviously, first of all, maybe a slight correction. So the first data that we'll have for the 1206 pembro combination will be during the second half of next year. So it's not a year later because I think we'll have during the first half, we'll have then further update or actually what we have guided now it's mid next year on the triplet. So I think we might even have -- and as you know, Merck as well as AstraZeneca, they don't have any rights, but they see the data a little bit earlier. So what we're doing now is pushing really hard on the 1206 pembro combination as much as we can, such that we might have already some interesting data that we may be -- that are not in the market yet, but that Merck will see since they are following us closely, and that could then trigger interesting discussions. So that might be enough, let's say, AstraZeneca would make the move. And if Merck would see something that is bubbling up, something interesting that is bubbling up, they might be able to counter. And also, I think I will use the opportunity here to update or to remind everybody. So with 1206, obviously subcu. And if you only would see, let's say, a 10% increase of responses to KEYTRUDA first line, this is, of course, a very interesting thing for Merck because Merck KEYTRUDA or Merck's KEYTRUDA has been just approved as subcu. So you could then really think of co-formulating KEYTRUDA subcu and 1206 subcu into one injection basically. And that could be something very, very interesting. And coming back to your question. So I think if we see initial data and Merck would see that rather early, they might then still be able to react in case AstraZeneca should come forward and is interested in a collaboration. Richard Ramanius: And what about an interest from AstraZeneca in combining BI-1206 with Imfinzi or durvalumab, their checkpoint in... Martin Welschof: Absolutely. That could be another option. So because the thing is because I get this question a lot that some people think, okay, AstraZeneca might, if they're interested to collaborate on non-Hodgkin lymphoma and Merck on solid cancers. But if either party is interested to do that, then probably they will opt for the full program, even if they have some specific interest. So AstraZeneca absolutely could also then consider if they think 1206 is interesting enough for them to consider collaboration to also consider on other applications besides non-Hodgkin lymphoma, absolutely. Richard Ramanius: Okay. Then I just have one more financial question. Are we going to see any more results of the cost-cutting measures just recently? And what type of burn rate could we expect going forward? Stefan Ericsson: I think you could say -- you see right now, we had -- for the first three quarters, we have SEK 446 million. So you could extrapolate that to the full year, a little bit less than SEK 600 million, and that will go down a little bit next year. Operator: The next question comes from Oscar Haffen Lamm from Stifel. Oscar Haffen Lamm: My first one would be on the readout coming out earlier than last communicated. Could you just give us some granularity on the reasons behind? Is it simply due to a faster recruitment than you initially planned? Martin Welschof: It's basically due to progress on different fronts. Obviously, recruitment is one part of it. But the interest in both studies is very high. So recruitment is going very well. And then, of course, you have better progress than we originally planned. So that's the main reason. That's the main reason. Oscar Haffen Lamm: Okay. Got it. And then a second question on the 1206 triplet combo data. What is the next data patients that are treated with higher dose of 1206 compared to last update? I'm thinking the 225 milligram compared to 150 milligram that was mainly used in the preliminary data. Martin Welschof: Yes. So basically, the data that you will see is a continuation of the data that we already presented earlier this year. So it will be the same dose, just a higher number of patients. Operator: The next question comes from Dan Akschuti from Pareto Securities. Dan Akschuti: Just one follow-up on the previous one. So in May of this year, you showed that all 8 patients in the triplet combo in NHL had shown a reduction of some of the target lesions, even the stable disease ones moving towards response. And now I'm just wondering, is this end of this year, is that going to be another interim readout? Or will it be of the full 30 patients? Or will we get the full one then still in the first half of next year or -- is there a possibility to go into Phase III as a single agent for 1808 in CTCL number? Martin Welschof: Yes. So starting with 1206 first. So the full 30 patients will be then at some time point next year. So I think roughly by mid next year. So what we have now is not the full 30 patients yet, but significantly more what we have shown in May. And on 1808, so yes, absolutely. So the plans and what we have discussed with the regulator is single-agent pivotal study. And I don't have the slide here in the deck, and I just have to memorize what we will do. So as I said already earlier, so we're currently running the combination with pembro. In parallel, we will start with dose optimization such and then also preparing for the pivotal study such that -- and those plans are still the same. We potentially could start a pivotal study for monotherapy first line in 2027. Operator: The next question comes from [indiscernible] from DNB Carnegie. Unknown Analyst: So good to see the planned readout being ahead of schedule. So first off, on 1206 and the triplet, you've seen pretty upbeat, Martin, on response rates being able to move up as patient numbers increase. So can you say anything about your expectations for the readout before year-end? And what would make this readout live up to expectations? And secondly, you should have a pretty substantial data set on the doublet, and we've seen some really nice long-lasting responses. And we've also seen the duration of complete responses. But can we also expect you guys to disclose the median duration for all responses? Is this data mature enough essentially? I'll start there. Martin Welschof: Yes. Thank you. So for the data package, what we're expecting is basically, as I already mentioned earlier, the overall response rate that should be, and that's our target above 75%. And then on -- then the other point, obviously, is a very high ratio of complete responses. So that is what we hope to present to the market. And then just remind me of the second part of your question. Unknown Analyst: Yes. So that was on the median duration of response for the doublet and whether or not that data is mature enough to present. Martin Welschof: Yes. So what we have, we can present. But obviously, so the study did not start that long ago. But it looks like what we have seen, but it's, of course, since the study is still relatively young, still preliminary data, but it looks that we have a similar or the same duration as we already have presented when we came out with the doublet data. And also to tell everybody, so those patients that were in complete response are still in complete response. So now this is more than 3 years for some of those patients. But obviously, we don't have the same length with the triplet combination because that just started less than a year ago. But we can see that the responses that we get are enduring basically, right? But it's still early days. Operator: [Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Martin Welschof: Yes. Thank you, everybody, for participating and also for the good questions. So we are, of course, happy and excited that we can update the market earlier than what we projected around 1808 single-agent CTCL and 1206 in non-Hodgkin lymphoma. I think this is very good and shows the interest in the study regarding the sites that are involved. And of course, this is driven by good data. Obviously, otherwise, we wouldn't have that progress. And then also next year, I think we are really then zoning into a very interesting phase of the company because then we have more mature data, which should drive partnering and/or financing. And I'm really looking forward to that, especially partnering. So I think I will conclude with those words. I don't know, Stefan, do you have any final comments from your financial perspective? Stefan Ericsson: No further comments. Martin Welschof: Okay. Then I think we can close the meeting. Thank you very much, and talk to you soon.
Operator: Greetings. Welcome to the Align Third Quarter 2025 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Shirley Stacy, with Align Technology. You may begin. Shirley Stacy: Good afternoon, and thank you for joining us. I'm Shirley Stacy, Vice President of Corporate Communications and Investor Relations. Joining me for today's call is Joe Hogan, President and CEO; and John Morici, CFO. We issued third quarter 2025 financial results today via Business Wire, which is available on our investor website at investor.aligntech.com. Today's conference call is being audio webcast and will be archived on our website for approximately one month. As a reminder, the information provided and discussed today will include forward-looking statements, including statements about Align's future events and product outlook. These forward-looking statements are only predictions and involve risks and uncertainties that are described in more detail in our most recent periodic reports filed with the Securities and Exchange Commission available on our website and at sec.gov. Actual results may vary significantly and Align expressly assumes no obligation to update any forward-looking statements. We have posted historical financial statements with corresponding reconciliations, including our GAAP to non-GAAP reconciliation, if applicable, and our third quarter 2025 conference call slides on our website under Quarterly Results. Please refer to these files for more detailed information. With that, I'll turn the call over to Align Technology's President and CEO, Joe Hogan. Joe? Joseph Hogan: Thanks, Shirley. Good afternoon, and thanks for joining us today. On our call today, I'll provide an overview of our third quarter results and discuss performance from our two operating segments, Systems and Services and Clear Aligners. John will provide more detail on our Q3 financial performance and comment on our views for the remainder of the year. Following that, I'll come back and summarize a few key points and open the call to questions. I'm pleased to report third quarter revenues, Clear Aligner volumes and non-GAAP operating margins are all above our outlook. Our Q3 results reflect year-over-year growth in Clear Aligner volumes, driven primarily by EMEA and APAC and Latin American regions as well as strong sequential growth from APAC and Latin American regions, driven primarily by teens and kids category. Our Q3 Systems and Services revenues were down year-over-year and sequentially as expected, given Q3 capital equipment seasonality. Q3 non-GAAP operating margin of 23.9% was above our outlook of approximately 22%. While activity in the orthodontic and dental markets remains mixed, especially in North America, the initiatives we're taking to drive consumer demand and patient conversion, including working with our DSO partners, are delivering results and we continue to focus on execution of these go-to-market programs. In addition to the breadth and depth of our global business and product portfolio and consumer preferences for the Align brand are unique advantages that provide balance in a dynamic global market. In fact, the year-over-year Clear Aligner volume growth rate improved from Q2 to Q3 for our top 10 country markets except for Canada. For Q3, total revenues of $996 million increased 1.8% year-over-year and decreased 1.7% sequentially. Q3 Clear Aligner revenues of $806 million increased 2.4% year-over-year and were up slightly sequentially. Q3 Clear Aligner volume of 648,000 cases increased roughly 5% year-over-year and was up slightly sequentially. Q3 Imaging Systems and CAD/CAM services revenues of $190 million decreased slightly year-over-year and was down 8.6% sequentially. For Q3, Systems and Services revenues decreased sequentially as expected primarily due to seasonality. On a year-over-year basis, Q3 Systems and Services revenues decreased slightly, primarily due to lower volumes, offset somewhat by increased scanner services and exocad CAD/CAM sales. Q3 revenues also reflect strong growth from the iTero scanner leases, an important option for doctors that enables greater access to our advanced digital technology. At the end of Q3, the installation of active iTero systems, which includes sales and leasing, continues to expand, and there are over 120,000 units globally, a 12% year-over-year increase. From a regional perspective, Q3 scanner sales increased sequentially in North America among GPs as well in Latin America and APAC regions. On a year-over-year basis, Q3 scanner sales increased in EMEA and Latin American regions. The iTero Lumina with iTero multi-direct capture technology sets a new standard with effortless scanning and superior visualizations helping doctors transition to our advanced imaging systems. For Q3, iTero Lumina represented over 90% of our full system units, and we're still driving adoption and utilization through wand upgrades as well as new full systems installations. Today, we announced a series of new product innovations for iTero Digital Solutions, a comprehensive ecosystem that includes intraoral scanners, integrated software tools designed to transform dental consultations into a modern multimodal oral health assessment that helps doctors and their teams deliver exceptional chairside experiences supporting Invisalign treatment conversion. These new capabilities span key practice workflows that underline the Align digital workflow. From AI-enabled X-ray assessment to dynamic personalized visualization and patient engagement tools at chairside to expand compatibility with 3D printers and milling machines. These new innovations simplify workflows, improve doctor-to-patient communications, increase patient acceptance and drive practice growth. More information on these innovations is available in today's press release and our webcast slides. For exocad, Q3 revenues increased sequentially and year-over-year. During Q3, we began piloting exocad ART in several countries in Europe. And based on the initial learnings, we're expecting to expand to more countries in 2026. Exocad ART stands for Advanced Restorative Treatment, a module with exocad Dental CAD software that bridges orthodontics and restorative dentistry. It enables orthodontists, dentists and dental labs to integrate tooth alignment with restorative procedures and deliver better function, less invasive restorations and longer-lasting and aesthetically superior treatment outcomes. Exocad ART further extends the value of the Align Digital Platform with comprehensive digital workflows and integrated solutions from Invisalign, iTero and exocad. For Clear Aligners, Q3 worldwide volumes were up 0.5% sequentially and up 4.9% year-over-year. For Q3, 88,000 doctors globally submitted Invisalign cases, an all-time record, driven primarily by the GP channel. In addition, Q3 reflects a new all-time high for the number of doctors submitting Invisalign case starts for teens and kids. On a sequential basis, Q3 Clear Aligner volumes reflect strength from the international adult and teen patients as well as North American DSO adult patients, partially offset by the North American retail doctor channel. Year-over-year, Q3 Clear Aligner volume reflects strong growth across the APAC and EMEA regions, offset somewhat by North America. Q3 Clear Aligner volumes increased year-over-year for both orthodontists and GPs, driven by growth across adults, teens and kids and continued strength by DSOs. From a product perspective, for Q3, we had strong year-over-year growth from Invisalign First, DSP touch-up cases, Invisalign Palatal Expander, retention including DSP as well as continued mix shift from non-comprehensive Clear Aligner products. For the Americas, Q3 Clear Aligner volumes were down year-over-year, primarily due to North America, partially offset by continued growth in Latin America. Despite lower volumes, increased adoption of several products, including Invisalign First for teens and kids, Invisalign DSP touch-up cases, including retention and the Invisalign Palatal Expander system continued. We also saw double-digit growth year-over-year from North America DSOs. Given the economies of scales and more effective optimal cost structures inherent in their business model, we anticipate that our DSO partners will continue to grow their Invisalign business and are one of the best examples of how to incorporate our digital technology and workflows to accelerate practice growth. To offset a financial barrier for patients interested in Invisalign treatment, Align and Healthcare Finance Direct, or HFD, are partnering to increase the affordability of treatment. HFD is a preferred patient financing partner and provides our Invisalign trained doctors with greater options to support their patients and enhance their practices. Among DSOs and doctors enrolled in HFD, enrollment is growing, and we have noticed an incremental lift in Invisalign treatment that we expect will continue. In the EMEA region, Q3 Clear Aligner volumes grew double digits year-over-year, driven by increased submitters and utilization in the orthodontic channel with strength in teens, kids and adult categories. This performance reflects continued adoption of non-comprehensive products, including moderate DSP touch-up cases including retention and Invisalign Palatal expander as well as Invisalign Comprehensive Three and Three and Invisalign First within our comprehensive portfolio. During the quarter, we saw strong double-digit DSO growth in EMEA on a year-over-year basis. For the APAC region, Q3 Clear Aligner volume grew double digit year-over-year, reflecting increased submitters and utilization across both the GP and orthodontics channel, across teens and growing kids, led by China. Invisalign First continues to contribute to year-over-year growth, where the growing patient portfolio provides a significant opportunity in the region with some of the highest rates of complex malocclusion. DSO performance has also -- is also up double digits on a year-over-year basis, led by China and Japan. In addition, Q3 strong retention performance on a year-over-year basis reflects increasing submitters and utilization across both the GP and orthodontist channel. In Q3, over 256,000 teams and growing kids started treatment with Invisalign Clear Aligners. This number represents a 14.7% sequential increase, primarily due to strength in APAC, North America and Latin America, partially offset by softer performance in EMEA due to seasonality. On a year-over-year basis, case starts increased 8.3%, driven by growth in APAC, EMEA and Latin America, partially offset by North America. From a product standpoint, Invisalign First and Invisalign Palatal expander, or IPE, continued to drive growth year-over-year across all regions. During the quarter, we achieved a record number of teen and kids cases shipped in the quarter, representing a record 40% mix of total Clear Aligner cases shipped. For Q3, the number of doctors submitting cases starts for teens and kids was up 3.8% year-over-year, led by continued strength from doctors treating young kids or growing patients with Invisalign First aligners and Invisalign Palatal expander. During Q3, we continued to roll out the Invisalign Palatal Expander system and Invisalign system with mandibular advancement featuring occlusal blocks or what we call MAOB. IPE offers a more hygienic and comfortable alternative to traditional metal expanders that has proven clinically effective at achieving the expansion doctors want for their patients. MAOB is designed to create Class II skeletal and dental malocclusions in growing patients ages 10 to 16 by simultaneously advancing the mandible and aligning the teeth. By integrating solid occlusal blocks into Clear Aligners, MAOB offers greater durability and vertical opening for early mandibular advancement, precision wings that guide the lower jaw forward and SmartTrack material and SmartForce features for predictable tooth movement. Today announced ClinCheck Live Plan. It's a new feature in Invisalign digital treatment planning that automates the generation of initial doctor-ready treatment plans in 15 minutes. This advancement represents a major technical milestone for the Align Digital platform that can reduce the Invisalign treatment planning cycle from days to minutes. ClinCheck Live Plan is built on Align's proprietary data and algorithms derived from decades of research and development and the experience of doctors who have treated more than 21 million Invisalign patients worldwide. With ClinCheck Live Plan, doctors have the option to treatment plan in the moment and can receive a fully customized initial ClinCheck treatment plan in about 15 minutes after submitting an eligible case with Flex Rx. Doctors then have the option to review the proposed tooth movements and approve the case while the patient is still in the office. This can enable the doctor to receive and approve the treatment plan faster, which can lead to the patients starting Invisalign faster, ultimately increasing the office efficiency and improving the patient experience. Over the past few years, Align has introduced a range of new treatment planning tools to enhance consistency, doctor control, and speed and treatment planning. I often refer to these innovations as touchless ClinCheck or ClinCheck in minutes to emphasize the potential for the software to totally transform the treatment planning experience for doctors and their patients. To that end, we continue to make great progress in automation with machine learning and AI-powered technologies that are the foundation of our next-generation treatment planning offerings. I'm excited by our continued progress and immeasurable impact we are beginning to see. The use of Invisalign Flex Rx has doubled every year. And to date, over 1 million Invisalign cases have been submitted through Flex Rx for personalized treatment plans. In addition, we now have over 100 Invisalign Palatal Expander clinical cases published in the Align Global Gallery, both unprecedented milestones for new product introductions in the orthodontic market. With that, I'll turn the call over to John. John Morici: Thanks, Joe. Now for our Q3 financial results. Total revenues for the third quarter were $995.7 million, down 1.7% from the prior quarter and up 1.8% from the corresponding quarter a year ago. On a constant currency basis, Q3 revenues were favorably impacted by approximately $11.7 million or approximately 1.2% sequentially and were favorably impacted by approximately $15.6 million year-over-year or approximately 1.6%. Q3 Clear Aligner revenues were $805.8 million, slightly up primarily due to favorable foreign exchange and a price increase in the U.K. on August 1, partially offset by product mix shift to lower prices -- lower-priced countries and products. Favorable foreign exchange impacted Q3 Clear Aligner revenues by approximately $9.8 million or approximately 1.2% sequentially. Q3 Clear Aligner average per case shipment price was $1,245, a $5 decrease on a sequential basis, primarily due to slightly more pronounced product mix shift to lower-priced countries and products, partially offset by favorable foreign exchange and a price increase in the U.K. On a like-for-like basis, Q3 Clear Aligner ASPs for the U.S. and EMEA were up sequentially. On a year-over-year basis, Q3 Clear Aligner revenues were up 2.4%, primarily from higher volume, price increases and favorable foreign exchange, lower net deferrals, partially offset by higher discounts and product mix shift to lower-priced countries and products. Favorable foreign exchange impacted Q3 Clear Aligner revenues by approximately $13 million or approximately 1.6% year-over-year. Q3 Clear Aligner average per case shipment price was $1,245, down $30 on a year-over-year basis, primarily due to discounts and product mix shift to lower-priced countries and products, partially offset by price increases and favorable foreign exchange. Clear Aligner deferred revenues on the balance sheet as of September 30, 2025, decreased $19.5 million or 1.6% sequentially and decreased $78.7 million or 6.2% year-over-year and will be recognized as additional aligners are shipped under each sales contract. Q3 Systems and Services revenues of $189.9 million were down 8.6% sequentially, primarily due to lower scanner wand sales and scanner system sales, partially offset by favorable foreign exchange and higher nonsystem sales. Q3 Systems and Services revenues were down 0.6% year-over-year, primarily due to lower scanner system sales, partially offset by higher scanner wand sales, higher nonsystem sales and favorable foreign exchange. foreign exchange favorably impacted Q3 Systems and Services revenues by approximately $1.8 million sequentially or approximately 1%. On a year-over-year basis, Systems and Services revenues were favorably impacted by foreign exchange of approximately $2.6 million or approximately 1.4%. Systems and services deferred revenues decreased $7.9 million or 4% sequentially and decreased $30.9 million or 13.9% year-over-year, due in part to shorter duration of service contracts selected by customers on initial scanner system purchases. Moving on to gross margin. Third quarter overall gross margin was 64.2%, down 5.7 points sequentially and down 5.5 points year-over-year, primarily due to restructuring and other noncash charges, impairment on assets held for sale, depreciation expense on assets to be disposed of other than by sale and excess inventory write-off, partially offset by operational efficiencies. Overall gross margin was favorably impacted by foreign exchange of 0.4 points sequentially and 0.6 points on a year-over-year basis. On a non-GAAP basis, which excludes the impact of the above-mentioned restructuring and other noncash charges, gross margin for the third quarter was 70.4%, down 0.1 points sequentially and flat year-over-year. Clear Aligner gross margin for the third quarter was 64.9%, down 5.2 points sequentially, primarily due to restructuring and other noncash charges, Foreign exchange favorably impacted Clear Aligner gross margin by approximately 0.4 points sequentially. Clear Aligner gross margin for the third quarter was down 5.4 points year-over-year, primarily due to the restructuring and other noncash charges, partially offset by operational efficiencies. Foreign exchange favorably impacted Clear Aligner gross margin by approximately 0.6 points year-over-year. Systems and Services gross margin for the third quarter was 61.3%, down 8.2 points sequentially, primarily due to excess inventory write-off. Foreign exchange favorably impacted the Systems and Services gross margin by approximately 0.4 points sequentially. Systems and Services gross margin for the third quarter was down 6.2 points year-over-year, primarily due to excess inventory write-off. Foreign exchange favorably impacted the Systems and Services gross margin by approximately 0.5 points year-over-year. Q3 operating expenses were $542.9 million, down 0.4% sequentially and up 4.5% year-over-year. On a sequential basis, operating expenses were $2.2 million lower, primarily due to lower consumer marketing spend, partially offset by restructuring costs. Year-over-year operating expenses increased $23.4 million, primarily due to restructuring costs and partially offset by lower consumer marketing spend. On a non-GAAP basis, excluding stock-based compensation, restructuring and other charges and amortization of acquired intangibles related to certain acquisitions, operating expenses were $463.3 million, down 6.9% sequentially and 2% year-over-year. Our third quarter operating income of $96.3 million resulted in an operating margin of 9.7%, down approximately 6.4 points sequentially and down approximately 6.9 points year-over-year due to Q3 restructuring and other charges of $36.3 million, primarily related to post-employment benefits and other noncash items, including the impairment of assets held for sale, depreciation expense on assets to be disposed of other than by sale and impairment loss on inventory for an aggregate of $88.3 million. Operating margin was favorably impacted from foreign exchange by approximately 0.4 points sequentially and 0.5 points year-over-year. On a non-GAAP basis, which excludes stock-based compensation, restructuring and other charges, impairments on assets held for sale, impairment loss on inventory, depreciation expense on assets disposed of other than sale and amortization of intangibles related to certain acquisitions, operating margin for the third quarter was 23.9%, up 2.6 points sequentially and up 1.8 points year-over-year. Interest and other income and expense net for the third quarter was an expense of $1.6 million compared to an income of $10.5 million in Q2 '25, primarily due to foreign exchange fluctuations on open assets and liabilities. On a year-over-year basis, Q3 interest and other income and expense was unfavorable compared to an income of $3.6 million in Q3 2024, primarily driven by unfavorable foreign exchange movements and lower interest income. The GAAP effective tax rate for the third quarter was 40.1% compared to 28.2% in the second quarter and 30.1% in the quarter of the prior year. The third quarter GAAP effective tax rate was higher than the second quarter effective tax rate and the third quarter effective tax rate of the prior year, primarily due to the change in our jurisdictional mix of income due to restructuring, partially offset by lower U.S. minimum tax on foreign earnings and changes in the newly enacted tax law. On a non-GAAP basis, our effective tax rate in the third quarter was 20%, which reflects our long-term projected tax rate. Third quarter net income per share was $0.78, down $0.93 sequentially and down $0.77 compared to the prior year. Our EPS was favorably impacted by $0.02 on a sequential basis and $0.03 on a year-over-year basis due to foreign exchange. On a non-GAAP basis, net income per diluted share was $2.61 for the third quarter, up $0.11 sequentially and up $0.26 year-over-year. Moving on to the balance sheet. As of September 30, 2025, cash and cash equivalents were $1.0046 billion, up sequentially $103.4 million and down $37.3 million year-over-year. Of the $1.004.6 billion balance, $190.8 million was held in the U.S. and $813.8 million was held by our international entities. During Q3, we repurchased approximately 0.5 million shares of our common stock at an average share price of $136.77. These repurchases were made pursuant to the $200 million open market repurchase plan announced on August 5, 2025, which we expect will be completed in January of 2026. As of September 30, 2025, $928.4 million remains available for repurchase of our common stock under our previously announced April 2025 repurchase program. Q3 accounts receivable balance was $1.0994 billion down sequentially. Our overall days sales outstanding was 101 days, up approximately 2 days sequentially and up approximately 8 days as compared to Q3 2024 and primarily reflects flexible payment terms that are part of our ongoing efforts to support Invisalign practices. Cash flow from operations for the third quarter was $188.7 million. Capital expenditures for the third quarter were $19.8 million, primarily related to investments in our manufacturing capacity and facilities. Free cash flow, defined as cash flow from operations minus capital expenditures amounted to $169 million. I'd like to provide the following remarks regarding U.K. VAT and U.S. tariffs as of September 30. As previously disclosed in our Q3 earnings release and conference call on July 30, 2025, we stopped charging VAT to impacted customers in the U.K. As of August 1, 2025, our invoices no longer include the U.K. VAT rate of 20% for all Invisalign treatment packages that were ClinCheck approved as of August 1, 2025, and for refinement and replacement aligners, Vivera retainers, PVS processing fees and additional aligners placed on or after August 1, 2025. At the same time, we simultaneously adjusted prices for our Clear Aligners and retainers to keep the overall price consistent. Currently, we do not expect a material change to our result of operations as a consequence of the latest U.S. tariff actions, and we refer you to our Q1 2025 press release and earnings materials as well as our Q2 2025 webcast slides which includes specifics regarding potential tariffs -- impacts of U.S. tariffs. Assuming no circumstances occur beyond our control, such as foreign exchange, macroeconomic conditions and changes to our current applicable duties, including tariffs and other fees that could impact our business, we provide the following business outlook for Q4: We expect Q4 2025 worldwide revenues to be in the range of $1.025 billion to $1.045 billion, up sequentially from Q3 of 2025. We expect Q4 Clear Aligner volume and Clear Aligner average selling price to be up sequentially from favorable geographic mix. We expect Q4 2025 Systems and Services revenues to be up sequentially, consistent with typical Q4 seasonality. We expect Q4 2025 worldwide GAAP gross margins to be 65.5% to 66%, up sequentially from higher revenue, lower restructuring and other charges, noncash items, such as impairment loss on assets held for sale and impairment loss on inventory, partially offset by higher depreciation on assets disposed of other than by sale. We expect non-GAAP gross margin to be approximately 71%. We expect our Q4 2025 GAAP operating margin to be 15.3% to 15.8% up sequentially, primarily from lower restructuring and other charges, noncash items such as impairment loss on assets held for sale and impairment loss on inventory, partially offset by higher depreciation on assets disposed of other than by sale. We expect Q4 non-GAAP operating margin to be approximately 26%. For fiscal 2025, we expect 2025 Clear Aligner volume growth to be mid-single digits and revenue growth to be flat to slightly up from 2024, assuming foreign exchange at current spot rates. We expect fiscal 2025 GAAP operating margin to be around 13.6% to 13.8%, down year-over-year due to higher restructuring and other charges and the incurrence of noncash charges expected to be approximately $145 million to $155 million primarily for the impairment loss on assets held for sale, depreciation on assets disposed of other than by sale and impairment loss on inventory, partially offset by lower legal settlement loss. Most of the onetime charges will be noncash with the expected cash outlay for 2025 estimated to be around $45 million. We expect the 2025 non-GAAP operating margin to be slightly above 22.5%. We expect our investments in capital expenditures for fiscal 2025 to be approximately $100 million. Capital expenditures primarily relate to technology upgrades. We are nearing completion of the restructuring actions that are intended to sharpen operational focus, reduce ongoing costs and enhance capital efficiency. For fiscal 2026, we expect these restructuring actions as well as other initiatives to improve our GAAP and non-GAAP operating margin by at least 100 basis points year-over-year. With that, I'll turn it back over to Joe for final comments. Joe? Joseph Hogan: Thanks, John. In summary, I'm pleased with our third quarter results and encouraged by the sequential and year-over-year growth in the Clear Aligner segment as well as the continued expansion of our digital scanning solutions and footprint. While the North American retail doctor channel remains mixed, we continue to see strength in our other key geographies and areas of our portfolio, including teens and kids, and digital workflow innovation as demonstrated by continued strong double-digit year-over-year growth by our DSOs. Our investment in AI-powered treatment planning software, direct 3D printing of aligners and next-generation iTero Lumina scanning technology are key to helping doctors deliver better outcomes more effectively and efficiently, while enhancing the patient experience. Looking ahead, we intend to remain flexible in navigating headwinds in the U.S. dental market and are committed to supporting our doctor customers with localized marketing, education and clinical support across all regions. We're making good progress against our strategic initiatives to drive long-term growth across our business, and we're excited about the opportunities to further expand our reach, deepen engagement with consumers and providers and deliver value to our shareholders. Before we wrap up, I want to take a moment to express my sincere gratitude to the doctors around the world who continue to trust the Align team and our technology to transform smiles and change lives. Your partnership and commitment to patient care inspire us every day. We appreciate your continued support and confidence. I also want to thank our employees who continue to demonstrate agility, innovation and resilience in everything they do to deliver and extend our leadership in digital orthodontics and restorative dentistry. With that, I thank you for your time today, and I'll turn it over to the operator. Operator? Operator: [Operator Instructions] Our first question comes from the line of Elizabeth Anderson at Evercore ISI. Elizabeth Anderson: Congrats on a nice quarter. It was really nice to see the acceleration in cases in the quarter. I was wondering if you would mind commenting on any early 4Q comments -- color that you've seen in terms of the end market. And also, just if you could comment a little bit further about the new ClinCheck launch and what you think the expected impact on the gross margins will be? Joseph Hogan: Yes. Elizabeth, look, obviously, we felt good about third quarter overall. We are just looking forward to moving forward. The technology we're talking about incorporating overall, it is a comprehensive type of solution we've been developing over a series of years. I can see it -- two critical targets here is one to make it much more efficient for our doctors to be able to convert cases and understand the difficulty of cases and get the proper type of a structure for that case. And secondly, it helps us from an efficiency standpoint also in the sense of we can take our time with customers on other things that are maybe more difficult. So it's great to see these things coming together. It's not just a productivity tool for those doctors also. It also helps them in their communications. We talked about the 15-minute, the live update piece. As you can be able to address that patient in that chair in 15 minutes, you have a much better chance of closing the case because you know what the extent of the case will be and how long it will be. So we're excited about that, Elizabeth. Operator: Our next question comes from Jon Block at Stifel. Jonathan Block: Look, not many blemishes, but I'll try to find one. So ASP was supposed to be up a smidge Q-over-Q. It was down a bit. John, I think I heard you right, you mentioned country mix. So I think like-for-like was still maybe what you expected. But for 4Q, you do expect it to be up sequentially. Just help me out with that. So I'm guessing a full quarter of that probably helps with that. What else gets it up sequentially? And then just more big picture, Joe, for you, if you want to comment on the pricing environment and really any thoughts on the timing about the potential rollout of what we're at least referring to as no refinement plan? And then I'll ask a follow-up. John Morici: Yes, Jon, I'll take the first one on the ASP. It was really just the growth that we saw in some of the markets like China that has a lower ASP compared to Europe. So the opposite of that happened in Q4. Europe becomes bigger as a percentage of our total. They come out of their holiday season and that shows up in Q4 and China as a percentage comes down in Q4. So you really -- those 2 geographies drive a fair amount of ASP impact. Joseph Hogan: And Jon, your bigger picture on the no refinement plan. You can see we've been evolving on that route for a while, Jon. I mean, obviously, we went from a 5 x 5 to a 3 x 3, our moderate products and those kinds of things normally didn't have any more than one aligner associated with it. So I look at this as not like a phase transformation. I look at this as a continued evolution in the sense of serving our doctors the way they want to be served. And you think about it, too, Jon. I think what we've done is developed the technology over the years in a sense that doctors understand these malocclusions. They don't need 5 additional aligners in most cases to be able to address things and they want that optionality to say, "I know this case. I think I can get it done without refinements," or "I can buy one if I do get in trouble," or "I'll buy an insurance policy because I'm not sure." So it's just -- it's an improvement in technology, but it's also an improvement in confidence in the sense that we have in developing our cases and the doctors do, too. Jonathan Block: Okay. That was helpful. And I'll pivot for the second one. Maybe this falls to both of you guys again. You've certainly given some 2026 margin thoughts and the 100 bps is good to see. Just any high-level discussion on the top line next year. It seems like, Joe, like half the Clear Aligner business is growing double digit. The other half is flat to down, being North America. Systems and Services, at least in my view, is maybe a little bit longer in the tooth regarding the Lumina product cycle. John, you talked about ASPs being down low single digits. And when I roll that up, I land up LSD when you think about all those moving parts, but anything directionally for us to think about to sort of pair with the margin commentary? Joseph Hogan: Jon, I'll take a shot at that, but that's a big question, right? So I mean, obviously, we gave you a fourth quarter, and we feel good about those projections that we have in the fourth quarter overall. Obviously, if you look at -- in my script, Jon, we talked about third quarter versus second quarter, we had 9 of our top 10 countries were up. And so we're seeing good robust growth. Our biggest issue is actually North America retail. And obviously, in North America DSO, we talk about it a lot. That growth is over 20% in some areas. And so we look to help us solidify that as we go into the fourth quarter. We think we'll continue with a strong global type of presence that we have. Right now, I'm not making any predictions for 2026. Operator: Our next question comes from Michael Cherny at Leerink Partners. Michael Cherny: Maybe, Joe, if I can just follow up on that last comment you made, at least in terms of the markets in North America. As you think about that retail customer, I'm trying to wrap in a lot of comments we already had, but what do you think is the biggest gating factor do you think gets them back to some level of, I don't want to call it, normalized demand, new normal demand, whatever it might be? And what can Align proactively do relative to waiting out the macro in order to help them get there? Joseph Hogan: Michael, it's a good question. I'd say if you break down, again, North America retail side, Canada, we've had more pressure in Canada than I reported than we had in the United States. But overall, I think we continue to push hard on the DSO side because we know that, that works both on the GP side and on orthodontic side. Secondly is we feel like moving downstream from a marketing standpoint, getting close to our customers, advertising more around ZIP codes and all that can direct those patients to those doctors because I still lean into -- these are economic issues that I think that the retail customers feel more than what I call the business-oriented DSOs that we have out there. And as much as we can leverage our brand and the strength of our portfolio to help to drive that, I think it'll help to drive the marketplace, too. I mean, ultimately, what addresses this, I think, is a much more confident U.S. consumer, but we can't wait for that. So we're going to use our brand. We're going to use our technology. You'll see us use our field force to get closer to our retail customers and doctors and try to help them out as much as we possibly can. Operator: Our next question comes from Jeff Johnson at Baird. Jeffrey Johnson: Joe, just -- I promised you when I met you or when I saw you last time in Vegas that I was going to try to maybe get you to give us a little more detail by geography than you do on these high-level comments. So on EMEA and APAC, I think I heard you say up double digits year-over-year in both markets on Clear Aligner volumes. Just one, want to confirm that was the case on a year-over-year basis; and two, are we talking kind of 10%, 11% there? Just trying to kind of use those numbers to back into how much if North America would have been down a few points or down more than kind of that low single digits, more in the mid-single-digit range from a North American case volume standpoint. Joseph Hogan: Jeff, overall, to confirm that double-digit year-over-year growth that we talked about. Again, it was widespread. We talked about our top 10 countries. India being one that's growing well, Turkey in different areas, really strong performance in EMEA overall. So Jeff, I'm not ready to give any kind of broad specific numbers on the double-digit piece, but it's robust in a lot of different parts of the world, which gives us a lot of confidence in the sense that we can keep that kind of momentum, but also to make sure from a resource standpoint and a focus standpoint, we start to move our retail doctors in the United States more towards positive growth. Jeffrey Johnson: Yes. All right. And then just on the U.S. side, I mean, obviously, that's where the biggest headwind remains. You talked last quarter about kind of the gross receipts looking good, but then the case is not closing. Any change in behavior? Did any of that clear itself up a little bit? Did it get a little worse? And I think more importantly, on that front, just as 3Q itself played out in that retail channel, just again any kind of incremental improvements or degradations throughout the period. We did see consumer confidence come off in September and then again in October. So would just love to hear kind of what the exit rate might have looked like on 3Q as we head into 4Q here as well from a U.S. standpoint. Joseph Hogan: Yes. Jeff, I'd say we did dig down into gross receipts and CCAs last quarter to try to explain what had occurred. I can tell you there's no primary change or any kind of material change in that data at all. It differs all over the world. We watch each one of those countries. There's really nothing to report on in that sense. I think what you just mentioned at the end of your question is obviously, you're watching the North American marketplace pretty closely and what you see consumer confidence and different things. But -- and again, nothing has really changed in the sense of how -- from an overall sales standpoint, how our DSOs continue to grow and how our retail accounts continue to be challenged. I guess I'd overemphasized. It didn't get any worse. It's consistent. Operator: Our next question comes from Brandon Vazquez at William Blair. Brandon Vazquez: Can I first start on the orthodontic side or more specifically, the teens? That seemed to be a nice highlight of the quarter. Last quarter, we were talking about this kind of shift back towards wires and brackets in kind of difficult macro times. I didn't hear any of that this quarter encouragingly. So maybe just spend a minute on teens, what was driving kind of the growth there? And do you think we're moving past this kind of shift back to wires and brackets again and we're a little bit back on the offensive there? Joseph Hogan: Yes. I think overall, when you look at that teen increase, I mean, it was pretty phenomenal when you look at the growth. Remember, it's a big China growth period for us from a teen standpoint. That's their season. And we saw really substantial growth there, which is tremendous. What's helping to drive the growth also are our new products like IPE and mandibular advancement with occlusal blocks. It just gives us more leverage to be able to start those patients earlier. And often, as we mentioned before, Brandon, Invisalign First, goes along with those products one way or another to be able to address different types of expansions or different kinds of malocclusion. So what I like about the teens is it had good breadth to it all over the world. We saw the same thing in Europe also and in some of the emerging economies that we're doing. Again, I think it's the penetration that we're getting in those areas, but also our technology, the breadth of our technology, particularly for early interventions in kids. Brandon Vazquez: Okay. And maybe as a follow-up here, switching gears a little bit. The -- one of the common themes that I've been hearing among many in the dental space, including yourselves, is that DSOs seem to have some kind of algorithm working correctly here, driving growth in some different segments within dental. I don't know if you guys will give this number, but just out of curiosity, if you will, what percent of your business is DSOs at this point, roughly speaking? Can maybe spend a minute or two on why they specifically are doing better and if that should be durable as we head into next year? John Morici: Yes. Overall, Brandon, it's about in the 25% or so. It varies by country, as you know, but that's probably a good ballpark to be in. Operator: Our next question comes from Steven Valiquette at Mizuhu Securities. Steven Valiquette: So I guess from my side, I was just curious to hear more color around the evolution of the HFD patient financing partnership. Just curious if that help in any notable way to help get patients across the finish line in the third quarter? Or is that still maybe going to be just a bigger factor for the fourth quarter and into 2026, where that stands right now? John Morici: Steve, this is John. Yes, I would say it's healthy, and we're seeing more and more doctors use it. You see it across some of the DSOs. They've taken advantage of that as well. But when patients are -- potential patients are deciding whether they want to go into treatment and it usually comes down to some type of pricing, what's the overall price? And then in all cases, it gets down to how much is it per month if I don't pay it outright. So HFD becomes more critical with that. We like the partnership that we're seeing and more and more doctors are using it. So I would say it's playing out how we wanted it to in the third quarter, and I would expect that we'd see more of that in Q4 and beyond. Operator: Our next question comes from Jason Bednar at Piper Sandler. Jason Bednar: I wanted to start on the China market. It sounds like a pretty good third quarter you had there. Just wondering, any updated perspective on the competitive landscape and anticipated VBP in that market as well as how or whether you plan to adjust your go-to-market and pricing strategy in light of VBP. Joseph Hogan: Jason, I mean, we're aware of what's going on from the VBP standpoint. It's still not clear exactly what provinces at all will be included in that and exactly when it will be implemented. But we're positioning ourselves because we know, ultimately, that's probably going to happen one way or another. But I don't have any new news to report versus what we had in the second quarter. Jason Bednar: Okay. And Joe, when you say you're positioning yourself, maybe what exactly do you mean by that? And then I'll just ask my follow-up now. I wanted to drill down on the topic du jour here that U.S. retail commentary you're giving. The DSOs doing well. They're up strong double digits. Sure, they're more sophisticated. But it's also evidence this isn't necessarily just a consumer spending problem in the U.S. So I guess I'm wondering out loud if it's not an economic or consumer spending problem and maybe the business that you're -- that's more sensitive here is some maybe lower volume, maybe lower ROI business for you in accounts that have more economic incentive to switch or convert to a cheaper alternative. I guess, how much effort do you put behind defending that business, especially at a time when you're really committed to delivering on margin expansion targets next year? Joseph Hogan: Yes. I guess the first part of your second question was about China again. Remember, there are a lot of Tier 3 and Tier 4 cities. So we did have to make sure that our portfolio is structured properly to be able to get at those types of patients because primarily, we've been structured around private patients in the larger areas of China. Overall, when you say defending things, I think -- I'd like to think that we expand markets with our new technology and what we do. And I mean, obviously, we have to defend certain territories in certain areas. But I look at this market as a market that we can expand. And obviously, we've had a difficult second quarter and whatever. And -- but as we continue to develop technology, remember, 75% of the people out there still have a malocclusion and there's a lot that we can address by this overall. So part of this is not just playing defense, it's playing offense to help to grow that marketplace. And so that's not just in the United States or different parts of North America. That's all over the world. And you can see that strength in the business as we reported in the third quarter. John Morici: And I would say just to close on your DSO comment, I think that some DSOs are doing a really good job. They're recognizing what's happening in the marketplace. And they're seeing that maybe consumers that they're out, maybe they're coming in for a cleaning. What do those DSOs do? They're scanning most patients. They're giving them a lot of visualization kind of before and after. Many of them are competitive from a price standpoint, an overall price standpoint, and almost all of them are doing external -- internal and external financing like an HFD. So they're really working. It's not to say everybody is on the same page and some retail doctors are doing this as well, but DSOs kind of en masse are taking that digital orthodontic approach and then being very patient sensitive in terms of how do they get that patient into treatment. And that's just a great example of the market opportunities that's there, but doing it in a way that really tries to get those potential patients excited about treatment. Operator: Our next question comes from Vik Chopra at Wells Fargo. Vikramjeet Chopra: I just want to confirm that you're still confident in your 5% to 15% growth targets that you laid out in your LRP. And if so, is mid-single-digit top line growth on the table for next year? Joseph Hogan: Vik, we're sticking with our 5% to 15% plan for the future. That hasn't changed, and we really believe the business can do it. Operator: Our next question comes from Michael Ryskin at Bank of America. Michael Ryskin: I'll just ask one. You called out some of the geographic mix shift in terms of how that impacted ASP as you went through the year between Americas and China and EMEA. You also had an FX tailwind that I think, I mean, actually started as a headwind in 1Q, kind of was essentially neutral in 2Q, and it became more of a tailwind in 3Q. And then I look at the sort of like list of reported ASPs, it's been relatively consistent in the $1,240, $1,250 range. So if you adjust for some of that FX becoming more and more favorable as we go through the year, there is -- it does look like the underlying ASPs are a little bit weaker. Is that purely just attributed to the geo mix and maybe product mix? Or is there anything else going on there you can point to? John Morici: Yes, Michael, this is John. So when you look at a like-for-like on, say, Europe or like-for-like within the U.S., actually ASPs are up on a quarter-over-quarter basis. We just have as such -- we're very pleased with the volumes that we saw in some of these emerging markets, like China and so on for us. It's just that the ASP is lower. And that's the effect that we saw. So despite the FX and everything else, it's that country mix that drives that ASP lower. Had we not -- if you took China out, our ASPs would have been up significantly or pretty well from Q2 to Q3. It's just that you've got that country mix piece of it that comes in. And then you see the converse of that in Q4, where you have less China in Q4, more Europe, as an example, there's just a difference in ASP and you will see an ASP improvement as we go from 3Q to 4Q. Operator: Our last question comes from Erin Wright at Morgan Stanley. Erin, your line is open. Joseph Hogan: Erin, sorry, we can't hear anything. Shirley Stacy: Yes, happy to circle back. Operator: He has left. Shirley Stacy: Okay. Thank you, operator. I think we'll go ahead and close off the conference call. So thank you, everyone, for joining us today. We appreciate it and look forward to the opportunity to meet with you at upcoming investor conferences and industry events. If you have any follow-up questions, please contact Align Investor Relations. And I hope you have a great day. Thanks. Operator: Thank you. This concludes today's conference, and you may now disconnect your lines at this time. Thank you for your participation.
Operator: Good afternoon, ladies and gentlemen, and welcome to Verra Mobility's Third Quarter 2025 Earnings Conference Call. My name is Towanda, and I will be your conference operator today. This call is being recorded. [Operator Instructions] I would like to turn the presentation over now to your host for today's call, Mark Zindler, Vice President of Investor Relations for Verra Mobility. Please go ahead, Mr. Zindler. Mark Zindler: Thank you. Good afternoon, and welcome to Verra Mobility's Third Quarter 2025 Earnings Call. Today, we'll be discussing the results announced in our press release issued after the market closed along with our earnings presentation, which is available on the Investor Relations section of our website at ir.verramobility.com. With me on the call are David Roberts, Verra Mobility's Chief Executive Officer; and Craig Conti, our Chief Financial Officer. David will begin with prepared remarks, followed by Craig, and then we'll open up the call for Q&A. Management may make forward-looking statements during the call regarding future events and expectations, 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 risk factors. These factors are described in our SEC filings. Please refer to our earnings press release and investor presentation for our cautionary note on forward-looking statements. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today, and we do not undertake any obligation to update forward-looking statements. Finally, during today's call, we'll refer to certain non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measure is included in our earnings release, quarterly earnings presentation, and investor presentation, all of which can be found on our website at ir.verramobility.com. With that, I'll turn the call over to David. David Roberts: Thank you, Mark, and thanks, everyone, for joining us. Before I dive into our consolidated financial results, I'll start with an update on our automated photo enforcement contract with the New York City Department of Transportation, which will help contextualize our third quarter financial performance and our revised guidance for the year. We are actively working with the New York City Department of Transportation to finalize the new automated enforcement contract, which was announced at the end of March 2025. As we work to finalize the new contract, we are now in a position to share the key financial expectations. We expect that the new contract will have a 5-year term, with an option for a 5-year renewal and an estimated total contract value of $963 million. We expect annual service revenue to grow from about $135 million in 2024, to a range of $165 million to $185 million by 2027. Furthermore, the New York City Department of Transportation has elected to purchase its own equipment, which is expected to add $20 million to $30 million in product revenue in both 2026 and 2027. Craig will cover additional financial details in his prepared remarks. In parallel with working to finalize the new contract, the New York City Department of Transportation has instructed Verra Mobility through a change order process to install up to 250 red-light cameras by year-end 2025, as a part of the legislatively authorized expansion. The new red-light cameras are expected to generate approximately $30 million of revenue in 2025, of which about $10 million is expected to be product revenue and $20 million is expected to be installation services revenue. The red-light camera expansion program started in the third quarter, and consequently, we generated $17 million of revenue in conjunction with the red-light camera installations in the third quarter, of which approximately $6 million was product revenue and about $11 million with installation services revenue. We look forward to continuing to serve the New York City Department of Transportation and the citizen safety priorities of Vision Zero. This program has been demonstrated to improve safety on New York City's roads as evidenced by the data showing reduction in crashes and fatalities. Based on 2024 reports published by the New York City Department of Transportation, daily violations at speed camera locations have decreased 94% since the start of the program in 2014. Additionally, the average daily number of red-light running violations issued at camera locations has declined by 73% since the program began in 1994. We look forward to continuing to support New York City's safety mission. The contract is strategically important, and we believe a source of long-term value creation for Verra Mobility. Shifting now to our third quarter consolidated financials, we delivered a strong quarter with all of our key financial measures ahead of our internal expectations. Total revenue for the quarter increased 16% over the same period last year to $262 million, with all three business segments meeting or exceeding their respective internal plan. The aforementioned New York City red-light expansion change order was a key catalyst contributing $17 million of revenue for the quarter. Moreover, adjusted EPS increased 16% over the prior year period, driven by our operating performance, prior period share repurchases, and the reduction in our interest rate on our term loan debt. Moving on to segment level financials. Commercial Services third quarter revenue and segment profit increased about 7%, respectively, over the prior year period. Rental Car or RAC tolling increased 7% over the prior year period, driven by increased travel volume and product adoption as well as higher tolling activity compared to the third quarter of last year. The growth in RAC tolling was partially offset by a decline in fleet management revenue of about 3% compared to the third quarter of 2024, due to the customer churn that we had discussed on our second quarter earnings call. Next, moving on to the macro environment and the implications for our Commercial Services business. As we discussed on our second quarter earnings call, travel demand stabilized and grew modestly in Q3 over the prior year quarter. Third quarter TSA volume increased about 1% over the third quarter of last year, and year-to-date TSA volume is about the same as 2024. Based on the commentary from the major airlines, we anticipate solid fourth quarter travel demand at levels slightly ahead of our guidance provided during our second quarter earnings call. Moving on to Government Solutions. Total revenue increased 28% over the third quarter of 2024. Total revenue from New York City, our largest government solutions customer, increased 46% over the third quarter of 2024, driven by the new red-light camera installations. Additionally, service revenue increased 11% outside of New York City driven by expansion from existing customers and new cities implementing photo enforcement programs. International product sales increased $4 million over the third quarter of 2024, rounding out the year-over-year growth in revenue. Next, I'd like to highlight two important pieces of legislation that were passed during the quarter. First, California passed a work zone speed pilot that is expected to deploy up to 35 camera-based systems on state highway construction or maintenance areas. California also reformed its red-light camera enforcement program by shifting the violation from criminal to civil, reducing the fine amount and using certain program operating requirements. These reforms bring California's program more in line with other state safety programs, and we believe they will create additional positive momentum for automated enforcement. We estimate that these two legislative authorizations add an incremental $140 million in total addressable market, the majority of which is driven by the red-light camera reforms and the legislation. This additional addressable market opportunity increases our incremental TAM to approximately $365 million, with the potential to expand to $500 million if California passes additional enabling legislation. Contracted bookings in Government Solutions continued to be a source of strength in the third quarter. We entered into bookings of about $14 million of incremental annual recurring revenue based on a full run rate, bringing the trailing 12 months total to about $51 million. Notable third quarter bookings include a school bus stop-arm program in Seattle, Washington, a speed program in Phoenix, Arizona, expansion of the school zone speed program in Auburn, Washington, and a new red-light safety program in Modesto, California. Additionally, subsequent to the end of the quarter, we were notified by San Jose, California, of the intent to award the City's Speed Safety Program to Verra Mobility. We are incredibly honored to partner with the City of San Jose to bring this critical safety technology to the community. This award marks our third California Speed Enforcement Award, following San Francisco and Oakland. We anticipate the three remaining pilot cities, Los Angeles, Glendale and Long Beach to launch their respective procurements over the next several quarters. We're pleased to report that the San Francisco speed pilot program is demonstrating its intended effects. Through the first 4 months of operations, a San Francisco Municipal Transportation Agency study that tracks vehicle speeds along 15 of the corridors, where the cameras have been installed on an average 72% reduction in speeding, based on data captured before and after the cameras went into effect. Moving on to T2 Systems, our Parking Solutions business, total revenue increased about 7% for the quarter, driven by a 3% increase in SaaS and services revenue, and a 30% or $1 million increase in product revenue, and these results were in line with our internal expectations. Moving on to our full year outlook. We are increasing our full year 2025 revenue guidance driven by the New York City red-light camera expansion. We expect this expansion will generate an incremental $30 million of total revenue this year. Additionally, note that our expectations for the remainder of the business remain unchanged as we believe the market for automated enforcement is strong, our Parking business turnaround is ahead of our internal plan, and we expect stable travel demand. Today, we're also going to provide a preliminary outlook for 2026. As you may recall, our 2025 guidance to date assume New York City revenue would be flat in 2025 compared to 2024. Our outlook assumes that our new contract with New York City is effective in January 2026. Driven by the change order to our existing contract and the red-light camera installation shifting from 2026 into 2025, we expect total consolidated revenue to moderate to mid-single digit growth in 2026. At the segment level, we anticipate Government Solutions growing high single digits on strong service revenue. Additionally, we expect Commercial Services to grow mid-single digits on modest TSA volume growth combined with the impact of the customer churn we discussed in the second quarter of this year, which impacts FMC revenue through the first half of 2026. Finally, T2 is expected to grow low to mid-single digits next year on moderate SaaS and equipment sales growth. Additionally, we expect adjusted EBITDA margins to decline 250 to 300 basis points on portfolio mix and impacts from the New York City renewal contract. Craig is going to walk through this detail along with the path to margin expansion as we capitalize on the growth opportunities and cost reduction initiatives currently underway across our businesses. In my view, 2026 represents a year of transition between the investments made in the business over the past 2 years and the benefits we expect to realize. Over a multiyear period, beginning in 2027, we are poised to deliver strong growth and margin expansion, driven in large part by the growth in forward momentum in Government Solutions and our ability to execute at scale that business -- as well as the continued growth opportunity in commercial services and T2. Moving on to capital allocation. Due to the conviction in our long-term growth outlook and margin expansion initiatives, our Board of Directors authorized a $150 million increase to our existing stock repurchase program that is available through November of 2026. This brings the available repurchase authorization to $250 million and we expect to commence the buyback in the near term, subject to market conditions and other factors. Craig, I'll turn it over to you to guide us through our financial results, the New York City contract update, our revised 2025 financial outlook, and our preliminary perspectives for 2026. Craig Conti: Thank you, David, and hello, everyone. We appreciate you joining us on the call today. We'll turn to Slide 4, which outlines the key financial measures from the consolidated business for the third quarter. Our Q3 performance, which included 12% service revenue growth and 16% total revenue growth year-over-year exceeded our internal expectations. Service revenue growth, which consists primarily of recurring revenue, was driven by the change order for New York City red-light expansion program and service revenue growth outside of New York City in the Government Solutions business as well as increased revenue from RAC tolling and European operations in the Commercial Services business. At the segment level, Government Solutions service revenue grew 19% year-over-year. Commercial Services revenue increased by 7% over the prior year. In T2 Systems SaaS and services revenue increased 3% compared to the third quarter of 2024. Total product revenue was about $19 million for the quarter, Government Solutions contributed roughly $14 million with $6 million coming from the New York City red-light expansion and $8 million from international product sales. T2 delivered about $4 million in product sales overall for the quarter. On the profitability side, our consolidated adjusted EBITDA for the quarter was $113 million, an increase of approximately 8% versus the same period last year. We reported net income of $47 million for the quarter, including a tax provision of about $18 million, representing an effective tax rate of approximately 28%. GAAP diluted EPS was $0.29 per share for the third quarter of 2025, compared to $0.21 per share for the prior year period. Adjusted EPS, which excludes amortization, stock-based compensation and other nonrecurring items was $0.37 per share for the third quarter of this year compared to $0.32 per share in the third quarter of 2024, representing 16% year-over-year growth. The adjusted EPS growth was driven by the increase in adjusted EBITDA, a sustained reduction in interest expense driven by our prior year debt repricing efforts and our share repurchases in 2024. Cash flows provided by operating activity totaled $78 million, and we delivered $49 million of free cash flow for the quarter, in line with our internal expectations. Turning to Slide 5, we generated $416 million of adjusted EBITDA on approximately $943 million of revenue for the trailing 12 months, representing a 44% adjusted EBITDA margin. Additionally, we generated $153 million of free cash flow or a 37% conversion of adjusted EBITDA over the trailing 12 months. Next, I'll walk through the third quarter performance in each of our three business segments, beginning with Commercial Services on Slide 6. CS year-over-year revenue growth was 7% in the third quarter. RAC tolling revenue increased 7% or about $5 million over the same period last year, driven by increased product adoption and tolling activity, which benefited from a 1% increase in U.S. travel volume over the prior year quarter. Our FMC business declined 3% or about $500,000 year-over-year, driven by prior period customer churn. Additionally, our European operations contributed $2 million of growth compared to the third quarter of 2024. Commercial Services segment profit increased 7% over the prior year, representing a 67% segment profit margin. The margin improvement was largely driven by operating leverage created by improved travel volume and increased product adoption. Turning to Slide 7, Government Solutions saw strong service revenue growth in the quarter, driven by $11 million of installation service for the new red-light camera expansion in New York City as well as 11% service growth outside of New York City. The growth was broad-based across all customer use cases with particular strength in speed, bus lane and school bus stop-arm enforcement programs. Total revenue grew 28% over the prior year quarter, benefiting from about $14 million in product sales, of which $6 million were generated from New York City red-light camera sales and $8 million from international product sales. In total, product sales increased by $9 million over the same period last year. Government Solutions segment profit was $31 million for the quarter, representing margins of approximately 26% compared to 29% in the prior year period. The reduction in margins versus prior year was primarily due to readiness investments made to prepare the company for execution on the pending New York City contract. Let's turn to Slide 8 for a view of the results of T2 Systems. We generated revenue of $22 million and segment profit of approximately $4 million for the quarter. SaaS and Services sales increased 3% compared to the prior year, while product revenue increased 30% or $1 million, compared to the third quarter of 2024. Included within SaaS and services, recurring SaaS revenue increased low single digits compared to the third quarter of 2024. Let's turn to Slide 9 for a view of the balance sheet and take a look at net leverage. We ended the quarter with a net debt balance of $843 million, which reflects the strong free cash flow we generated over the first 9 months of the year. Net leverage landed at 2x, and we've maintained significant liquidity with our newly expanded $150 million undrawn credit revolver. Our gross debt balance at year-end stands at about $1 billion, of which approximately $690 million is floating rate debt. Subsequent to the end of the quarter, we executed a successful refinancing of both our ABL revolver and our term loan. The market for institutional debt is strong relative to recent historical levels, so we took action well in advance of our term loan going current. We increased the revolver limit from $125 million to $150 million and also added an accordion feature to provide an additional $75 million of liquidity if ever needed in the future, resulting in a potential limit of $225 million. Additionally, the maturity of the revolver was extended 5 years to October of 2030. Given the current favorable institutional debt market conditions, we proactively refinanced our term loan on extending the maturity 7 years to October of 2032, and lowered the interest spread by 25 basis points to 2% flat. Now let's turn to Slide 10, and have a look at full year 2025 guidance. Based on our year-to-date results and our outlook for the fourth quarter, we are increasing full year 2025 revenue guidance and affirming all other guidance measures. As David discussed, New York City has authorized the installation of up to 250 additional red-light cameras in 2025 under our existing contract, which is expected to deliver about $30 million of revenue, of which about $10 million is expected to be product revenue and $20 million is expected to be installation service. The adjusted EBITDA generated from these camera sales is expected to be offset by onetime readiness investments to support the new contract requirements in New York City. The readiness investments include the development of a world-class real-time camera health dashboard, cloud migration activities for certain legacy data, and minority and women-owned business enterprise subcontractor ramp-up costs. As a result of these investments, we are not increasing adjusted EPS or free cash flow guidance for the balance of 2025. Excluding the New York City camera installations, our perspective on guidance remains unchanged. The updated full year 2025 guidance ranges are as follows: we now expect total revenue in the range of $955 million to $965 million, representing approximately 9% growth at the midpoint of guidance over 2024. The remainder of the financial guidance remains unchanged and is as follows: we expect adjusted EBITDA in the range of $410 million to $420 million, representing approximately 3% growth at the midpoint over 2024. We anticipate an adjusted EPS range of $1.30 to $1.35 per share. Free cash flow is expected to be in the range of $175 million to $185 million, representing a conversion rate in the mid- to low -- low to mid-40th percentile of adjusted EBITDA. Moving on to the segment level. Government Solutions is expected to generate low to mid-teens total revenue growth for 2025, driven by the new camera installations for New York City, along with the expansion of camera installations with existing customers and new customers awarded in prior quarters. We continue to anticipate that Parking Solutions revenue will be about flat with 2024 levels. We expect SaaS revenue to grow low single digits, offset by a decline in installation of professional service revenue on roughly flat product sales. Based on assumption that travel volume will be only slightly elevated in 2025 compared with 2024, we anticipate Commercial Services growing at the high end of mid-single digits. We anticipate CS revenue, adjusted EBITDA and margins to decline sequentially in the fourth quarter, consistent with historical norms based on travel trends. Our key assumptions supporting our adjusted EPS and free cash flow outlook can be found on Slide 11. Turning now to Slide 12. I wanted to share the key financial assumptions for the New York City contract, we're in the process of finalizing, along with some updated perspective on the overall Government Solutions business. On March 31 of this year, New York City announced that Verra Mobility was selected as the vendor for their automated enforcement program with an initial term of 5 years with a 5-year extension option. The estimated total contract value for the first 5 years is $963 million, and we are currently in final contract negotiations with New York. We anticipate that New York City will again purchase its own equipment from Verra Mobility with all installation and relocation services included in service revenue and additive to the scope of the contract relative to our existing contract. We expect to sell and install about 1,000 incremental new red-light and fixed bus lane cameras over the next 2-plus years. New York City service revenue is expected to grow high single to low double digits through 2027, then to level off in 2028 and beyond. New York City product sales post-2027 are expected to be less than $5 million per year. Total Government Solutions service revenue is expected to grow high single to low double digits over the next several years, leveling at the low end of high single digits, following the completion of the New York City installations. And lastly, Government Solutions segment profit margins are expected to dip in 2026, to the low to mid-20% range on repricing and primarily due to the contract requirement that at least 30% of the total contract value was invested in minority and women-owned subcontractors. We anticipate that beginning in 2027, productivity improvements and platform consolidation will drive margin expansion and approach 30% in 2028 and beyond. Now let's move on to a brief review of how we expect 2026 will play out, incorporating preliminary estimates for commercial services in T2 on Slide 13. I'll remind you that our annual operating plan is not yet complete, so these estimates may change. At the consolidated level, due to the New York City red-light camera installations shifting forward into 2025, we're anticipating mid-single-digit revenue growth overall in 2026. Additionally, we're anticipating a 250 to 300 basis point reduction in adjusted EBITDA margins due to a combination of portfolio mix in the New York City renewal contract, partially offset by a year-over-year reduction in ERP implementation costs. Let me drill down a layer on both of these items. First, on the portfolio mix. This is simply the impact of Government Solutions outpacing Commercial Services growth, which has an approximate 25 basis point impact on consolidated adjusted EBITDA margins. More importantly, the New York City renewal contract is expected to result in an approximate 250 to 300 basis point decline in margins, driven by service pricing changes established through the competitive procurement process in the minority and women-owned subcontractor requirements. Adjusted EPS is expected to increase low to mid-single digits year-over-year despite the investment in ramp-up costs in Government Solutions, largely due to the expanded stock repurchase plan announced today. Rounding out the business segments. We expect Commercial Services to grow mid-single digits due to our expectation that TSA volume will grow approximately 1% to 2% over 2025, just as it has year-to-date, so far this year. Additionally, we expect the fleet business growth to moderate to low single digits due to the prior period churn in our FMC business, which will anniversary in the second quarter of 2026. Segment profit margins for Commercial Services are expected to be up about 25 to 50 basis points due to volume leverage and the reduction of the ERP spend in 2026. Finally, we anticipate that T2 Systems will grow low to mid-single digits with segment profit margins up 50 to 100 basis points over 2025. Looking out beyond 2026, we expect that the Government Solutions platform consolidation that we've discussed over the past several quarters will be a catalyst for margin expansion and general productivity enhancements in 2027 and beyond. This platform, which is highlighted on Slide 14, is an IT initiative to deploy our latest smart mobility platform, termed MOSAIC, internally. MOSAIC is a cloud-based, fully secured application intended to streamline the end-to-end processing of traffic incident events. The platform is expected to provide numerous benefits such as flexible architecture that improves project deployment pipelines, enhanced automation processing, and other productivity improvements and operating efficiencies, and as such, is expected to be a key driver of Government Solutions margin expansion in 2027 and beyond. As David discussed, our Board authorized the expansion of our existing stock buyback plan by an incremental $150 million, bringing the total authorization up to $250 million. We expect to commence the stock repurchases in the near term, subject to market conditions and other factors. We are incredibly excited about the future trajectory of the business. As David noted, finalizing the updated New York City contract provides financial predictability and a source of value creation. Additionally, we are poised for growth and profitability across our businesses as the benefits of investing in our platform yields the intended scale and margin benefits. This concludes our prepared remarks. Thank you for your time and attention. At this time, I'd like to invite Towanda to open the line for any questions. Towanda, over to you. Operator: [Operator Instructions] Our first question comes from the line of Faiza Alwy with Deutsche Bank. Faiza Alwy: Thank you so much for giving us all that detail around the New York City contract, really helpful, and just giving us a longer-term view there. I guess I wanted to double click on the margins, as you can imagine. So Craig, you pointed to a few different things. It sounded like there were some start-up costs that you're incurring this year. And then it sounds like there are some continuing costs next year and beyond and you mentioned the subcontracting with the minority and women-owned businesses. So I guess, just parse that out to the extent you can further quantify how much of this might be onetime versus continuing. That would be really helpful. Craig Conti: Yes, you bet. So let me start first with 2025. So when we talk about those onetime readiness costs, that truly is one time. And the scope of that is approximately $5 million to $10 million depending on where it shakes out. And that's all baked into the guidance. But I think the crux of your question is let's move into 2026. So at the total Verra Mobility level, I expect margins to come down about 250 to 300 basis points, okay? And there's three buckets I want you to think about there. The first bucket is the portfolio mix, which simply means that the GS business, which is a lower-margin business than CS, as you well know, is growing faster than CS in 2026 as compared to '25. That's about 25 basis points at the consolidated level. That's negative. Then we pick up about 25 to 50 basis points on the positive between two things. Number one is our CS business. We'll still have volume leverage and accrete margins as we've talked about. I don't see any change there. And also, the ERP spending, as we've discussed in the past, the thrust of that spend will be behind us. So we'll get some benefit there. So I get 25 to 50 basis points back. And then the New York City renewal in totality, I expect to be a 250 to 300 basis point reduction in 2026, and that's really two pieces. The first is the price normalization. This was a competitive contract, as everyone well knows. And then the second piece is the cut in of the minority and women-owned business requirements. Now those minority and women-owned business requirements is a recurring cost and that will be to the tune of $20 million to $25 million per year that we did not have previously as we look out for the life of contract. Faiza Alwy: Understood. And just a clarification, are you going to see -- is there an incremental CapEx spend that's maybe coming from purchase of these cameras? Or does that go through the income statement? Craig Conti: Let me be really clear on this one, Faiza, it's a great question. Absolutely not. Absolutely not. So the expectation here is that New York is once again going to purchase their own capital as they have in the past. Faiza Alwy: Okay. Got it. And then just a follow-up on this point right around the competitive process and the margin dilution that you're seeing from this contract. I know you have previously talked about, as the TAM has increased, you've made some investments in the business. Like are you seeing a similar outcome with some of these other contracts that you're signing with other municipalities or district -- or jurisdictions? And like how should we think about margins overall beyond just the New York City impact in the Government Solutions business? David Roberts: Yes. I would say -- this is David. I would say that New York City, obviously, given its size and scale makes it -- the impact there is significantly higher. Two, I would say that in general, we are competing at very similar levels across the board that we had in the past. And then what I would say is outside of New York, only a few other major metropolitan areas at this time have the same level of requirements around the use of, for example, for minority and women-owned businesses. So we're not seeing that pop up all across the country and things like that. So I would look at New York City as a bit of a -- as it always has been a bit of a unique one. Craig Conti: And I would add on to the end of that, as you asked about go-forward margins, I think we said on this call a couple of times that the GS business is a high 20s, 30% margin business. Clearly, it's not going to be that in 2026, and we know that. But that has not changed. That has not changed. So the investments that we've made in previous years and a little bit this year to consolidate our platform and I wanted to give some updated perspective on what that is today called MOSAIC will get us back to that level of profitability. So we feel very good about that. Operator: Our next question comes from the line of Keith Housum with Northcoast Research. Keith Housum: Appreciate the color on New York City here. Any color you can provide on '26 for the cadence of the cameras? Will they be pretty even throughout the quarter -- through the year or you guys need to build off throughout the year? David Roberts: It's -- we don't know yet. I mean, we'll get to the end of the year and do the planning with it, but it will probably be relatively smooth throughout the year, but there's always fits and starts depending on weather and other things that may go along within the city. Craig Conti: And I think the only thing I would say is that is if we look across all of the years, the thrust of the installs will be done by 2027, is our current -- is where we are currently with a few trickling into 2028. But yes, as David said, we're not at that level of detail where I could kind of give you a view by quarter. Keith Housum: Got you. And then Craig, you might have just mentioned it, what do you anticipate the benefit being from MOSAIC in 2027 and beyond? Craig Conti: I think that we will -- for the... David Roberts: Say, 2025, not 2026. Craig Conti: Yes, he said '27 and beyond, right? I mean the '27 and beyond you are asking. David Roberts: 2025, sorry. Keith Housum: Yes. Craig Conti: Yes. Here's how I think about that is, I'm actually going to back it up to 2026. I think this is about 1.5 points to 2 points of margin in the GS business alone until we get to, I'll call it, the level altitude here, which is probably out in the end of 2028. So when you look at the New York City slide that I put and you kind of look in the upper right, the major driver of bringing the GS margins from the low to mid-20s back up to those high 20s, approaching 30% by 2028 is MOSAIC. So I would level load it across that time period. Keith Housum: Okay. That's helpful. Appreciate it. In terms of the share repurchases, you guys have had a share repurchase outstanding $100 million out there previously for a while. But it sounds like you guys are ready to act on the combined 250 years shortly, correct? As opposed to previously you guys were more opportunistic and you hold for dry powder. Craig Conti: The short answer is yes. The slightly longer answer is we always have to say, obviously, subject to market conditions. But we feel pretty good about taking an active role on that, Keith. Operator: Our next question comes from the line of Louie DiPalma with William Blair. Louie Dipalma: Congrats on inching closer to the finalization of the contract. I was wondering what remains in terms of establishing the definitive contract? And do you have a sense of the timing? David Roberts: At this point, what I would call it is primarily administrative working inside of the process that the city has laid out for contract approval. There's not really any significant terms and conditions that we're working through at this point. I would expect it relatively short order. Louie Dipalma: And for Craig, you provided great detail on the 3-year Government Systems revenue and EBITDA outlook. I think, it implies a 3-year government systems EBITDA growth CAGR of approximately 7%. I was wondering what does the 3-year outlook assume for CapEx? I don't think you provided any CapEx assumptions, but anything regarding CapEx or the total company free cash flow conversion in 2028 would be helpful. Craig Conti: Yes. I won't go into 2028 free cash flow conversion just yet, Louie. We're still kicking around a potential date for an Investor Day, which will probably be a great time to do that. But as I think of 2026, I think the CapEx spend looks a lot like it did in 2025. And I got to say, I'm really proud of that because we're going to have another year of -- in 2026 for non-New York City high single-digit growth, and I think we'll have a CapEx total that looks a lot like the one that we put in front of investors this year. So as we continue to go out, all I would say is directionally, I expect that our CapEx as a percentage of service revenue, both for the company and for GS, everything I see today, we should have hit the high watermark here in 2025. That's the view I have today. Obviously, when I learn more, I can tell you a little bit more. Louie Dipalma: Great. And another New York City related question for David or Craig, you both discussed installing 1,000 incremental cameras over the next 2 years. Does that total include all of the upgrades for the existing cameras. And do you still plan on upgrading the entire fleet of existing cameras? Or does that 1,000 include everything? Craig Conti: Well, Louie, I can give you most of that. It does not include the upgrades. That 1,000 does not include the upgrades. However, when I went into the financial, we kind of did the CAGR discussion just a minute ago, that does include the upgrade. So those upgrades will be more. In terms of a number, I really want to see a final contract from New York because that's really at the customer's option. But the 1,000 does not include upgrades. It also doesn't include relocations of cameras from one spot to another. Louie Dipalma: Okay. And one final one. From a high level, how does the functionality of the new cameras compared to the cameras that you've been -- you were installing 5 years ago. Are there like many new features with the cameras? And is there the potential to add on like new revenue lines. And I'm not talking specifically about the New York market, but even for other markets, like what's the additional functionality with the latest generation of cameras? David Roberts: I would say primarily two things. One is obviously the resolution and the quality of the image detection gets much higher. So think of your iPhone 17 versus the iPhone 12 or whatever, just the quality of the images and video is significantly better. That's number one. The ability to shoot across other lanes. I would say a lot of the investment we made is into the platform that Craig had mentioned MOSAIC, which is functionality that will deliver a much more seamless, much more efficient capability for our customers, look at data, data dashboards, making decisions. But the third point is, yes, in the world of cameras, that is the direction, which is a single camera that can do 5, 6 or 7 things, not just one thing. And that's what we would anticipate moving with that type of technology going forward. Operator: Our next question comes from the line of David Koning with Baird. David Koning: I guess I was wondering, I was looking at the government revenue, if you take total less the New York, so total service less New York service, and when you do that, next year's growth is good, 7%, 8% when you just kind of take your numbers. The year out is really good. It's like 16% in that acceleration -- okay. I guess what's behind that? I mean, that's an amazing acceleration. And is that part of the EBITDA margin expansion because your higher margin work, assuming -- I assume, is going to be accelerating into '27. David Roberts: Yes. I mean, so the growth -- that's exactly right. So if you think -- that's why we -- in my remarks, Dave, we talked about there's a little bit of a reset because yes, because of the size and what's happening in New York, which is awesome, awesome stuff, it's just going to have a bit of a drag next year. But past that, when you get past the implementation of our technology upgrades as well as all of the winning that we have been doing in the marketplace, our win rate has been significantly higher over the last 12 months that was previously we basically won all of the opportunities so far in California. We're winning great opportunities in school bus. So what I would say is -- but remember, there is a time to book and then a time to realize revenue, which does take a little bit. So what you're seeing is all of the winning in the backlog turning into revenue as we get into early or mid-part of next year, that translated into real growth in '27. David Koning: Got you. Okay. No, that's great to see. And then I guess my follow-up, in commercial, you had the second toughest comp of the year, yet you accelerated growth despite the fleet management headwind, and so I'm wondering how you had the best growth for the year so far in Q3 despite both the tough comp and the fleet management. It seems like something is going really well there. Craig Conti: Yes. David, you get annoy with me here on fleet. I'm going to tell you again, it wasn't as bad as I thought. And basically, what that means is tolling activity outside of the churn that we talked about last quarter was as high as we've seen probably in the last 5 or 6 quarters. So the churn didn't have as large of an impact. Let's put it that way. And I do not expect that will be the case as we go into the fourth quarter. So if you remember, when we were -- all of us, if we remember, 90 days ago, we talked about, I expect that fleet business to have a mid-teens year-over-year negative [ beat ]. I do expect that to come in the fourth quarter. And quite frankly, I expected in the third quarter. However, that tolling activity picked up. But the RACs have been strong. Sitting here today, we are at -- we had a good solid Q3 in TSA throughput at [ $101 million ]. On a year-to-date basis, we're just north of [ $100 million ]. And then the month of October has been really strong. Last I looked on a month-to-date basis, it was plus 4%. So I feel pretty good about how the business is performing. But that fleet -- that fleet thing is going to show up in the fourth quarter, a little bit more than the last quarter. Operator: Our next question comes from the line of Chris Zhang with UBS. Chao Zhang: So I wanted to double-click on California a little bit, and I appreciate the legislative update, and the updates across different cities and especially congrats on the San Jose Award. I'm just wondering from the 2026 guidance perspective, is it fair to think that anything from what you've been awarded, including San Jose in the guide, whereas the upcoming pilots or especially -- specifically Los Angeles, Glendale, and Long Beach, those are not in the guidance yet. And can you give us a sense of what's your overall scale in California and what are the potential opportunities you have visibilities to especially those private cities? Craig Conti: Yes, Chris, first of all, welcome. Second of all -- yes. This is Craig. I'll give you the financial piece of that, and then I'll let David talk about the commercial motion that we've seen in California. So the ones that you just spoke of are pilots, right? So those pilots, I think, in totality for the state of California, all the pilots amount to about $10 million of ARR, and roughly half of those have only gone out for RFP. So to the degree that we won 100% of the pilots that have come out to RFP, as David just talked about, yes, that's in our guide, but it's not a significant amount of money. The other thing is, when you're talking about a new modality even in a state that's an existing customer, typically the time from winning of the contract or the award of the contract to revenue is 12 to 18 months. So even if those had been bigger numbers, the answer would be implicitly, it's in the guide, but it's not a really big number. But outside of that, with the red-light, I think, maybe, Dave, do you want to talk about that? David Roberts: Yes. I mean I think as I mentioned in my remarks, we still have a couple of pending from the school zone speed program, which we will anticipate first part of next year. The red-light is significant. So we're the largest provider of red light in the state of California currently. But historically, it had always had some unique administrative challenges to a way that it would fully -- with multiple different challenges that I mentioned some in my remarks that I won't go back into. But -- so we just look at that as an opportunity to reshape the way that we're serving customers already. And because they've removed some of the administrative barriers, we would anticipate some of those programs to expand. We feel like we're in -- California is really something that we've worked really, really hard on as an organization, an enormous amount of focus, partnering with our government relations as well as our local teams as well to produce what we consider is going to be a great outcome for many, many years to come. Operator: Thank you. Ladies and gentlemen, that brings our Q&A session to the end. And that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Greetings. Welcome to Spok Holdings Third Quarter 2025 Earnings Results Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Al Galgano, Investor Relations. Thank you. You may begin. Al Galgano: Hello, everyone, and welcome to Spok Holdings' Third Quarter 2025 Earnings Call. I am joined by Vince Kelly, Chief Executive Officer; Mike Wallace, Chief Operating Officer; and Calvin Rice, Chief Financial Officer. I want to remind everyone that today's conference call may include forward-looking statements that are subject to risks and uncertainties relating to Spok's future financial and business performance. Such statements may include estimates of revenue, expenses and income as well as other predictive statements or plans, which are dependent upon future events or conditions. These statements represent the company's estimates only on the date of this conference call and are not intended to give any assurance as to actual future results. Spok's actual results could differ materially from those anticipated in these forward-looking statements. Although these statements are based upon assumptions that the company believes to be reasonable, they are subject to risks and uncertainties. Please review the Risk Factors section relating to our operations and the business environment, which are contained in our third quarter 2025 Form 10-Q and related documents filed with the Securities and Exchange Commission. Please note that Spok assumes no obligation to update any forward-looking statements from past or present filings and conference calls. With that, I'll turn the call over to Vince. Vincent Kelly: Thank you, Al. Good afternoon, everyone, and thank you for joining us for our third quarter 2025 earnings call. I'm proud of the performance our team was able to deliver in the third quarter, especially after the exceptional performance in the second quarter, where we saw several new customer contracts get accelerated into that period and despite the seasonal headwinds we typically face in the slower summer months. On a year-to-date basis, we continue to make progress in key performance areas, including net income, adjusted EBITDA and cash generation, wireless ARPU trends, software revenue growth and gross backlog levels. Based on our solid performance through the first 9 months of the year and our visibility into our very robust product sales pipeline, we are reaffirming our guidance. We have advantages over the competition in our core healthcare software contact center space, including long-term and deep relationships with the top healthcare systems in the nation who continue to purchase from us on a regular basis, offering customers an integrated platform as opposed to multiple point solutions and continuing to invest in and enhance our platforms consistent with what our customers are requesting. Spok is viewed as an indispensable partner by many of our customers. In other words, they need Spok to efficiently carry out their day-to-day operations. Later in the call, Mike Wallace, our Chief Operating Officer, will lay out for you the product offerings that we have built that we believe will allow us to create significant shareholder value into the future. Let me also take this opportunity right upfront to remind everyone that our mission remains solidly unchanged. That is, to generate cash and return capital to our stockholders over the long term while responsibly investing in and growing our business. As we've demonstrated through our performance since our strategic pivot more than 3 years ago, we believe we are on a sustainable path to achieving that goal. So today, we'll share with you an update on how our strategic business plan is progressing in support of this goal as well as our financial results for the quarter. I'll start by reviewing the agenda for today's call. The order will be as follows: we'll begin by providing a review of our company performance for the quarter. I will then turn the call over to Mike Wallace to review some of our quarterly sales and operational highlights as well as give you an overview of our product offering. Then our Chief Financial Officer, Calvin Rice, will review our third quarter financial highlights and financial guidance for 2025. I'll then wrap the call, and we'll take your questions as time allows. As I said upfront, we're proud of what the Spok team has been able to accomplish through the first 9 months of the year. Year-to-date highlights include strong levels of adjusted EBITDA, which covered our quarterly dividend and capital expenditure requirements; continued sales pipeline growth, providing confidence in our outlook; an increase in cash balances, which we believe hit a low point in the first quarter and will continue to build through the remainder of the year, consistent with past year trends; a 5.2% increase in software revenue that includes triple-digit growth in managed services revenue on a year-over-year basis; improved wireless trends as net unit churn dropped by 20 basis points from the prior quarter; continued expansion of our wireless average revenue per unit, further reflecting the impact of prior pricing actions and sales of our encrypted HIPAA-compliant alphanumeric GenA pager; and continued discipline in expense management as we saw flat year-over-year adjusted operating expense levels while supporting the increase in software sales and making the necessary investments in product research and development to fuel future growth. In short, we're very pleased with our performance in the first 3 quarters of the year and believe that these results provide a solid springboard for the remainder of the year and for 2026. In the third quarter of 2025, we generated more than $6.6 million of adjusted EBITDA, which more than covered the $6.4 million we returned to our stockholders in the form of dividend distributions. At the same time, we maintained our third quarter research and development investment and believe we are on track to invest approximately $12 million in product research and development in 2025. We believe this investment will fuel future software revenue growth and that our extensive experience selling and operating our established communication solutions will continue to create significant value for stockholders by maximizing revenue and cash flow generation. As I mentioned, Spok has a proud legacy of creating stockholder value through free cash flow generation, and we intend to continue this track record. In fact, over the last 20 years, Spok has returned a total of more than $720 million to our stockholders either through our regular quarterly dividend, special dividends or share repurchases. More recently, since we announced our strategic pivot back in early 2022, Spok has returned nearly $100 million to our stockholders. When you take into consideration our current cash balance, distribution to stockholders, share repurchases, debt repayments and acquisitions since our inception, Spok has generated nearly $1.1 billion of free cash flow. Maximizing cash flow over the long term supports the 3 major tenets of our strategy, which include: number one, continued investment in our wireless and software solutions; number two, continued disciplined expense management; and number three, a stockholder-friendly capital allocation plan. Before I turn the call over to Mike, let me take a moment to review Spok's significant positive attributes. As a leader in healthcare communications, we maintain the largest paging network in the United States, we control significant and valuable narrowband personal communication spectrum, we have a blue-chip customer base of more than 2,200 hospitals, we have created a large portfolio of intellectual property via strategic R&D investments, and we continue to generate significant cash flow and return to our investors on a quarterly basis. Spok delivers the critical communication solutions hospitals rely on every day. Our Spok Care Connect suite of solutions integrates with existing workflows in the hospital and enables them to deliver information quickly and securely into the hands of clinicians who need to act on it wherever they are and on whatever device they're using. From the contact center to the patient's bedside, Spok Care Connect provides directory details, on-call schedules, staff preferences, secure texting and a lot more. We have over 2,200 healthcare facilities as customers, representing the who's who of hospitals in the United States. We have built our solutions over many years and have long-standing valuable customer relationships. And as you probably saw earlier this month, we announced that 9 of the 10 children's hospitals named to the 2025 and 2026 U.S. News & World Report Best Children's Hospitals on a roll, rely on Spok industry-leading secure healthcare communication solutions to support care collaboration and deliver outstanding patient experiences. For over a decade, nearly every hospital named to the Children's Best Hospitals on a roll has relied on Spok solutions. And this news comes on the heels of our announcement that 18 of the top 20 adult hospitals on the U.S. News & World Report listed also rely on Spok. This industry-leading reputation is coupled with the financial strength that nearly 80% of our revenue is reoccurring in nature, and we are a company with no debt, which provides us with significant flexibility. We're a pioneer in healthcare communications with a best-in-class product offering and have built an industry-leading reputation over the years. So at this point, I'd like to hand the call over to Mike to outline our sales performance and give you a brief overview of our product offerings. Mike? Michael Wallace: Thanks, Vince, and thank you, everyone, for joining us this afternoon. As Vince pointed out, timing issues impacted bookings levels during the third quarter after an exceptionally strong second quarter. However, on a year-to-date basis, we continue to make great progress in a number of key areas. As we discuss each quarter, we continue to build a solid financial platform and stockholder-friendly capital allocation strategy, and we remain true to our mission of being a global leader in healthcare communications. Today, I'd like to briefly provide you with a little more visibility into Spok's industry-leading product platform and what gives us confidence as we move forward. The cornerstone of that platform is Spok Console, which streamlines operator workflows and ensures rapid emergency response; Spok Messenger, which integrates with clinical systems to deliver alerts and notifications to the right person on the right device; and Spok Mobile, which empowers care teams with secure HIPAA-compliant messaging at their fingertips. Let's begin with Spok Console, being a secure healthcare contact center solution that serves as the central hub for hospital operator workflows. It gives operators the tools they need to respond promptly to every call and process priority communications. By uniting disparate data systems into a centralized digital directory, Spok Console ensures operators have fast access to physicians, patients and staff and that the right message reaches the right person at the right time. With a modern user-friendly interface, it integrates with the organization's PBX and leading UCaaS systems. Call center agents manage calls directly through the Console software, guided by intuitive screens and color-coded directories that simplify lookups and streamline communication. Spok Messenger is an FDA 510(k) cleared clinical alerting management solution that delivers critical information and updates from nurse call systems, patient monitors, clinical systems and other sources directly to the right care team members on their preferred devices, including pagers, smartphones and voice over IP devices. It intelligently routes, prioritizes and escalates alerts based on roles, schedules and rules, helping to reduce delays and improve response time. Integrating with existing hospital systems, Spok Messenger enables seamless, secure communication across departments and devices. It also delivers near real-time visibility, empowering teams with the transparency they need to track alert delivery and respond with confidence. Designed for reliability and HIPAA compliance, Spok Messenger supports better workflow efficiency, reduces alert fatigue and enhances patient safety. And lastly, Spok Mobile is a secure HIPAA-compliant messaging app that enables clinicians and staff to collaborate quickly and reliably. It integrates with hospital directory information, clinical monitoring systems and on-call schedules to ensure messages and alerts reach the right person on the right device. Spok Mobile supports message escalation based on established priorities and allows users to send notifications directly to providers' mobile devices as an alarm management option. It also maintains a detailed message history to ensure information is readily available for auditing purposes. With role-based messaging, group communication and delivery confirmation, Spok Mobile streamlines workflows and helps care teams stay focused on patient care. In short, we are proud of the product platform that the Spok team has built and believe that these offerings will create significant sales opportunities and drive shareholder value into the future. With that, I'd like to turn the call over to Calvin to review the financials. Calvin? Calvin Rice: Thanks, Mike, and good afternoon, everyone. I would now like to take a few minutes and provide a recap of our third quarter 2025 financial performance, which we reported today. I encourage you to review our 10-Q when filed as it includes significantly more information about our business operations and financial performance than we will cover on this call. Turning to our income statement. In the third quarter of 2025, GAAP net income totaled $3.2 million or $0.15 per diluted share, down from net income of $3.7 million or $0.18 per diluted share in 2024. In the third quarter of 2025, total GAAP revenue was $33.9 million, down from total revenue of $34.9 million in the prior year. Revenue in the current year quarter consisted of wireless revenue of $17.8 million and software revenue of $16.1 million compared to $18.3 million and $16.6 million in the prior year, respectively. With respect to wireless revenue, we saw a 20 basis point sequential improvement in quarterly net unit churn in the third quarter at 1.4%, down from 1.6% in the prior quarter. ARPU increased $0.24 or 3% from the prior year, primarily driven by the continued impact from pricing actions and to a lesser extent, continued sales of our GenA pager. As a reminder, we implemented a 3.5% price increase in September that impacts roughly 50% to 60% of units in service, and that will be fully reflected in fourth quarter revenue. While we believe the demand for our wireless services will continue to decline on a secular basis, as reflected in declining pager units in service, we are hopeful that our focus on pricing and other initiatives like the GenA pager will continue to further offset revenue lost through pager unit decline. Also, we closely manage the expense base for the wireless infrastructure to limit the impact of revenue loss. Turning to third quarter software revenue. License and hardware revenue totaled $1.5 million compared to $2.4 million in the same period of 2024 as a result of lower software license bookings. Total professional services revenue in the third quarter was $5.5 million versus $4.8 million in the third quarter of 2024, up nearly 13% from the prior year period and more than 26% for the first 9 months of 2025. Our outperformance in professional services has been primarily driven by the triple-digit year-over-year growth of our managed services. This service offering provides customers with all necessary implementation and upgrade services for any Spok software products they own over their multiyear term, which is typically 3 years. While managed services are likely to be cost prohibitive to our smaller customers, we continue to see great traction with enterprise-focused customers. Adjusted operating expenses, which excludes depreciation, accretion and severance and restructuring costs, totaled $28.5 million in the third quarter, largely unchanged from the prior year period. During the quarter, increases in research and development expenses, selling and marketing expenses and the cost of product were offset by declines in technology operations expense and G&A costs. Technology operations expense continues to decline as we manage costs in relation to our declining wireless unit totals. Adjusted EBITDA in the third quarter totaled $6.6 million as compared to $7.5 million in the prior year period. Despite the year-over-year decline, adjusted EBITDA levels were sufficient to cover our quarterly dividend. We ended the third quarter with $21.4 million in cash and cash equivalents, which grew from the prior quarter as anticipated. Based on our current outlook, we anticipate cash balances to continue to grow through the end of the year. Moving on to guidance for 2025. Based on performance in the 3 quarters of 2025, we are reaffirming our financial outlook in the year for revenue and adjusted EBITDA. As a reminder, the figures I'm going to discuss today are included in our guidance table in the earnings release. For the year, we expect total revenue to range from $138 million to $143.5 million. Included in this financial guidance is wireless revenue ranging between $71.5 million and $73.5 million and software revenue range between $66.5 million and $70 million. Lastly, adjusted EBITDA is expected to range from $28.5 million to $32.5 million. With that said, I will now turn the call back over to Vince. Vincent Kelly: Thank you, Calvin, and thank you, Mike. On a final note, I'd like to again point out that I'm proud of the performance our team was able to deliver in the third quarter, especially after the exceptional performance in the second quarter and despite the seasonal headwinds we typically face in the slower summer months. We believe we can continue to grow our franchise value while returning capital to stockholders. We have a long-term organic growth engine in our software solutions through Spok Care Connect. We also maintain a source of strong recurring revenue in our wireless service line, which remains relevant and important to health care customers and supports critical communications even during network events when cell phones and other technology fail. We run the largest paging offering in the world and have integrated it with our software operations. We believe that the strong combination of these 2 product lines will take us into the future and create significant shareholder value. Before I open the call up to your questions, I'd like to thank our stockholders for their continued support. We appreciate your interest in Spok, and we look forward to updating everyone again when we report fourth quarter and full year results in February of 2026. Thank you for joining us this afternoon, and have a great day. Operator, you may now open the line to questions. Operator: [Operator Instructions] Our first question is from Anderson Schock with B. Riley Securities. Anderson Schock: So could you talk about the 55% year-over-year decline in licensing revenue? I guess, what drove this and whether we should expect to see similar license revenue going forward? Calvin Rice: Anderson, it's Calvin. I mean, I think we've mentioned this before on calls, license revenue is going to be lumpy because the vast majority of it is directly related to sales. And from a quarter-to-quarter basis, given the enterprise nature of a lot of these sales, those can push and pull. Obviously, we pulled a lot of that into the second quarter. We had some big deals from the third quarter push into the fourth quarter. And so from that regard, no, I don't think it's an expectation that should be set that we're going to see a decline. I do think the expectation should be that there is variability in the license revenue from one quarter to the next. Anderson Schock: Okay. Got it. And then you had a really strong second quarter for new software contracts and software operations bookings. I guess what led to the weaker third quarter? And how should we think about the fourth quarter? Is there any seasonality we should be thinking about that impacts the timing of these contracts? Vincent Kelly: Yes. We've looked at this closely, and we're very bullish on our outlook. That's why we reiterated our guidance. We're expecting to have a strong fourth quarter. We went back and looked at since the pivot, which was starting in the second quarter of 2022, we haven't missed a quarterly forecast until this quarter. We did miss our internal operations bookings forecast. Embedded in that was license. We're still forecasting license revenue grows on a year-over-year basis. Our company total revenue will grow on a year-over-year basis. And so we're looking for a strong fourth quarter here. We've got a very robust pipeline. We've got some very large deals in the hopper right now that we're working. We get a couple of those, and we're going to turn in another very strong quarter. We turned in $8.3 million in operations bookings in the first quarter, $11.6 million in the second quarter. We hit that air pocket, which was odd because July started off pretty well in the third quarter, but August and September were very slow. Some deals slipped. Like I said, we've got some large deals in the pipeline. We're very bullish, and we expect to close them this quarter and report a good fourth quarter when we report at the end of February. Anderson Schock: Okay. Got it. And then do you still anticipate a 6% to 8% increase in R&D for 2026? And then could you just detail the focus of this investment? And when should we expect to see revenue contribution or margin improvement from these investments? Vincent Kelly: So R&D this year is going to be a little bit over $12 million. We've given the team more money to invest this year than they had last year, about $1 million more. Next year, it will be a little over $13 million. So about $2 million more a year on a run rate over what our baseline was in 2024 and prior. And a lot of that's going to the consolidation of our Care Connect suite, upgrading it, adding enhancement, adding functionality. And you'll see going forward in each quarter of 2026, some benefits from that. It will result in more new logo. It will result in increased upgrades and multiyear engagements. We're not doing this without the anticipation that we're going to get good benefits from that. Operator: With no further questions, I would like to turn the floor back over to Vince Kelly for closing comments. Vincent Kelly: Okay. Folks, thanks for joining us this afternoon in our third quarter earnings call. We look forward to talking to you in a quarter at the end of February with much better results. Everyone, have a great day. Operator: Thank you. This does conclude today's conference. You may disconnect at this time, and thank you for your participation.
Operator: Good day, and welcome to the BrightSpire Capital Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to David Palame, General Counsel. David Palamé: Good morning, and welcome to BrightSpire Capital's Third Quarter 2025 Earnings Conference Call. We will refer to BrightSpire Capital as BrightSpire, BRSP, or 'the company' throughout this call. Speaking on the call today are the company's Chief Executive Officer, Mike Mazzei; President and Chief Operating Officer, Andy Witt; and Chief Financial Officer, Frank Saracino. Before I hand the call over, please note that on this call, certain information presented contains forward-looking statements. These statements, which are based on management's current expectations, are subject to risks, uncertainties and assumptions. Potential risks and uncertainties could cause the company's business and financial results to differ materially. For a discussion of risks that could affect results, please see the Risk Factors section of our most recent 10-K and other risk factors and forward-looking statements in the company's current and periodic reports filed with the SEC from time to time. All information discussed on this call is as of today, October 29, 2025, and the company does not intend and undertakes no duty to update for future events or circumstances. In addition, certain financial information presented on this call represents non-GAAP financial measures. The company's earnings release and supplemental presentation, which was released yesterday afternoon and is available on the company's website, presents reconciliations to the appropriate GAAP measures and an explanation of why the company believes such non-GAAP financial measures are useful to investors. Before I turn the call over to Mike, I will provide a brief recap on our results. The company reported third quarter GAAP net income attributable to common stockholders of $1 million or $0.01 per share, distributable earnings of $3.3 million or $0.03 per share, and adjusted distributable earnings of $21.2 million or $0.16 per share. Current liquidity stands at $280 million, of which $87 million is unrestricted cash. The company also reported GAAP net book value of $7.53 per share and undepreciated book value of $8.68 per share as of September 30, 2025. Finally, during this call, management may refer to distributable earnings as DE. With that, I would now like to turn the call over to Mike. Michael Mazzei: Thanks, David, and welcome to our third quarter earnings call. We're pleased to report the strong results achieved during this past quarter and are particularly encouraged by the overall trajectory of the business. In the third quarter, book value remained stable, and we made considerable progress toward established objectives, which include resolving watch list loans and REO properties, and rebuilding our loan portfolio and maintaining dividend coverage. Our adjusted DE continued to cover our dividend, but we also achieved net positive loan originations for the second consecutive quarter, and also saw a meaningful growth in our origination pipeline. Together, these results demonstrate clear progress toward transforming our loan book and growing earnings. Also of note, we are observing continued improvements in the overall commercial real estate markets. Credit and lending spreads continue to tighten, and this has contributed to a steady increase in loan inquiry. Additionally, both the CMBS and CLO markets remain very highly active, showing solid new issuance growth. Coupled with a more favorable interest rate environment, these trends should create a supportive backdrop for increased loan originations. Along these lines, during the third quarter and through the first half of October, we originated 10 loans totaling $224 million. We have currently 7 loans in execution for an additional $242 million. To date, this will bring our total new closed and in execution commitments to $741 million since resuming loan originations late last year. Given this progress, we have already begun the process of preparing for our next CLO securitization. An essential part of our progress this quarter is due to meaningful developments in our watch list, as several of these borrowers have now commenced a formal sales process on the underlying properties. As a reminder, we started 2025 with a watch list of $411 million, which has now been reduced to $182 million. If successful, these borrower-led sales will substantially reduce our remaining watchlist exposure. Turning to the REO portfolio and our largest exposure, the Signia Hotel property, we continue to make gradual improvements while we address deferred maintenance and CapEx needs at the asset. Given the upcoming sporting events calendar, we expect to hold this property through the first half of 2026. Additionally, we currently have 2 REO office properties in the market for sale, and we have a specific timetable to market additional REO assets early next year. Our timetable for sale of REO assets will generate liquidity for future loan originations and drive the loan book growth toward our targeted portfolio of approximately $3.5 billion. The execution of this strategy will strengthen earnings and improve positive dividend coverage in 2026. Furthermore, we're also seeing a continued gradual reduction in our office loan portfolio, which now stands at $653 million, down from $769 million at the start of 2025. We expect an additional reduction as some borrowers have indicated intentions to sell properties in this improving market. The CMBS market has also accepted more office loans over this past year. In closing, we believe the coming quarters will be among our most productive. With each passing quarter, the combination of new loan originations, steady progress on watch list loans and the resolution of REO assets will drive the transformation of our portfolio and improve earnings. With that, I will now turn the call over to our President, Andy Witt. Andy? Andrew Witt: Thank you, Mike. I'll start by walking through the details of our net positive originations activity and then provide further updates on watch list loans and REO assets. During the third quarter, capital deployment consisted of $146 million of total commitments across 7 multifamily loans, as well as future fundings of $11 million, resulting in total deployment of $157 million. As for repayments, 2 loans paid off in full, 1 hospitality loan and 1 office loan for total proceeds of $88 million. Additionally, there were 5 partial paydowns during the quarter, totaling $9 million, resulting in $97 million in total repayments. For the second quarter in a row, we've achieved net positive loan originations, a trend we expect to continue with increasing momentum over the next several quarters. Currently, the loan portfolio stands at $2.4 billion across 85 loans, with an average loan balance of $28 million and a risk ranking of 3.1. Our average loan balance decreased year-over-year as a result of a deliberate strategy to reduce concentration risk and diversify the portfolio. During the quarter and subsequently, we continue to make progress on the watch list loans. The watch list portion of the loan portfolio currently stands at 8%, comprised of 5 loans for a total gross book value of $182 million. Reducing total watch list exposure remains a priority as we are working actively with the borrowers to effectuate resolutions. In a number of cases, the borrowers are in the process of actively marketing the underlying properties for sale. The reduction in watch list loan exposure quarter-over-quarter was driven by the removal of the Oregon office loan, which we took ownership of during the quarter. The property is currently in the market for sale. During the third quarter, one Austin, Texas multifamily loan was added to the watch list with a gross carrying value of $23 million. Performance at the property deteriorated primarily due to the insufficient funds to complete the property stabilization. As for our REO portfolio, it stands at $364 million of undepreciated gross book value across 8 properties. We completed the sale of the Phoenix, Arizona multifamily property in the third quarter, substantially in line with carrying value. Additionally, we are currently in the market with 2 office properties, including the Oregon office property previously mentioned. REO office exposure is comprised of 3 properties for a cumulative undepreciated book value of $81 million or 22% of the REO portfolio. We continue to make progress on our 4 multifamily properties within the REO portfolio. We are actively executing on value-add business plans with respect to 3 of the properties. These plans contemplate repositioning the properties, leasing them up and then taking them to market for sale. In each case, we are making progress toward that end and expect to be in the market with 2 of the 3 properties in Q1 2026, with the remaining property to follow in the summer of 2026. The fourth multifamily property is a predevelopment site in Santa Clara, California, which we intend to hold for the time being. As we've discussed before, the broader Bay Area is seeing a resurgence in demand, and we anticipate this property will benefit as a result of the favorable market tailwinds. Multifamily REO exposure stands at $147 million or 40% of the REO portfolio. Lastly, as Mike highlighted, we continue to make progress on the $137 million San Jose, California hotel, which comprises the remaining 38% of the REO exposure. In closing, we are encouraged by the momentum generated during the third quarter and look forward to sustaining and increasing that momentum on the originations and asset management front as we head into 2026. With that, I will turn the call over to Frank Saracino, our Chief Financial Officer. Frank? Frank Saracino: Thank you, Andy, and good morning, everyone. For the third quarter, we generated adjusted DE of $21.2 million or $0.16 per share. Third quarter DE was $3.3 million or $0.03 per share. DE includes specific reserves of approximately $18 million. Additionally, we reported total company GAAP net income of $1 million or $0.01 per share. First, a reminder regarding one of our legacy office equity investments. Earlier this year, we defaulted on the CMBS financing for our multi-tenanted office equity property located just outside Pittsburgh. During the third quarter, a receiver was appointed and as a result, we deconsolidated the assets and liabilities from the company's consolidated balance sheet. With that, we reported a GAAP impairment of $2.5 million related to the property. However, the impairment charge had no impact on our undepreciated book value as we had previously written the investment down to 0 over a year ago. Quarter-over-quarter, total company GAAP net book value decreased to $7.53 from $7.65 per share in the second quarter. We reported undepreciated book value of $8.68 versus $8.75 per share in the second quarter, slightly down quarter-over-quarter. Now I would like to quickly bridge the third quarter adjusted distributable earnings of $0.16 versus the $0.18 recorded in the second quarter. The change was primarily driven by the lender foreclosure of the Equinor Norway net lease asset, which occurred in 2Q, and the deconsolidation of the multi-tenanted office equity property previously highlighted. This was partially offset by positive net loan originations. Looking at reserves. During 3Q, we recorded a specific CECL reserve of approximately $18 million related to taking ownership of the property associated with the Oregon office loan, which Andy discussed earlier. As the loan was resolved during the quarter, we charged off the reserves. Our general CECL provision decreased to $127 million or 517 basis points on total loan commitments versus $137 million or 549 basis points reported in the second quarter. Our debt-to-assets ratio is 63% and our debt-to-equity ratio is 1.9x. Lastly, our liquidity as of today stands at approximately $280 million. This comprises $87 million of current cash, $165 million under our credit facility, and approximately $28 million of approved but undrawn borrowings available on our warehouse lines. This concludes our prepared remarks. And with that, let's open it up for questions. Operator? Operator: [Operator Instructions] And the first question will be from Jason Weaver from JonesTrading. Jason Weaver: Congrats on the quarter. First, I wonder if you could give me some update on your liquidity position, post quarter-to-date originations and those what you expect to -- the ones that are in execution that you expect to close? And if you're placing those recent loans into the 2024 CLO or holding those online? Andrew Witt: Those are being held on balance sheet. Liquidity is hovering around $100 million in cash. And as we said in the prepared remarks, much of the future originations that we're doing will come out of the resolution of assets, and the equity repatriation for assets that are either largely unencumbered -- totally unencumbered or largely unencumbered today. So from a liquidity standpoint, we plan on a lot of the fundings coming out of REO resolutions. Jason Weaver: Then just help me think about the pace of 4Q originations through the next couple of months. I know you put up the $320 million number, and I guess that's about $308 million net. But for November and December, do you expect that to be more muted or similarly active, just due to the sort of dovish posture and the progress we've seen on rate? Andrew Witt: Similarly active, because the pipeline has been gaining some momentum, if you will, and it's been increasing over time. I don't want to jinx this, but it's a pretty good environment. We're seeing a lot more loan inquiry quarter-over-quarter. And so to kind of go to the end result here, what we need to do for 2026, and I've said this on the previous earnings call, we need to get to a loan book of about $3.5 billion. And net-net, between now and the end of next year, we need to do well over $1 billion in originations. Gross, we need to do about $1 billion -- close to $1.5 billion in originations gross to offset any payments that we have. So you're looking at something that is probably like $300 million a quarter to really keep abreast of that. Jason Weaver: I think you're on your way. Operator: Our next question will be from Chris Muller from Citizens Capital Markets. Christopher Muller: Congrats on a solid quarter. So I want to start and ask about your net lease portfolio. We just saw Blackstone and Starwood jump into that space. So I wanted to ask how you guys are thinking about that space? And is this an area that there could be some growth for BrightSpire? Or are you happy with the assets you have there already? Michael Mazzei: I'd say we're happy with the assets we have right now. We have not explored going into the triple net market. I don't think we have a necessarily competitive advantage in that market. So I think from a net lease standpoint, we'll deal with the assets we have now. If we can get an interesting bid on some of these assets, we might consider selling them. But right now, no change in plan. Christopher Muller: Then I guess on overall sentiment in the market, do you expect to see a boost in demand if we get another cut from the Fed today? Or does that more just help continue to close that gap between buyers and sellers? Michael Mazzei: It's absolutely improving. The commentary we had yesterday, some of our originators were very pleased to see the price of caps going down in their discussions with borrowers. It is a pretty solid environment. You've got a dovish Fed. The long end seems to be coming down because of maybe the employment numbers. So you have a sub-4% 10-year treasury. I think you've also -- you've got some lenders that are getting exhausted. And I think they've gone on several years with loan modifications, us included. And we're encouraging borrowers to either refinance or sell the properties, which is why you saw the commentary around some of the borrowers on our watch list now have those properties up for sale. And you're seeing that across the board. So it's a pretty Goldilocks environment right now. You've got still a low level of construction lending, which will hopefully help absorption late 2026, early 2027. Interest rates lower. The negative carry on these assets because the cap rates are still 5% for multifamily, in some cases, even a little less. So that negative carry environment is becoming less. So it's making transaction sales volume increase. So we're starting to see a big uptick in that, and we're starting to see an uptick in acquisition financing versus in the first half of the year, first quarter, substantially refi. So we're seeing a lot more requests for acquisition financing than we have earlier in the year. Christopher Muller: Congrats again on a solid quarter and some great progress. Operator: The next question is from Tom Catherwood from BTIG. William Catherwood: So just wanted to pivot back to the answer on originations. Andy, obviously, you had mentioned out originating your repayments, and that's been the second quarter in a row you've done it. But because of REO, the loan portfolio has contracted over the last 2 quarters. With that $320 million of loans that you've talked about closed or in closing in 4Q, are we at the point where you think we can grow the loan book going forward? Or with other potential REOs in the pipeline, could it be 2 steps forward, 1 step back? What are your thoughts as far as getting beyond the takeback period so that the portfolio can get up to $3.5 billion that you're targeting? Michael Mazzei: Andy, do you want to jump on that? Andrew Witt: Yes. So, I think we're really at that point right now. So we've been increasing the momentum of our loan originations. The pipeline is growing, and we are pushing things through REO sale. And so that will be a little bit of a headwind. But it's really that capital that is the fuel for building the loan book. So I think you will see the loan book increase. It's increased kind of quarter-over-quarter for the last couple of quarters when you're just looking at the loan book. And so what you'll see in the future quarters is increased rate of growth, moving towards that $3.5 billion number. William Catherwood: Andy, then in terms of your San Jose hotel, I was in the market there in September and walked the property. It looked great. It had a tech conference going on, so it was crowded. The question I have for you, though, is kind of with that packed event schedule that you mentioned for 2026 in San Jose, what could the asset contribute towards distributable earnings as occupancy ramps up? I mean this is a high operating leverage business. To us, it seems like there could be a material contribution. What are you underwriting for 2026? Michael Mazzei: The NOI, it's still about -- it's still going to be a sub-$10 million NOI. For this year, we're coming in below that. So next year, as we said, we have some significant events occurring in the first half of the year. We also have, as we said in the prepared remarks, some deferred maintenance elevators, lobby work that needed to be done and some CapEx that needs to go into the hotel. So that dovetails well into that timeline. We have to put these in place, because if we sold the asset, any buyer would look at those and say, elevators need to be redone, and we're taking that off the purchase price. So we need to get that done. Those have been needing to be done for quite a while. But yes, our hope is that we continue to see uplift in that Bay Area. You just saw the hotels in San Francisco, 2 large 3,000 collective rooms in these 2 hotels traded. We are seeing a lot of interest in the -- generally in the Bay Area and in San Francisco. The one caution I would have is that there is a concern that if San Francisco really is coming back the way people are saying, that there may be some latent group demand to go to San Francisco. So we really need to observe that. But in terms of contribution, I would say roughly a $10 million number for NOI would get you within a stone’s throw where we think we might end up for 2026. We haven't gotten a budget yet for that year. We're running slightly behind that for 2025. Operator: [Operator Instructions] The next question is from Gaurav Mehta Alliance Global Partners. Gaurav Mehta: I think in your prepared remarks, you talked about preparing for a new CLO issuance. Can you provide some details on the size and timing of the expected issuance? Michael Mazzei: Thank you for the question. Actually, because it is so close, we actually can't comment on it. It would be inappropriate. But I would say it would be within the context of what you're seeing in the CLO market. Gaurav Mehta: As a follow-up, I think in your prepared remarks, you talked about 2 office properties listed for sale. I think one of them was Oregon. Can you provide some detail on which is the second office property you're looking to sell? Michael Mazzei: It is one of the Long Island City properties, and we are in the process of soliciting offers for that as we speak. Operator: Ladies and gentlemen, this concludes today's question-and-answer session. I would like to turn the conference back to Mike Mazzei for any closing remarks. Michael Mazzei: Thank you. Well, in summary, we covered our dividend. We had positive net loan originations for the second quarter in a row. Our pipeline is improving. As we mentioned, we are in the process of embarking on a new CLO. And we anticipate, as we said in the prepared remarks, substantial progress on our watch list and REO in the coming 2 quarters. So we look forward to that. With that, I would like to thank you for joining us on the call today, and we will see you in February. Operator: Thank you, sir. The conference has concluded. Thank you for joining today's presentation. You may now disconnect.
Operator: Welcome to the Northeast Bank First Quarter Fiscal Year 2026 Earnings Call. My name is James, and I will be your operator for today's call. This call is being recorded. With us today from the bank is Rick Wayne, President and Chief Executive Officer; Richard Cohen, Chief Financial Officer; Santino Delmolino, Corporate Controller; and Pat Dignan, Chief Operating Officer and Chief Credit Officer. Prior to the call, an investor presentation was uploaded to the bank's website, which we will reference in this morning's call. The presentation can be accessed at the Investor Relations section of northeastbank.com under Events and Presentations. You may find it helpful to download this investor presentation and follow along during the call. Also, this call will be available for rebroadcast on the website for future use. [Operator Instructions] As a reminder, the conference is being recorded. Please note that this presentation contains forward-looking statements about Northeast Bank. Forward-looking statements are based upon the current expectations of Northeast Bank's management and are subject to risks and uncertainties. Actual results may differ materially from those discussed in the forward-looking statements. Northeast Bank does not undertake any obligation to update any forward-looking statements. I will now turn the call over to Rick Wayne. Mr. Wayne, you may begin. Richard Wayne: Thank you, and good morning, everyone. As I go through this presentation, as we go through it, I want to just outline what the agenda will be for this morning. I'm going to first go over some highlights for the quarter and dig a little bit deeper in some of the material that we had put out yesterday. And after that, Pat will discuss the lending activity, and Santino will go over the financial results for the quarter. Finally, I want to make a few comments on Richard Cohen, who is moving on after tomorrow after almost 2 great years at the bank. So first, as to the highlights. We consider the quarter very strong. We had net income of $22.5 million, a NIM of 4.59%, return on equity of 17.64%, a return on assets of 2.13% and diluted earnings per share of $2.67. And finally, within a whisker, if that's a technical term, I don't think it is, actually, of $60 of tangible book value at $59.98. I want to comment first on loan activity. Purchases were strong. We bought loans with UPB of $152.7 million at an invested amount of $144.6 million. Now as you know, in our past, we have had 2 very large quarters where we purchased large transactions, the first in the second quarter of our fiscal year '23 and the second one in the first quarter of fiscal year '25. If you exclude those very large purchases, this would have been our second largest purchase quarter going back 3 years and probably longer. I just looked at the material for 3 years for this. One of the things that we are frequently asked in investor calls and otherwise is what does the purchase pipeline look like? And with all of the caveats in the forward-looking statements, specifically, we may buy a lot or we may not buy any. It's transactional. I would say that the purchase pipeline is as large now as we have seen in quite some time. A lot of it triggered by M&A activity and some balance sheet repositioning by other holders of commercial real estate loans. We have both the capital and the human resources to do the appropriate diligence on the amount that's out there, and we will look at every -- virtually every opportunity that is within our parameters. On originations, we did $134 million with a little rounding this quarter. I would point out that there is some seasonality to the origination business. We went back and looked 4 years ago, and we only had one first quarter in our fiscal year, which was in Q1 of '23 that had a higher amount of originations, $182 million. That meant, obviously, that for -- out of the last 4 years, 3 of the quarters, we did not do as much origination volume as we have done this quarter. And our origination pipeline is also quite robust. I now want to comment briefly on the SBA activity. This quarter, we funded $42 million, and we sold $53 million of loans that, of course, include some that were originated prior to this quarter. As we discussed in the July call, there were changes made to the SBA rules, which suggested and we indicated that we would have lower volumes in some number of quarters to come. Because we had less closings, we had less sales and because we had less sales, we had less gains. The gain in the linked quarter was $8.2 million compared to $4.1 million for the current quarter. And that difference of $4.1 million amounted to $0.34 diluted EPS. I think it's very helpful to understand that. We expect a few things to happen. Of course, one, at some point, the government will reopen. Pat may touch on the impact of that for us. And we now have -- absent the government closing, we have been seeing a ramping up of the volume that was temporarily diminished for the reasons that I described. Finally, a few comments on asset quality, which Santino will expand on relative to our balance sheet size. Overall, our loan book was pretty flat. Our purchased loan book increased by $31 million and our originated loan book decreased by $39 million. Because for purchases, the allowance comes out of the purchase price typically rather than booking a provision and because our originated loan book decreased, as I mentioned before, the amount of the allowance also decreased. And finally, I want to make a point on the timing of transactions. As I said, our loan book was mostly flat but our average loan balances were down $92 million compared to the linked quarter because much of the activity around purchasing and some originations occurred late in September. So that had an impact on interest income in the quarter. But for the reasons I described, it bodes well for the future because our average loan balances were higher. And with that, I will now ask Pat to talk about our loan activity. Pat? Patrick Dignan: Thanks, Rick. We had a solid loan activity this quarter, especially for the summer months, as Rick pointed out, the real estate and financing markets are very active. And while this is fueling more loan payoffs than we'd like, it's also creating a lot of opportunity. First, another note on the SBA business. The $42 million closed is comprised of 286 loans at an average rate of 11.7%. Although we saw increasing volume in each of the 3 months of the quarter and felt like we were making real progress toward our volume targets, the government shutdown essentially halted any new originations since October 1. We continue processing loans in the hopes of funding soon after the government is reopening. So we won't be wasting any time with that. But obviously, it's out of our control. Meanwhile, we're very optimistic about our new insured small business loan product with annuity, which is off to a great start since launching on October 1 with about $10 million closed since then. In our purchase business, we bought 522 loans in 7 transactions with $153 million of principal balance and a purchase price of $145 million or just under $0.95. These were mostly smaller balance loans with no real concentrations of note. Five of the 7 transactions were from loan funds, one from a small bank and one from a national insurance company. As Rick pointed out, over the last few weeks, we've seen a significant uptick in purchase opportunities, mostly from M&A activity, which is likely to continue for some time. This is a lumpy business and no guarantees will win at all or any of it, but the sheer volume of new opportunity is very encouraging for the next several quarters. In our origination business, we closed $134 million, which included 22 loans with an average balance of $6 million, LTVs just over 50% and an average interest rate of just under 8%. While lender finance product continues to dominate the origination business, direct loan opportunities have picked up significantly. The belief from borrowers that interest rates will come down over the next year is fueling new transactions and at the same time, creating an aversion to traditional debt, which typically includes significant prepayment protection. Our pipeline is as full as it's ever been, and we expect that we can remain disciplined in credit and still show strong growth going forward. Back to you, Rick. Richard Wayne: Santino? Santino Delmolino: Thanks, Rick. As Rick mentioned, this was another good quarter for the bank. We had earnings of $22.5 million or $2.67 per diluted share. ROA was 2.1% and ROE 17.6%. Total assets ended the quarter at $4.17 billion, which is down slightly from $4.28 billion at June 30. Loans were flat as purchases of $145 million and originations of $134 million were offset largely by paydowns and payoffs. Much of these purchases and originations occurred at the tail end of the quarter, so you'll see our average balances are down quarter-over-quarter, partially -- which is partially impacting our lower NII for the quarter. The excess cash we carried on the balance sheet at June 30 was put to use during the quarter to pay down our brokered CDs. So you'll see some shrinkage in the deposit portfolio as well. Capital remains strong with Tier 1 leverage at 12.21% and tangible book value came in just under $60 a share. Switching focus to the P&L. NIM was strong this quarter, coming in at 4.6%, resulting in pre-provision net interest income of $48.2 million, down from NIM of 5.1% in the prior quarter and pre-provision net interest income of $59.4 million. Decrease here is largely a result of heightened transactional income that we saw in Q4 fiscal year '25. Additionally impacting that is the higher average cash balances we carried during the quarter, which while accretive to net interest income did compress NIM a little bit. Provision for loan losses was a credit this quarter of $435,000, as Rick mentioned, which is due to a few things: one being less loans put on the balance sheet that required a provision as well as a slight decrease in the allowance coverage ratio. This is largely a factor of our continued strong asset quality, particularly in the originated loan business. From an SBA front, we had gains on sales of $4.2 million on sales of $58 million compared to $8.2 million in gains on sales of $108 million last quarter. As Rick and Pat previously mentioned, this is largely due to rule changes at the SBA back in May, which we previously disclosed the projected impact on this -- on earnings. On the expense side, we continue to be disciplined while strategically investing in our people and in technology that set up the bank for long-term success. Rick, back to you. Richard Wayne: Thank you, Santino. And now we would welcome any questions that you might have. Operator: [Operator Instructions] Our first question comes from Mark Fitzgibbon from Piper Sandler. Mark Fitzgibbon: Rick, I wondered if you could share with us. I noticed in the press release, you said there was a change in the cost structure arrangement with annuity, I assume over the SBA stuff. Could you share with us how that structure changed? Santino Delmolino: Yes. So we put out an 8-K on this back in last October. So beginning October 1 of last year, the cost structure changed where instead of a split in the gain on sale with annuity, they're charging us a flat fee on a per loan submitted basis. So that structure has been consistent for the past 4 quarters now. It's really just in comparing to the quarter end September 30, 2024, it was different. Mark Fitzgibbon: And then just how do you think we should be thinking about gain on SBA loans for the fourth quarter? I mean, assuming the government opens up maybe halfway through the quarter, can you kind of get back on track and get to a volume level that looks something akin to what you had in the third quarter? Richard Wayne: A little bit hard to say that, Mark, because there's a bunch of variables. I could say that starting in that we were seeing, and Pat mentioned this, we were seeing a ramp-up in SBA activity each month in the past quarter, which is what we expected to happen as both from a technology perspective and retraining those at annuity that are doing the first cut of underwriting and then our team as well. And I think if absent the government shutting down any of those things that happened, we probably would have been reasonably comfortable saying that by the end of this calendar year, we would have been up to where we were. But the reason there's less certainty about saying it now is what will the ramp up -- one, how long will the government be shut down? Because now it's essentially other than doing as much as we can do, there are critical things that we cannot do while the government shut down. We can't get an SBA number, and we can't get tax transcripts and we just can't get the loan to close. And how long that will -- that ramp-up will take, it's hard to say. I would say this reasonably comfortably that once the government is reopened over some number of months, let's say, 6 months. This is really an estimate because I don't know this for sure. We would expect we would get back. There's no reason to believe there won't continually -- continue to be large demand for that product. But there are a bunch of variables that would impact that. Mark Fitzgibbon: Okay. Fair enough. And then it looked like there was a decent linked quarter increase in professional fees. Anything unique in there? Santino Delmolino: A couple of things impacting that. One is just some temporary employees for folks that we've had out on leave during the period. So that aspect of it shouldn't continue on a go-forward basis. We've also seen -- we had some heightened legal fees in relation to the new growth term loan product, the insured loan product as well as just general increases in professional fees period-over-period. Richard Wayne: I want to just use that as a jumping off point, if I can, Mark, and others on the call because I want to comment about Richard before -- I don't want anyone to leave the Q&A before I've had a chance to say this. And the triggering thought to that was what Santino just said because we had hired a highly experienced auditor to come in and help us as we got through getting our financials. That's why that was more expensive. But as everyone knows, a while ago, we announced that Richard would be leaving the bank at the end of this month. This will be the last time you'll hear him in this room, I suspect he may, because he's still a stockholder, he may call up and be a really aggressive questioner, but we'll have to see about that. But I want to make a few points clear on this. One, Richard left on his own. I tried to talk him out of it almost every day, but unsuccessfully. Richard came to us. He moved his family boldly from South Africa. He was formerly a partner at KPMG. He came here without a job and not knowing much other than visiting from time to time the states, not knowing exactly what he would do. We were lucky that we were able -- first, we hired him as a consultant and then in this role, he's really done an extraordinary job for us. He grew a lot in the job. And this sounds like cliche because this is what people always say when someone leaves. In this case, it happens to be very true. He's really liked by everybody, he's respected by everybody. He added a lot of value to us, and he will be missed. I just want to add one other thing because 2 things can be true as I suggested to the Board yesterday, Richard can be all of those things, but we're lucky we have a deep enough bench, and Santino, who was our controller, could step right up. And Rebecca Jones now Rand, married name, sorry, Rebecca, who is our Director of Accounting, will be here, and we've hired a new controller. So we still continue to have a very, very -- and lots of other people in the accounting and finance roles. We have a very, very deep bench. But I just wanted to be clear about Richard that he's going out to start some business he's figuring out. And I suspect at some point, I would bet that he'll be wildly successful. I am not going to say bet, I'm not going to invest in it, but I believe he will be. Richard, do you want to say anything before we. Richard Cohen: I really do. Thank you, Rick. I mean it's been a very difficult decision to leave the bank. I'm immensely privileged to have been part of this fantastic organization. I'm equally immensely grateful for the relationships that I have with all of you, the investors, with the Board, with the leadership of the bank, with my team and with the incredible staff here. I so thoroughly enjoyed the culture. It's an amazing place to work. The bank is solution-oriented. It's focused. It's a warm place to work, and it's a very open environment. Maybe the last thing I'd like to say is a very special thanks to Rick and to Pat and to the Board for their faith in me for the close relationship that I have with them personally, which will continue into the future. And my very best wishes to Tino and to my fantastic team in whom I have immense confidence. I leave you in very, very capable hands, and I intend to stay very close and in contact with the bank over here. Richard Wayne: Thank you for that, Richard. We're clapping, you can't hear us. Thank you, Richard. Mark, I apologize for jumping off on that, but I wanted to make sure those things were said and heard. Mark Fitzgibbon: Richard, congratulations and best of luck in your new role. And Tino, to give you an opportunity to swing to the fences here, can you tell us what the margin is going to look like next quarter? Santino Delmolino: Almost, almost. No, we generally don't give guidance on margin. The real challenge, as you know, is with the transactional income, it can be really lumpy just depending on which loans pay off during the period. Richard Wayne: Here's a stat we don't mention often, but we have $207 million of discount on our purchased loan book. And what happened last -- for the linked quarter, we had more primarily, because of one big transaction. But -- and it's hard for us to know when there are going to be payoffs. And some loans have very significant discount. Most of all what I described is interest discount from loans that we bought at a discount because of interest rates, but that's always out there. So it's hard for us to say -- to predict what our margin will be because that's really the piece of it that is unpredictable and can be significant. Operator: Our next question comes from Damon DelMonte from KBW. Damon Del Monte: Richard, good luck with your new endeavors. Just a quick question on the -- NDFI lending has become kind of a hot topic in the industry in the last couple of months, and you guys do a lot of similar financing in that regard. Just kind of curious how you're feeling about the quality of the people you're with and the underlying assets and if you're seeing any signs of stress or there's any concern from your seats? Patrick Dignan: I assume you're talking about that... Damon Del Monte: Well, yes, but like the lender financing you do in general. I mean the items in the news have been tied to subprime auto lending. But I think just overall, just kind of how do you feel about the health of your lender financing portfolio? Patrick Dignan: We've heard from a few investors concerned about that recent fraud issues that were in the news, specifically the case where a title policy was doctored to improve the lender's perception of a lien position, resulting in significant credit deterioration when the truth was revealed. And our approach is and has always been a trust but verify. In the lender finance business, obviously, our borrower is the lender, and they are collecting documents from their borrower. And so I think oftentimes, we're getting that documentation secondhand. And so we have developed over time -- there's no way to 100% protect yourself from fraud, but we've -- we believe we're doing all we can to prevent this type of issue from happening. We do complete third-party background checks on all borrowers, funds and principles. We do independent verification of lien position and title insurance. We hold all the original loan documents in custody. We do daily monitoring of all court and recording activity relating to our borrower, the underlying borrower and the underlying collateral. In fact, it's fairly frequent that we will know that there's been a lien or some judgment on the underlying collateral and these usually minor things before our borrower does because we monitor it so closely. And we have very robust monthly reporting from our borrowers that show all activity, loan payments and communications with the borrower. So I think the short answer is this is a business that you just got to stay very, very closely on top of, and I think we do. Richard Wayne: In addition to what Pat just said, apart from potential fraud risk, it's not really the same business we're in. I know it's loan on loan and some people may consider that to be indirect financing and maybe that's true in some sense. But in another sense, it's totally different. We underwrite every single loan. So virtually all of our transactions are structured into bankruptcy, remote, special purpose entities with carve-out guarantees generally for any fraud or something that's specified in the documents, but it's a guidance line underscored. Meaning somebody comes in and they have a line with us and they want to take an advance under that line, we have to approve that advance, and we underwrite that loan right next to him. And so it's very different, totally different than some kind of a warehouse line where a borrower can borrow based on a borrowing base certificate without the lender focusing on the actual credit like we do, is totally different what we do. So to answer in a word, and we're very comfortable with our asset quality. And especially, as you know, from what we include in the material, the low LTVs throughout our whole book. Damon Del Monte: Right. Okay. That's great color. That's kind of what I was looking to hear. And then I guess just on the loan growth, obviously, pipelines for both purchased and originated sound like they're pretty healthy and you have some strong optimism to close out this calendar year and going into next year. Just wondering if you have any visibility on the payoffs thus far this quarter to kind of help give us some perspective as to what the net growth could be for loans outstanding for the quarter? Richard Wayne: I'll just make a general comment. Let me ask Tino to fill in if he has the information, he's saying no. This quarter, we had, I would say, a larger amount of payoffs than we typically have. And kind of something that is surprising is usually when you have large payoffs, in the purchase space, you tend to have more transactional income. But in this quarter, we had larger payoffs and we didn't have as much transactional income as I would have estimated at the beginning of the quarter. We purchased $145 million. We can just think through this live and Tino or Rebecca will correct me when I go wrong here. We purchased -- invested $145 million in our loan portfolio on purchase did what -- what was the net change in it, Tino or Rebecca? Santino Delmolino: Net change. Purchase is up like 20 -- I don't have the number right in front of me, but on Slide 3... Richard Wayne: So $24 million. So that would say we had $122 million of paydowns and amortization. That is high for that. And I think that in an interest rate environment that is declining, we would expect payoffs to increase. When somebody didn't have a better offer on the table, they wouldn't refinance just for the support of it. But historically, we've seen in lower interest rate environments, we have seen more payoffs. And so I would kind of -- I'm not saying it will be more than the $120 million we had this quarter. This quarter was particularly high, but we had some loans that we were -- sometimes when you have paydowns on the purchase in particular, it's a good thing because you have loans that we think are teetering. Teetering may be too strong, but loans we would be happier if they were out of our portfolio. And we made an effort, and it was either last call or the one before, we took a look and we provided detail on where we thought there was risk in the New York multifamily portfolio based on rent stabilization and the possibility of an administration change going forward. And we've made a concerted effort to reduce our exposure in the area of rent-stabilized or rent-controlled portfolio for that reason. So I think that was kind of a big chunk of why the purchase -- the payoff around purchase book was a result of that. And just on that topic, as it relates to originated loan, one thing we're seeing is we're seeing borrowers now negotiate much more strongly for getting rid of floors or having a floor that is -- typically what we like to have is the floor set at the rate when we originate a loan, but for borrowers, that's not market anymore. So we're seeing some lowering of the floor also. That sounds very pessimistic in terms of loan growth, but that's not my intention because we would expect both our originated loan book based on what we know that's in the pipeline. And with the caveat I said about purchase loans earlier, you win or you don't win, but there's an awful lot out there. We would expect -- I got to give another caveat, but I won't. You get the point that we would expect a fair amount of volume and opportunity in both of those spaces. Damon Del Monte: Got it. Okay. That's good color. I guess just lastly on the tax rate that came in lower this quarter. Is that just a function of taxable income? Or is there something -- I know there was like some state law changes. Does that like carry through for the next year? Santino Delmolino: Yes. A few things there that are impacting our tax rate this quarter. There were 2 state law changes that had pretty significant impact. One, Massachusetts, we're now paying very little taxes in the state of Mass because of their apportionment law changes. California also changed their apportionment laws, which has caused -- which offset the decrease in Massachusetts a little bit. We're paying more in California now. And the third piece is in Q1 of the fiscal year is when we have all of our stock vests and grants. So to the extent that tax -- the fair value of the vest exceeds what we booked for book expense on that restricted stock, we get a tax benefit for that. So with where the stock price was at the date of vesting this quarter, we saw a pretty good tax pickup on that front as well. That won't be recurring through the rest of the year. So on a go forward, we're expecting the effective tax rate for the rest of the year to be somewhere in the realm of 31% to 32%. Operator: [Operator Instructions] Now I will turn the call over to Rick Wayne for closing remarks. Richard Wayne: Thank you for those of you on the call -- I'm sorry, no. Thank you for those who are on the call for listening. Thank you, Damon and Mark, for very thoughtful questions. And again, thank you, Richard, for your work, your friendship, your professionalism, so much appreciated. And we will talk to you again at the end of January. Thank you all. With that note, we will say goodbye. Operator: Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to Kadant's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Michael McKenney, Executive Vice President and Chief Financial Officer. Please go ahead. Michael McKenney: Thank you, Olivia. Good morning, everyone, and welcome to Kadant's Third Quarter 2025 Earnings Call. With me on the call today is Jeff Powell, our President and Chief Executive Officer. Before we begin, let me read our safe harbor statement. Various remarks that we may make today about Kadant's future plans and expectations, financial and operating results and prospects are forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to differ materially from these forward-looking statements as a result of various important factors, including those outlined at the beginning of our slide presentation and those discussed under the heading Risk Factors in our annual report on Form 10-K for the fiscal year ended December 28, 2024, and subsequent filings with the Securities and Exchange Commission. In addition, any forward-looking statements we make during this webcast represent our views and estimates only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views or estimates change. During this webcast, we will refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our third quarter earnings press release and the slides presented on the webcast and discussed in the conference call, which are available in the Investors section of our website at kadant.com. Finally, I wanted to note that when we refer to GAAP earnings per share or EPS and adjusted EPS on this call, we are referring to each of these measures as calculated on a diluted basis. With that, I'll turn the call over to Jeff Powell, who will give you an update on Kadant's business and future prospects. Following Jeff's remarks, I'll give an overview of our financial results for the quarter, and we'll then have a Q&A session. Jeff? Jeffrey Powell: Thanks, Mike. Hello, everyone. Thank you for joining us this morning to review our third quarter results and discuss our outlook for the remainder of the year. I'll begin with our third quarter highlights. We had solid earnings performance in the third quarter and benefited from record aftermarket parts revenue. As you know, our aftermarket parts business is one of our core strategic development areas, and it is encouraging to see this part of our new business continue to thrive. This is especially true in volatile times like now where economic headwinds are strong and global trade tensions remain high. Overall, market demand for capital equipment continued to be sluggish, though we are seeing increasing activity early in the fourth quarter. As has been the case throughout 2025, our operations teams around the world delivered exceptional value for our customers. I want to thank them for their outstanding effort and the results they generated during these challenging times. Turning next to Slide 6. I'd like to review our Q3 financial performance. Q3 revenue and earnings performance continued to improve sequentially from Q1 to Q2 despite softness in our capital business. Revenue was flat compared to the prior year period at $272 million and benefited from record aftermarket parts business, which was up 6% compared to the third quarter of last year. Solid execution contributed to an adjusted EBITDA of $58 million and adjusted EBITDA margin of 21.4%. Cash flow from operations and free cash flow in the third quarter was $47 million and $44 million, respectively, demonstrating the continued strength of our business model. Bookings were relatively flat compared to the same period last year due entirely to a sustained weakness in capital project orders, which has been in a lull since 2023. While capital project activity and quoting remains high, the timing of these capital projects continues to get pushed out. That said, we do see greater optimism in our sales teams with respect to capital orders moving forward in the near term. Next, I'd like to review the performance of our operating segments, beginning with our Flow Control segment. Good performance in aftermarket parts revenue could not offset reduced capital shipments in the third quarter, leading to a 3% decline in Q3 revenue compared to last year. Encouragingly, new order activity was up 5% with aftermarket and capital demand both contributing to this increase to $94 million. Adjusted EBITDA of $26 million was down 10% compared to the record EBITDA performance in the third quarter of last year. Factory automation and general industrial end markets continue to show strength, particularly in the Americas, while capital project activity in Europe and Asia reflects the persistent economic headwinds in those regions. In our Industrial Processing segment, revenue decreased 4% to $106 million. The revenue decline was entirely due to reduced capital shipments as aftermarket parts revenue was a record $81 million and represents 76% of total Q3 revenue. Solid demand for aftermarket parts was not enough to offset the decline in capital bookings, leading to a 5% decrease in bookings compared to the same period last year. The outlook for capital bookings in the near term remains positive, and we are well positioned to win those new orders when they are released. Adjusted EBITDA margin in the third quarter was 25.4%, down 330 basis points compared to the record margin set in Q3 of last year. I should note that our third quarter results do not include any contribution from our recently announced acquisition of Clyde Industries as that acquisition was completed after the third quarter closed. The acquisition will be included in our fourth quarter results, and we look forward to reporting on the integration in the next call. In our Material Handling segment, we benefited from excellent commercial and operational execution in the third quarter. Revenue was up 11% to a record $70 million with solid increases from both product lines. This record revenue performance was led by capital shipments, up 18% compared to the same period last year. Bookings declined 4% compared to the third quarter of last year due largely to softer demand for aftermarket parts for our Bulk material handling equipment during the quarter. Adjusted EBITDA margin increased 290 basis points to a record 23.3% compared to Q3 of last year. While we expect demand to stabilize in the near term, we continue to see good level of activity in the aggregate sector, particularly in North America. As we look ahead to the remainder of 2025, we expect aftermarket demand to remain healthy and business activity to improve. We are seeing a lot of activity around capital projects, and this is expected to be a meaningful contributor to our Q4 new order activity. Though the timing of these projects can be uncertain and could shift due to macroeconomic uncertainty or other factors. I will now pass the call over to Mike for his review of our Q2 -- Q3 financial performance. Mike? Michael McKenney: Thank you, Jeff. I'll start with some key financial metrics from our third quarter. Our third quarter revenue of $271.6 million included record aftermarket parts revenue of $188.4 million. Gross margin was 45.2% in the third quarter '25, up 50 basis points compared to 44.7% in the third quarter '24. Our parts and consumables revenue increased to 69% of revenue in the third quarter of '25 compared to 65% in the prior year. Gross margin included amortization expense associated with acquired profit and inventory of $0.5 million and $1.2 million in the third quarter of '25 and '24, respectively. Excluding this negative impact in both periods, gross margin was up 10 basis points over the third quarter of '24. For the first 9 months of '25, gross margin increased 120 basis points over the corresponding prior year period and 70 basis points after excluding the impact of acquired profit and inventory in both periods. This demonstrates our ability to maintain our gross margin profile despite various cost pressures, including the recent tariff challenges. SG&A expenses as a percentage of revenue increased to 27.9% in the third quarter of '25 compared to 25.4% in the prior year period. SG&A expenses were $75.8 million in the third quarter of '25, increasing $6.8 million compared to $69 million in the third quarter of '24. This includes $1.2 million from unfavorable foreign currency translation, $1.3 million in acquisition-related costs and $0.8 million from our recent acquisition. The remaining increase is primarily associated with incremental compensation-related costs. Our GAAP EPS decreased 12% to $2.35 in the third quarter, and our adjusted EPS decreased 9% to $2.59 in the third quarter of '25 compared to a record $2.84 in the third quarter of '24. The third quarter '25 adjusted EPS exceeded the high end of our guidance range by $0.36 due to higher-than-expected aftermarket parts revenue at our Industrial Processing segment. In addition, all of our segments had higher-than-expected gross margins due to the mix of aftermarket parts in the period. Our effective tax rate of 29.5% in the third quarter was higher than the anticipated rate, primarily due to the shift in geographic distribution of earnings expected for the year and an increase in nondeductible acquisition costs. Our adjusted EBITDA has increased each quarter in '25 with strong performance in the third quarter from our Material Handling segment. However, overall, our third quarter '25 adjusted EBITDA and adjusted EBITDA margin were comparatively lower than the record performance we achieved in the third quarter of '24. Turning to our cash flows. We had strong operating and free cash flow in the third quarter of '25 at $47.3 million and $44.1 million, respectively. On a year-to-date basis, both metrics are ahead of last year with free cash flow up 13% over last year. Nonoperating uses of cash in the third quarter of '25 included $16.5 million for the acquisition of the Babbini net of cash acquired, $3.2 million for capital expenditures, $4 million for a dividend on our common stock and $2.4 million for debt issuance costs. Let me turn next to our EPS results for the quarter. Our adjusted EPS decreased $0.25 from $2.84 in the third quarter of '24 to $2.59 in the third quarter '25. This included decreases of $0.32 due to higher operating expenses, $0.17 due to lower revenue, $0.05 due to a higher tax rate and $0.01 due to higher noncontrolling interest. These decreases were partially offset by $0.15 in lower interest expense, $0.10 due to a higher gross margin percentage and $0.05 from the operating results of our recent acquisition, excluding associated borrowing costs. Collectively, included in all the categories I just mentioned was a favorable foreign currency translation effect of $0.03 in the third quarter of '25 compared to the third quarter last year due to the weakening of the U.S. dollar against certain currencies. Now I'll review our liquidity metrics on Slide 15. We renewed our revolving credit facility at the end of the third quarter, increasing our borrowing capacity from $400 million to $750 million and extending the maturity date to September 2030. This will help support the acquisition strategy we outlined in our most recent 5-year plan. Our net debt, that is debt less cash, decreased $20.6 million or 14% sequentially to $131.1 million. Our cash balance grew to $126.9 million due to an increase in cash held in anticipation of our fourth quarter acquisition of Clyde Industries. Our leverage ratio calculated in accordance with our credit agreement increased to 0.94 compared to 0.86 at the end of the second quarter of '25. At the end of the third quarter '25, we had $502 million of committed borrowing capacity, which was lowered to $332 million following our acquisition of Clyde at the beginning of the fourth quarter. Our cash conversion days, which we calculate by taking days in receivables plus days in inventory and subtracting days in accounts payable, increased to 131 at the end of the third quarter '25 compared to 129 in the prior year quarter. Working capital as a percentage of revenue increased to 18% in the third quarter '25 compared to 17.7% in the third quarter -- in the second quarter of '25. Now turning to our guidance for the fourth quarter and full year '25. In early July, we completed the acquisition of Babbini for $16.5 million, net of cash acquired. And after the end of the third quarter, we acquired Clyde Industries for approximately $175 million, subject to customary closing adjustments. Both of these acquisitions were funded primarily through borrowings under our revolving credit facility. We have revised our guidance to include the operating results and associated borrowing costs from these 2 acquisitions. We are continuing to monitor the impact of tariff changes and pursue opportunities to reduce the impact of these costs by finding alternative suppliers through cost sharing and in some cases, making investments to change our manufacturing capabilities and manufacture components at different Kadant facilities. Capital bookings were below our expectations for the third quarter. Weak market conditions in the pulp and paper industry resulted in lower demand for our capital equipment products in our Industrial Processing and Flow Control segments. The larger impact by far was in our Industrial Processing segment, where certain market conditions have resulted in a lengthening in quote-to-order times with the majority of these pending orders moving into the fourth quarter or early 2026. This has negatively impacted our 2025 guidance as we will not receive the associated revenue and earnings related to these orders until '26. We are increasing our full year revenue guidance range to $1.36 billion to $1.46 billion from $1.02 billion to $1.04 billion. The revenue guidance increase includes the net effect of incremental revenue from our recent acquisitions and lower forecasted organic revenue in our Flow Control and Industrial Processing segments as a result of lower-than-anticipated capital bookings in the third quarter. We are maintaining our adjusted EPS guidance of $9.05 to $9.25 for 2025. Adjusted EPS guidance excludes $0.51 of acquisition-related costs and $0.02 of other costs. Our '25 guidance includes a $0.03 negative effect from foreign currency translation compared to our prior guidance. Future actions by the central banks may impact the U.S. dollar and other currencies, which could have an impact on our guidance. Both GAAP and adjusted EPS guidance are calculated using our initial estimates of purchase accounting adjustments, which are subject to change as we review and finalize the valuation work for our 2025 acquisitions. Our revenue guidance for the fourth quarter of '25 is $270 million to $280 million, and our adjusted EPS guidance is $2.05 to $2.25, which excludes $0.14 of acquisition-related costs. We anticipate gross margins for '25 will be 45.1% to 45.4%. This includes a 20 basis point negative impact from $2.1 million of amortization expense associated with acquired profit and inventory. We anticipate fourth quarter gross margin will be approximately 44% to 44.5%. We expect SG&A for '25 will be approximately 28.7% to 29% of revenue. This includes onetime acquisition-related costs of $4.8 million. We now anticipate net interest expense of approximately $14.4 million for '25. We expect our tax rate for the fourth quarter will be approximately 27% to 27.5%. I hope these guidance comments are helpful, and I'll now turn the call back over to our operator for our Q&A session. Olivia? Operator: [Operator Instructions] First question coming from the line of Gary Prestopino with Barrington Research. Gary Prestopino: Just as I usually ask here, Mike, do you have on the segment basis, the percentage of aftermarket parts revenue for this quarter versus last quarter or last year at this time? Michael McKenney: Yes. I can walk through that, Gary. For Flow Control, current quarter, 74% prior year quarter, 70%, for Industrial Processing, 76% this quarter, comparing quarter, 67%, and for Material Handling, this quarter, 52% comparing quarter, 55%. And then as we stated on an overall basis, 69% for this quarter compared to 65% last year. Gary Prestopino: Okay. That's very helpful. And then just a little bit -- I'm a little bit fuzzy on what you're talking about or you're talking about that orders are being pushed back into 2026 for capital bookings, particularly in the Industrial Processing but then you expect stronger capital equipment demand in the fourth quarter. So maybe could you kind of square what's going on there? And then I'd have another follow-up after that. Jeffrey Powell: Gary, so we have several projects that are in the late stages that we expect to book. And so the question becomes we've got essentially whatever the rest of this quarter to get these things booked. And in some cases, it requires down payments. In some cases, it requires letters of credit to be established. So there's some administrative things that go on after we receive the official contractor order. And so the question is, will we be able to get all of those administrative things taken care of this year and get those actually booked. We have fairly stringent booking requirements concerning down payments and letters of credit and bank credits and things like that. And some of those are out of our control. When you're talking about foreign orders in, say, Northern Africa or somewhere going to take quite a while to get some of that administrative work from the banks signed off on. So there's some several large orders out there and just a question of whether we will book them this quarter or those strip into the beginning of next year. But we're encouraged by the activity level we're seeing and the opportunities that we're seeing now on the capital side, particularly on the Industrial Processing business. Gary Prestopino: Okay. And then just in terms of the challenges the sales force has been having in terms of just the worldwide -- the tariffs issues and things like that. Is that more or less in the rearview mirror in your opinion and the future capital equipment needs across all 3 segments? Have the clients come to realize that this is going to be the case for a while, and we need to order new capital equipment because we're running our old hard. Jeffrey Powell: Well, I think it's certainly better than it was earlier in the year but it's not settled. I mean just this week, Trump got upset with Canada over a commercial they ran and said he's going to put another 10% tariff on them. He's meeting with China, I think, today to try to hammer out a deal there and maybe reduce some of the tariffs. So I would say there's still a level of uncertainty and volatility that's going on. It's less -- I would say it's less chaotic than it was 6 months ago but it's still not settled. And I think, as you said, some people are starting to realize, okay, this is the new environment we're living in, and we've got to move forward with our business. And that's why we think we're seeing some activity level. But it's not where it needs to be. It's not -- we really need to get this sorted out and kind of everybody agree on what it's going to be, so we can all work accordingly. So it's improving, but it's not where it needs to be yet. Operator: Our next question coming from the line of Ross Sparenblek with William Blair. Ross Sparenblek: Maybe just sticking on the order disruption. Can you maybe help us think through kind of sizing the range of outcomes for the fourth quarter and maybe also thinking through like this to Gary's point, brownfield, greenfield, what's kind of the near-term driver? Jeffrey Powell: I'll answer the latter part first. So some of the opportunities are brownfields, their existing plants with upgrades. And then in the developing world, as is often the case, there will be greenfields. There'll be kind of new opportunities in the developing world. So it's kind of both. As far as the range, we really don't kind of give bookings range. So I don't know what you want to say there, Mike. Michael McKenney: All right. I think we kind of lost you there for a second. But it looks like one of your peers called out maybe some disruption for several quarters, presumably because of tariffs. I mean those are larger greenfield orders. So you're not really seeing that level of impact or potential impact going into 2026. Jeffrey Powell: I think the impact we see from tariffs is just the uncertainty that it creates. And so our customers are more cautious and move more slowly as they try to better understand what the environment looks like going forward. So I would say it has impacted the timing on a lot of our projects. But the projects that we're tracking I don't think we've seen any of them that we think are going to go away or be extended for years. I mean I think the ones we're tracking that we have kind of building our business strategy around, we think will occur over the next short period of time. Ross Sparenblek: Okay. That's really helpful. One more question, I'll hop back in queue. Can you just give us a sense of factory utilization rates globally and how we should think about the parts and consumable mix here as we look at the year? Jeffrey Powell: Yes. Well, so as we've said all year long, we had another record parts quarter. Our parts are overperforming relative to the operating rates, and that's because the equipment is getting quite old and it's just taking a lot more parts to keep it running. So the operating rates, it kind of depends on the business you're looking at, whether you're talking about the wood processing side or the or the paper side. But in the U.S., operating rates are higher than the rest of the world. I would say they're higher here, maybe in the kind of in the wood side, maybe in the low 80s -- or I'm sorry, on the paper side in the low 80s. The wood side, it's a little less clear. Those they can kind of curtail very quickly. And so it's a little harder to keep track of those. But they're certainly running at a reduced operating rate and taking downtime. China, I would say, still in the 60s percent operating rates and Europe is in the kind of the 70s. So it really hasn't changed much throughout the year. Operator: Our next question coming from the line of Kurt Yinger with D.A. Davidson. Kurt Yinger: Just wanted to stick on the capital equipment side and understanding we're not going to kind of guide to a Q4 bookings number. If we were to look at the Q3 performance, kind of low $60 million in capital equipment bookings, the last 2 years have kind of been in the low 70s. I guess my question is, when we think about these larger fiber processing orders that you seem to have visibility to, but maybe kind of still pushed out, like are those sufficient to really pick things up relative to maybe what we've seen versus the last 2 years? Or is it just kind of helping get back to that baseline relative to the weak Q3? How would you kind of frame that for us? Michael McKenney: I think it would be a step change for us. It would be very, very helpful. These are projects that will be processed over a number of quarters, and we'll be able to recognize revenue on a percent complete basis. So as they get processed over, say, 3 or 4 quarters. I did -- on the -- and we usually kind of stay away from trying to forecast bookings but I can give you a little color on what we're looking at by the segments. If I look at capital activity in Flow Control compared to what -- to the prior year period, so fourth quarter of '24, we're looking for capital activity to be up 3% or 4%. So somewhat modestly in Flow Control. And in Material Handling, I'd say kind of same boat, up about 3% to 5%. And interestingly there, I want to clarify that isn't on the capital side. That's in parts and consumables, whereas flow control is on the capital side. But going to the -- I think the big wildcard is really in industrial processing. On the capital side there, wood is looking to be up, say, 3% or 4%. But the big difference maker is, as we've been discussing in fiber processing. So it could be up significantly compared to, frankly, many periods. There are a number of really nice projects that we're hoping will come in, I'd say, over the next quarter to 3 quarters. So first half of '26 to the fourth quarter of '25. But that's really the big wildcard for us. There's a number of good projects there. They haven't gone away. We feel we're well positioned, and we're just waiting for the order to be finally booked. Kurt Yinger: Got it. Okay. That's super helpful. And maybe bigger picture, the multiyear targets of 3% to 5% kind of organic top line growth, do we need a more broad-based recovery expanding past just some of those fiber processing orders? Or would those be kind of sufficient to help you get back into that range from what you can see? Michael McKenney: I would say we do need a more broad-based to really get back to that. Jeffrey Powell: In particular, housing. We need to see the housing environment improve because, as you know, that drives a lot of the economy and it drives a lot of our businesses. So a pickup in housing, I think, is quite important, not only to us but to the general economy. Kurt Yinger: Right. Okay. That makes sense. And then switching over to parts and consumables. That's obviously been a nice consistent performer here. How should we think about price versus volume kind of contribution so far this year? And then as we just kind of look across the backdrop, a lot of closures in the pulp and paper space, probably more to come on the wood processing side. Does that give you any concerns about potential deceleration there even? Or is kind of that older age of installed base still supporting pretty healthy demand? Jeffrey Powell: Yes. I would say that on the -- a lot of those closures, of course, you've got to kind of look at the details of those. They may not be -- if it's a pulp plant, of course, as you know, we -- until the recent acquisition of Clyde, which mainly focuses on the new mega plants, we've not had a lot of business on that. So when they announced closures of some of these mills that are virgin mills, that has less of an impact. It's not 0 but it has less of an impact on us. But I think we tend to look at the global market. In the global production, global demand is continuing to grow somewhere between 1.5% and 2.5%, depending on where you're at around the world right now. And so because we operate pretty much in every mill in the world, what you're seeing is you're seeing a shifting of the production to meet that demand growth. And we work very hard to make sure we're there so that we kind of -- if it's something shuts down in Georgia and something opens up in Turkey or Algeria, we're there to capture that. And so we think that for the most part, our -- as long as global demand continues to grow, our parts business, which is a function of operating rates and total production demand will be okay. Kurt Yinger: Okay. Okay. That makes sense. And Mike, as we think about the Q4 revenue guide, can you just put a finer point, I guess, around how much contribution you expect from Clyde and Babbini and then the overall kind of organic growth assumption in there? Michael McKenney: Yes. So for -- it's a good question, Kurt. For Clyde and Babbini, I'd say we're anticipating revenue in the $23 million to $25 million for those combined. I actually in mine -- I'm kind of the lower side of that to the $23 million. But a couple of comments I want to make on that. You can -- you'll be able to see, you heard in our comments, what you saw in our press release, Babbini had a very good third quarter. They shipped $5.9 million. You saw on the graphic, the chart we put up, that's $0.05 without interest cost. But a note of clarification there. Their third quarter tends to be their strongest third quarter. And of course, we've just brought them into the fold and haven't been able to -- we are working on but it will take us a little time to get them reoriented towards a parts and consumable business and capturing that flow. I think the management team there is very excited about doing that and changing their business model, not being as focused on capital equipment. But for capital equipment in the fourth quarter, there -- it's quite weak. Frankly, it's quite a weak quarter for them. On the Babbini front -- or excuse me, on the Clyde front, we had said their revenues were about $92 million. So if you divided that by 4, you'd say $23 million, and they actually would have been pretty close to that. But they pulled a capital order into their third quarter. So they're a little -- they're going to be a little under that $23 million because they shipped an order a little bit earlier. It was scheduled for the fourth quarter. I think they would have come in pretty spot on, on the '23, but they're a little lighter than they would normally be. So that's some color on the top line. And what was your -- what else? So I'll stick to -- you can see -- you saw for the third quarter, the $0.05. If we allocate the interest to that, that would be $0.04 for Babbini. And interestingly enough, with their weaker top line fourth quarter with interest allocated, they'll be dilutive $0.04 in the fourth quarter. So they'll be for the year breakeven but in the fourth quarter, dilutive $0.04 on our adjusted EPS. For Clyde, we have them right now at being dilutive of $0.02 with the interest charge in there. Excluding the interest charge, they'd be accretive $0.3 -- so if I took then both of those, Babbini, Clyde, with interest allocated to them, they're actually a dilutive $0.06 in the fourth quarter for us. Kurt Yinger: Got it. Okay. Perfect. And then just last from me on kind of run rate SG&A, if we were to back out some of the onetime acquisition costs and whatnot, is a good kind of go-forward quarterly number in the $80 million range or even a little bit above that? Michael McKenney: Well, I want to be -- we're working through the valuation. So we just have markers in currently. I think we'll run a little bit lower than that but you're not far off the mark there. But I think it will run just modestly lower than that. So maybe it's in the somewhere between the 78 to 80. Operator: [Operator Instructions] Our next question coming from the line of Edward with Boston Partners. Edward Odre: I just had one here. When you talk about delayed bookings, what's the sort of quantum of official orders that you've received and that are just waiting for administrative to include relative to just conversations that are being had that are kind of still up in the air. Could you provide any color around that? Jeffrey Powell: Yes. I mean we really -- because we don't kind of give bookings and they haven't officially been booked, I can't give you a number. I can just tell you that we're in discussions, the final discussions on some of these larger projects. And I said in some cases, we might have some of the paperwork but we're waiting for down payments where we can officially book it or we're waiting for a letter of credit. So I mean, there -- in some cases, they're very far along. So we feel quite confident about them, but they just haven't met our bookings requirements so that we can actually book it and disclose it. We just -- as I said, we stay pretty disciplined on that and make sure that we check all the boxes before we actually call the bookings. Edward Odre: No worries. And then just one thing I might have missed it earlier. In terms of price and consumables performance, how much of this was driven by price versus volume this quarter? Michael McKenney: I'd lean more towards the volume side of it. Operator: Our next question coming from the line of Ross Sparenblek with William Blair. Ross Sparenblek: A couple of questions. Can you help me pinpoint what the backlog was? I'm around like $260 million and also on the equipment side, I know there's some moving parts. Michael McKenney: Yes, Ross. The -- we ended the third quarter with backlog at $273 million and capital in that is about 60%, so about $163 million. Ross Sparenblek: Okay. And then is there any margin differential within that backlog versus the run rate for the year? Michael McKenney: No. I think it's fairly consistent. Ross Sparenblek: Okay. And then now that you've had some time with Clyde, what should we expect for that backlog contribution going into the fourth quarter? I know you said it was fairly strong, $92 million of revenue. I mean, where should that be shaking out as we think about modeling orders? Michael McKenney: I have that here somewhere, Ross. I think it's a little over $30 million. So use $30 million as a marker. Ross Sparenblek: Okay. And then is it all primarily -- it was not book and ship. There's about $25 million that's equipment but sales similar to orders for Clyde on a quarterly basis? Is that kind of the assumption? Michael McKenney: Sorry, Ross, what was that? What's the -- I didn't catch... Ross Sparenblek: When we include Clyde, are the orders going to be similar to what we should expect on the top line for revenue contribution, kind of a one-for-one. Everything goes through the order book? Michael McKenney: Yes. Everything is going to go through the order book is a certainty. Yes. Everything will be through the order book. 75% of the business is parts and consumables. What I can't give you right now because we're acclimating ourselves the business is exactly that turn cycle. Ross Sparenblek: Okay. And then just one last one on the margins. Can you give us a sense for Clyde, where the D&A, SG&A, R&D, gross margins all shifted out after you finish your accounting? Michael McKenney: Well, I can talk to the margin profile. And one thing I'd say is broadly, it fits very well in the Industrial Processing segment. So what you see for metrics in Industrial Processing, this will fit really well, both on the gross margin and EBITDA margin front. Ross Sparenblek: Okay. So nothing really to do there, pretty similar to the existing [ aftermarket. ] Michael McKenney: Yes, it fits very nicely in that segment. Operator: [Operator Instructions] Our next question coming from the line of Edward Odre with Boston Partners. Edward Odre: Just one more thing from me. Just regarding the Clyde acquisition, I wasn't able to see this in the release but how much cash do you acquire with that business? Michael McKenney: We always do it -- we do all our things net of cash because we're just going to -- at the end of the day, the only cash that's going to be left is operating cash. I can do it off from the top of my head but it's -- to be quite honest, it's somewhat irrelevant because we'll sweep it and just pay down debt and just have operating cash there. Operator: Thank you. And I'm showing no further questions at this time. I will now turn the call back over to Mr. Jeff Powell for any closing remarks. Jeffrey Powell: Thanks, Olivia. Before we wrap up the call today, I just wanted to leave you with a few takeaways. The second half of 2025 is expected to show solid improvement compared to the first half across a wide range of metrics despite the turmoil in global trade policies and other societal challenges that we're currently facing. As we look ahead to the fourth quarter of 2025, we expect demand for capital equipment to improve and strong aftermarket parts order activity. We made solid progress this year in our efforts to drive operational improvements, which includes our 80/20 performance enhancement program and other initiatives to maximize value despite the continuing challenging macroeconomic environment in various regions of the world. And lastly, we look forward to updating you next quarter on the integration of Clyde Industries and our other recent acquisitions. Thanks for joining today, and we wish you the best for the rest of the day. Operator: This concludes today's conference call. Thank you for your participation, and you may now disconnect.
Roger White: Well, good morning, ladies and gentlemen, and welcome to the C&C Group FY '26 Half Year Results. My name is Roger White, and I'm joined today by Andrew Andrea, CFO. I'm sure you will all know that in due course, Andrew will be swapping barley apples and wheat for tomatoes and pepperoni as he moves from drinks to food and from a wholesaler to operator moving into Domino's Pizza CFO. There will be plenty of time to wish Andrew Bon Voyage in due course. In the meantime, we have plenty to do in the period he's still with us. And I know that Andrew is fully focused on C&C Group across the whole of that period. Today, we will start with the highlights of the last 6 months before I hand over to Andrew, who will give you a detailed review of the financial performance in the first half of '26. I will then update on our current thinking regarding strategy, followed by a brief operational review of the first half, a closing summary and outlook before we move on to some Q&A in the room. Now moving directly on to Slide 4 in your packs. We've delivered a solid performance across the first half of FY '26. From a market context perspective, it's been a mixed period. The well-publicized challenges for the hospitality sector have accelerated across the past 6 months. Increased operating costs and mixed demand has impacted most operators. However, some decent summer weather certainly lifted the mood across the sector at certain times across the summer. However, as welcome as the good weather was, it did not lead to positive volume performance across the total market. At C&C, we focused on improving our efficiency, driving out costs and delivering great service to our customers. This has underpinned our performance in the period, leading to a 4% increase in our operating profit. Both our reporting segments, brands and distribution improved margins, and we continue to deliver strong free cash flow, which in turn has supported our capital allocation choices with further returns to shareholders via increased dividends and further execution of our share buyback plans. Revenue in the period appears subdued, but reflects in the main, the transition of contracted Budweiser Brewing Group volume out of the group alongside some thinning out of some lower-margin contract and customer volumes, something which is likely to continue as we look forward and focus our efforts on improving margins, in particular, in the wholesale part of the business. It's been a busy 6 months for the teams inside the business where we have worked hard on business improvement across control, simplification and business process redesign, alongside team development and our initial actions on brand development and innovation. Improvement in C&C is underway, but there is much to do, and it will take time to feed through to our performance. I would like to take this opportunity to thank all 2,850 colleagues at C&C Group who continue to work hard to serve and support all our customers and consumers at the same time as we seek to improve the business. Now I'm going to hand over to Andrew, who will take you through the detailed financial review for the first half. Andrew? Andrew Andrea: Thanks, Roger. So moving on to the next slide and starting with the headline financials. As Roger just alluded to and as we reported back in September, revenues were 4% behind last year, and I'll come back to that in a moment. However, we've made operating margin improvements in both our Branded and Distribution segments. That's helped drive group margins up 40 basis points and consequentially, that's driven positive momentum in each of the key profit metrics, most notably operating profit up 4% and double-digit growth in both PBT and earnings per share. From a cash perspective, we continue to be strongly cash generative. There have been a couple of one-off items, which I will expand on later, but the underlying cash flow of the business continues to be strong and leverage is in line with last year at 1.1x. So a business continuing to generate strong cash flows underpinned by earnings progression. Turning now to revenues on Slide 7. But as you can see from the chart, the majority of the revenue decline was anticipated and relates to the loss of the BBG distribution in Ireland. Just to remind you, this will annualize in January. So there's a little bit more of this to come through in the next 3 months or so. In our underlying distribution business, as widely reported in the market, national customers are reporting like-for-like absolute sales growth, but volume decline in drink, and that's reflected in our own distribution performance. And we are seeing some rationalization in the estates of many of our big customers. In the U.K. on-trade, cider has underperformed. Magners and Orchard Pig have seen lower sales this year. Roger will touch on off-trade progression, but on-trade is harder to land, and that's reflected in the sales performance. But encouragingly, we've seen an improvement in revenues in both Bulmers and Tennent's, our 2 core brands overall. So moving on to earnings. On the next slide, please. Thank you. We've seen operating margin percentage improvement in both Branded and Distribution. And this is driven by 2 key areas of focus in our business across both segments. The first of those is a focus on efficiency through our Simply Better Growth program, driving costs lower through the organization. But secondly, a much more disciplined approach to trading. So what we mean by that is, we want to run a business with sustainable earnings at an appropriate level of margin. We will actively exit things that don't earn us money. It's the classic failed is vanity, profit sanity equation. But by applying that, as you can see, that margin growth has driven absolute operating profit growth in both of our trading segments. Turning now to costs on Slide 9. By way of reaffirmation, our FY '26 costs are in line with our expectations. Modest inflation is the underlying theme for this year. And for FY '27, we are starting to hedge some positions. But as things currently stand, we're anticipating another year of modest inflation overall. There's nothing at this stage that is not in line with our expectations. So moving now on to cash flow and balance sheet. From a cash perspective, as I mentioned earlier, we've seen strong cash generation in the period. But as you can see, we've got a couple of one-off items bolstering that cash flow overall. First of all, from a CapEx perspective, our program this year is second half weighted. We're still guiding full-year CapEx of around EUR 18 million to EUR 20 million, and we've had a GBP 10 million benefit on working capital. I'd expect that to level out in the second half year. So GBP 15 million of that GBP 20 million uplift should flow back in H2. We have closed out some cash positions with the revenue that has given us an income tax benefit in the period. But overall, our aspiration is for free cash flow to be at a similar level to that which we generated in FY '25. Moving on now to debt and leverage. Our borrowings have increased slightly in the period. I'd expect that again to level off in the second half year. We've closed out a couple of lease negotiations on a couple of our bigger depots. So our IFRS 16 obligations have increased in the period. But our leverage, and just to remind you, our focus is on borrowings to EBITDA on a pre-IFRS basis is at 1.1x, in line with last year. And by way of reminder, our financing is long dated with headroom. So we have an RCF and term loan extending out to January 2030, and a couple of private placement notes maturing in 2030 and 2032. So we've got a prudent level of leverage, headroom against our facilities and no short-term refinancing requirements, which gives us cash and capital flexibility. So what does this all mean, then wrapping this up for capital allocation. Well, our primary driver of increased cash generation is growing our earnings in the medium term through growing EBITDA. But importantly, our underlying cash flows outside that are quite predictable. So working capital is pretty stable. There are opportunities, most notably rationalization of our SKU base. Our CapEx is modest in nature. We're forecasting somewhere in the region of EUR 15 million to EUR 20 million of CapEx year in and year out. And because of the finance facilities we've got, our finance costs are stable, and we have a stable effective tax rate overall. What that means, therefore, is we retain and maintain our aspiration of a business generating at least EUR 75 million of free cash flow in the medium term. And that capital allocation priority is to honor our commitment to return EUR 150 million back to shareholders in the 3 years to FY '27. And that will be driven through a combination of growing our base dividend. We've announced a 4% increase in our interim dividend and the option of either share buybacks or special dividends. Clearly, our preference is for the former, and we completed the latest EUR 15 million tranche of share buybacks in September of this year. So including the interim dividend, we've announced just over GBP 90 million of returns to date. So we've got around GBP 60 million to go. If we add in our dividend expectations, that means over the next 18 months, we've got around GBP 30-or-so million of buybacks to achieve in that 18-month period. And in generating that cash flow, coupled with our financing flexibility, we do have the ability to invest in strategic growth opportunities should they arise. And clearly, that will be done on a case-by-case basis and returns driven. Underpinning all of that is a target leverage of 1x earnings overall in the medium term. But what this demonstrates is that we have a business that's generating predictable cash flow. We've got very clear capital allocation methodologies underpinned by a low level of leverage overall. That's everything from me. I'll now hand back to Roger. Roger White: Thank you, Andrew. I'd now like to take a few minutes of your time to update on strategy before I talk through a brief operational review of the first half. So turning to Slide 14 in your packs. It's now around 9 months since my first day at the C&C Group, that time has certainly flown by. I've spent most of my time during the last 9 months just building my understanding of the business and the markets we operate in. It's true to say that we certainly have some complexities as a business, but we also have a range of opportunities and balanced with challenges. Let me update you on where we are thinking regarding the direction of travel of the C&C Group strategy. And if I can start by looking backwards to just set some context. C&C Group has been built over time via acquisition of multiple businesses to create a scale business across multiple markets and multiple geographies. However, integration has not been prioritized in this business build. So systems, policy, procedure and even cultures have in many ways not been harmonized. We, therefore, operate in multiple business models within a group structure, which at times has been unclear in its strategy. In addition, we struggle to realize the benefits associated to our scale. In recent years, to address this, the stated objective has been to create an integrated one C&C approach, attempting to push our group into one operating model. However, this has not been fully delivered due to the complexities of the businesses and the lack of historic integration that I mentioned a moment ago. So we currently operate in a slightly uncomfortable middle ground, neither as an integrated group nor as discrete business units. This reflects in our cost base, it reflects in our controls and it reflects in our focus as a business. We do, however, believe that scale alongside our brands and wholesale model can bring significant benefits in the markets we operate in and thus supports the principle that the C&C Group has a rational role to play in the creation of value across the beverage markets we operate in. Moving on to Slide 15. As we look forward, our immediate priority is to evolve how we operate as a group, simplifying and focusing on execution as we aim to create value from our scale and expertise, both centrally and locally. Our view is definitely that the beverage sector is a great part of the consumer goods market. It has deep consumer penetration across multiple occasions and has products and brands for everyone, whether locally or globally and whether consumed in a hospitality venue at home or even on the go. We can develop our position in this market as a highly credible brand owner and developer, supported by our position as an experienced and sizable wholesale operator. By leveraging our enviable scale alongside our market-leading reach, range and service, supported by our industry-leading category expertise, specifically associated to the hospitality sector. We need to develop further the winning consumer and customer propositions that will drive our business forward successfully. In the meantime, our operating segments will remain Branded and Distribution. We have many things to occupy us as a business in the coming period, but I would boil them down to these 3 simple objectives: simplifying our core central operations, processes and reducing our costs, growing volume in our branded segment and improving margin in our distribution segment. To achieve this, there are multiple actions required, some of which are already underway, others we will develop in the coming months. This will lead to an updated set of performance outcomes and longer-term performance targets, all of which we will set out in May 2026. I believe this evolutionary approach will yield the best outcome for shareholders in the short and medium and long-term and lead to the delivery of our longer-term strategy from a much more solid starting point. Now turning to Page 16. As we look forward and plan how we'll shape and grow the business, one thing underpins all of our ambition, and that is the building of a winning culture where performance and people go hand in hand. To support our evolving strategy, we aim to create an agile, inclusive and performance-driven culture that supports our local hero challenger status, providing our consumers and customers with a great experience, whether that be associated to our brands, our supply or even corporately. As you can all see from the slide, there are a number of work streams across the organization, talent, leadership, communication and capability, all of which tie into our cultural development and all of which are necessary to meet our ambition. However, in the very immediate term, we are still very much fixing the basics across our business to ensure that we are building from the most solid foundations. These foundations will support our operating structures and our growth ambitions as we progress the strategy development of our business. Now turning to Slide 17. Moving on to review the last 6 months, let me briefly update on markets brands, operations and our responsibility agenda. Firstly, turning to consumers and markets on Page 19. Consumer behaviors remain significantly influenced by economic factors. Confidence remains fragile. And as costs in hospitality have risen and consumers have had to shoulder the burden for this, it has led to some volume issues as consumers simply cannot afford to enjoy hospitality occasions as frequently as they historically have. In addition, when they do go out, value for money takes on even more importance. The drive for value has also impacted choices, not only where to visit, but what to consume while you're there. This is manifested in the higher proportion of sales in long alcoholic drinks products, somewhat to the detriment of wine and spirits. This picture speaks to the complexity that exists in our markets and reinforces the importance of our portfolio breadth and market coverage as a business. Now our branded portfolio is performing well in these challenging market conditions, supported by our strong regional routes to market. Our core brands have a unique long-standing importance to consumers within the markets they operate, and we are only just starting to tap into the possibilities of developing our brands further, whether it's in our well-known core or in areas where we currently have a smaller, more niche presence. As I mentioned earlier, we are confident in the potential of the wider beverage market to sustain long-term growth, and we believe there is potential for C&C to grow within that context. Now turning to Slide 20 and specifically to talk about some of our core brands. 2025 marks a major milestone for the Tennent's lagger as we celebrate 140 years of brewing Scotland's favorite beer. Despite market headwinds, Tennent's has shown remarkable resilience, broadly maintaining its market share across Scotland. In the off-trade, we have widened the gap to the 2 nearest competitors, while in the on-trade, our rate of sale is 2.5x that of our nearest competitor. Such as the strength of the brand performance, Tennent's is now a top 10 lagger brand by value across GB as a whole, outperforming a number of leading global brands. Tennent's does play a unique role in Scottish culture, and we have continued to be at the heart of what matters to our consumers from rewarding Scotts for the best and worst Scottish summer weather being part of the conversation and the experience at the Oasis concerts as the tour of the year arrived at Murrayfield. In fact, across the summer set of concerts in Scotland's 2 national stadia over 365,000 pints of Tennent's were enjoyed. Our last financial year-end review, I said we would bring innovation back to the brand. And I'm delighted to say that we've just launched Tennent's Bavarian Pilsner [indiscernible]. And this is a 4.7 ABV limited edition beer with a distinctive Bavarian flavor coming to the market this month. This is the first of a number of planned launches for the Tennent's brand built through our new innovation team and process. In addition, we brought a significantly improved reformulated Tennent's Zero to market alongside an expanded pack range for Tennent's Light, critical to the growing number of adults and GB saying they are moderating. Tennent's is an amazing brand with so much more potential still to be unlocked. Moving on to Slide 20 to talk about Bulmers. Bulmers has delivered a strong first half with total revenue up more than 6%, driven by focused brand investment and a revitalized brand communication strategy. In the on-trade, Bulmers original growth accelerated across the reporting period, up over 10% in the 3 months to July, benefiting from the undoubted spell of decent summer weather, while in the off-trade, it outperformed the cider category with growth of 10% and a 1.8% share gain. Power brand, as measured by Kantar, is up 9.5% year-on-year, reflecting the impact of the above the line and digital campaigns with its our time advertising returning for a second year backed by a 33% increase in media spend, helping Bulmers become the most salient long alcoholic drink brand in Ireland. We backed Bulmers Zero with Tonight's Zero, Tomorrow's Hero campaign, reaching almost 3 million consumers with both strong growth and share growth in the nonalcoholic cider category. Bulmers Light continues to grow with volume up, meeting the growing demand for lower calorie options. Like Tennent's 2025 was also a milestone year for Bulmers as the brand turned 90. We celebrated, as you would imagine, in both the trade and with consumers and employees. So in its 90th year, Bulmers is in good health, growing, innovating and connecting with consumers. Now moving on to Magners on Slide 22. I told you earlier in the year that we were at the beginning of a journey with Magners, and I'm pleased to say that we are on our way, seeing some positive initial impacts from our efforts. However, this is a journey that will take time and commitment. In the period, we have made our largest brand investment in over a decade, which has seen the magnetism campaign begin a renewed energy to the brand and consumers. It's already driving some strong brand health improvements in awareness and consideration and the social engagement scores are moving in the right direction. This marks a real shift in momentum after some very challenging years. Magners remains the #1 package cider in GB on-trade, selling over GBP 90 million in the last 6 months. So we do have scale, but we now need to drive momentum as we improve consumer awareness and drive brand reappraisal. We have new packaging that has now been rolled out and is driving increased consumer perceptions of quality and our focus on pack mix is beginning to bear fruit. Recovery journey for Magners is only just underway. Slide 22 highlights a number of consumer actions made to build brand momentum, including a number of PR-led activities, whether that's in concerts such as Belsonic in Northern Ireland, where we reached an audience of over 200,000 people with the Magners brand. Magners reach continues to grow globally, exported to 45 countries and including the U.S.A, I couldn't resist the picture of a Victoria's Shane Lowry enjoying Magners after clinching the rider cup for Team Europe. Magners is therefore, regaining its edge with renewed brand energy, improved consumer perception and a clear plan to drive value and growth into FY '27. Now moving to Slide 23. Our premium portfolio continues to grow, driven by Menebrea's strong performance in H1. On-trade volume sales are up 8%, with significant growth, particularly in Scotland. For Menebrea, we focused on building awareness and specifically food credentials, particularly through a strategic partnership, including with the well-known celebrity chef, James Martin. This has helped us drive our awareness now at 13% in GB, but a significant awareness in Scotland of over 28%, cementing a key point of difference, which is based on the insight that 73% of [at-home] beer serves are now accompanying food. We've launched new pack formats supported by our biggest off-trade investment to date, and we've delivered the strong growth that I mentioned. We've anticipated across multiple channels from [indiscernible] and digital screens in stores through to a traditional Italian beer window in London, which has brought a touch of Florence to the streets of London and driven national media coverage. Meanwhile, our exciting modern new cider brand Outsider is gaining momentum. It's now the #2 cider brand in Northern Ireland behind -- in the on-trade behind Magners, and it's expanded into Scotland with nearly 300 listings. In the off-trade, our new 4 packs and 10 packs have been listed in over 700 stores in H1, building on the strong digital-first marketing and consumer engagement position. So Menebrea and Outsider are proving the case that our premium and challenger brands, can drive growth, relevance and value across the portfolio. Now turning to the distribution business on Slide 24. Our distribution business, specifically Matthew Clark Bibendum operates a full-service composite supply model across the U.K. hospitality industry from 11 warehouses, it services 12,000 customer delivery points with a range of over 8,000 SKUs. I talked when we last met about a Road to Recovery for MCB. And I am delighted to confirm that if the measurement of recovery relates to customer service, choice and value, then we are in a much improved position. The tangible measure of service performance is now fully recovered, and we are now firmly into the phase of improvement in our operating efficiency from a strong base level of service. Whilst we have seen our product sales mix move in the period in line with market trends, we are starting to see the benefits associated to our technology investment in this area, such as our sales force efficiency and our ability to improve our customer performance, which is beginning to take shape. This is likely to see some short-term attrition to our customer numbers as we move out of less commercially attractive business and seek mutually beneficial longer-term commercial supply partnerships with our customers. This remains a highly competitive sector, but we're working to ensure we are increasingly capable of providing winning customer propositions at the same time as we provide our branded partners with unrivaled on-trade access. Turning to Slide 26. Let me give you a short update on our sustainability and responsibility performance. We see our sustainability agenda as a core part of our business operations and simply just part of daily life at C&C. We continue to make good progress in our decarbonization journey across the group with the latest major initiative being the anticipated investment in an e-boiler at our Wellpark Brewery next year to replace our current usage of gas at Wellpark with sustainably generated electricity. This initiative will be a major contributor to our decarbonization plan, but obviously, alongside the multitude of smaller but important actions we take every day. Across the group, our commitment to safety is absolute. In the period, we launched our health and safety Center of Excellence at our Birmingham site, where we train and develop our safety activities for rollout across the wider group. This initiative underpins our improvement plans, ensuring our development of safe working practices are successfully trained across the whole business. As a group, we continue to invest in technology and assets that meet our responsibility agenda, including the important enabling investment in dealcoholization technology to support our innovation drive into low and no. This exciting investment will be made at Wellpark and is expected to be operational during the course of next financial year. It will give us a technical edge in the production and delivery in this critical product area. So in the broadest sense, we continue to prioritize our responsibility agenda, not only with words, but also with tangible actions. So moving on to the final slide. In summary, H1 FY '26, we delivered a solid financial and operating performance. We delivered sustained improvement in service to customers and continued to generate strong amounts of cash. Our brand performance was resilient and gives me confidence in our longer-term potential. Distribution has recovered its service, which is critical to us moving to the next phase of margin improvement. I said in May, there is much to do at C&C. I would reiterate that comment once again today. Market conditions are without doubt challenging, but we now have a clear view of our next steps and where to prioritize our efforts as we deliver the balance of the current year and plan for the next. Thank you for listening today, and we are now going to open up to questions from the room, if we have any. And we have a microphone. So if you'd be good enough, if you have a question, just announce yourself who you represent and then ask the question. Harold Jack: Douglas Jack with Peel Hunt. Just a quick one on the distribution. How far along the road do you think you are towards removing unprofitable business within that division? I mean what's -- how many years should we look to you seeing that process complete? And what kind of benefit? Roger White: I think it's a long-term journey. It's not a short-term position. We provide a wide range, as I said, to 9,000 or so SKUs. Within that 9,000 SKUs, there's work to be done to both improve the range and also streamline the range, and that's to be done with the customer and consumer in mind, but will require a reasonable amount of effort to do it. So I think I would look at this as a -- this isn't going to happen overnight. It's going to take time. Some of the volume will be contracted. Some of it will require replacement activity behind it, but it's the motivation to work with our customers -- all our customers to give them a better outcome, but also to give us a better commercial outcome. Laurence Whyatt: Laurence Whyatt here with Barclays. I've got a couple, if that's okay. When you talk about this sort of new integration that you're putting the C&C Group back together, are there any KPIs that you are particularly targeting that we should focus on? Is it simply growth in the branded business, margin in the distribution business? Or are there any other indicators that you think are particularly important? Maybe we start with that. Roger White: I think there will be lots of KPIs that we will need to pull together and as I say, in May next year, come back to you with a set of hopefully -- properly worked through plans, initiatives and actions and a set of numbers that will go with that and a set of monitoring KPIs. I think today was really just about setting the stall out in what the higher level focus would be and that simplification at the center, margin improvement in distribution and growth in brands are, the areas we're working on the initiatives behind those. As I said, some are started. We've got a team of people on innovation. We've got a new process design. We've got the first signs of new things coming to market. So we've got growth in mind. We've got a more growth mindset in the service on the distribution business is going well, but we've got a lot of commercial work to be done to get a ranging right and our pricing right. So I think there will be much more to come. Laurence Whyatt: You mean pricing -- it's a clear focus in the industry at the moment. One of your competitors last week was talking around a lot of price being taken during the pandemic period and perhaps a lot more price than inflation. And then for their plan going forward to 2030, they're looking to take price below inflation, albeit ahead of the cost inflation. I was wondering if you have any similar thoughts on the consumer price environment within the U.K. and where do you think your pricing will be able to be? Roger White: Look, I -- there are in essence, 2 fundamental bits to our business. There's a branded business and there's a distribution business. And in the branded business, for us, it's about -- as I said, it's about growth, and we want to support our customers. If there is inflation there, we'll look to offset that as much as we can with efficiency and cost. And if we need to pass some on it, we'll be as modest as possible in support of the sector. The distribution business is a fundamentally lower margin business. It's about moving cost through, but being efficient, and we're going to do both of those things. So I can foresee -- as we sit at the minute, as Andrew said on his slide around materials, we don't see anything from a cost point of view that looks shocking at the minute. We will wait and see how the next few weeks goes. We are hedging for next year, and we can see a very similar sort of low single-digit amount of inflation coming. Fintan Ryan: Fintan Ryan here from Goodbody. Just a few questions from me, please. Firstly, maybe following on from that last question in terms of margins. Within the 60 basis points branded margin increase in H1, can you break down what was maybe the COGS gross margin? What was -- how much A&P stepped up by? And then what other sort of operational leverage you got? Andrew Andrea: An equal measure. So I wouldn't focus on one thing. With the margin improvement in branded, we're pulling lots of levers, as Roger has alluded to. So I don't think there's any one dominance in all of those 3, Fintan. Fintan Ryan: And in terms of A&P spend for the second half? Andrew Andrea: We're seeing a slight increase year-on-year. So a continuation of that going through to H2, including the continued investment in Magners that we've commenced in H1. Fintan Ryan: Okay. And maybe just following on from that point. Clearly, I know as a consumer see Menebrea everywhere and like good listing, particularly in Tesco. Maybe it's probably a longer-term question, but do you see any positive synergies in terms of reigniting the Magners brand, reflecting some of the wins that you've got from Menebrea and maybe even bringing Tennent's out of the border? Roger White: Look, I think momentum is everything in brands. And to get momentum moving, you need multiple sets of activity. It needs to be a combination of building awareness, growing distribution, bringing something new to market, having great products, convincing people through competitive pricing. There's -- so it's a range of activity. I'm delighted to hear that you're seeing Menebrea everywhere. I don't think we are nearly everywhere, but I'm glad that you're seeing it. I think there is a halo impact. If you are showing momentum, then whether it's consumers or customers or partners all see the positive benefit of that. So we do want to get into that positive momentum with all our brands. Fintan Ryan: One final question. I think you said to get to the GBP 150 million total cash return, you need to do 30 million buybacks over the next 18 months. Any thoughts of when we should expect that buyback? And basically given the shares have come off a bit recently, why not now? Andrew Andrea: Well, I think we sort of hold code when we pay dividends and there was an expectation of what the residual dividend will be. We've always said that we will do GBP 15 million or so tranches. So crudely speaking, we've got 2 tranches to go over an 18-month period. And we'll just align that to match to our cash flows, which was always the intention. But it's well within reach is the key point. Damian McNeela: Damian McNeela from Deutsche Numis. First question on Magners, Roger. I mean I appreciate that we're at the start of the journey on Magners, but it was a particularly good summer, and we saw the evidence of that in Ireland. What are the challenges that Magners brand really faces in the U.K.? And what work do you need to do to remedy that? Roger White: So look, I think the Magners brand is -- has been a great brand in the past, can be a great brand in the future. It's been heavily skewed in recent years to quite high volume, low-value price activity, in particular, in the take-home market. It's lost a lot of its momentum in the on-trade and building that distribution through the draft side of things, it's going to take time to do. So the starting point is consumer reappraisal, and we started that with the work we're doing and the early results on that look encouraging, but that doesn't feed through immediately into brand performance. We are starting to see trade reappraisal, our customer base appreciate the scale, breadth and positioning of the brand and they seem to positively want to support us. We need to get the distribution moving. We need to rebuild it. We need to move away from the lower value, high-volume price promotional work that's characterized it in retail, and we need to get the distribution in the on-trade moving. That is just going to take us a bit of time. But if we can have the consumer reappraisal successfully set up, then the off-trade will follow quickly and then the on-trade will take a little bit longer. So I think it is the longest journey. Andrew Andrea: Yes. I mean most national operators on draft have multiyear arrangements. So you're having to participate as the cycle arises. That will not arise all in a single year. Damian McNeela: And then just the second one, I think you mentioned on the distribution business, you were looking for potential customer attrition over the next -- well, can you qualify and quantify exactly the level that we should expect to see and whether that feeds through to revenue and margin? Roger White: No, I can't quantify. I think I'm just raising the potential as we look at our portfolio, as we look at our customer proposition, then we need to be adding value to our customers. We need to be creating value for our branded partners, absolutely. But we need to make some margin in doing that. And for me, as a relative newcomer here, I can see some areas where we are not making a suitable return, and that will require us to make some changes. I have got, I guess, I hope that we can find suitable ways of doing that, that doesn't lead to customer attrition, but it would be unrealistic of me to not suggest that there is a risk of that as we try and improve it. Now I'd like to think that we can grow the business. But we're -- as we said, we're going to focus on improving the margin and some of that might come at the expense in the short term of some turnover if it's not adding value to what we do. Damian McNeela: Okay. And then one last one for me. Christmas is just around the corner. What's the trade saying about bookings? And how are you feeling specifically about trading into Christmas? Andrew Andrea: The sentiment on bookings is positive at the moment. Christmas will happen fairly enough, 25th of December. It's midweek Christmas. So for the trade, that should be good. In Scotland, there's an old firm game in the middle. And a lot of our plans are making sure we land all of that right. So you've got a backdrop of positivity. But I've been in the pub game for a very long time. And what I do know is no matter what your bookings are, the majority of Christmas is impulse. And so no matter what [Hubco] say about bookings. It's what happens in that 2 weeks of Christmas that is mission-critical. So we'll let you know about Christmas on 6th of January. Roger White: The focus on the controllables for us, we are well set up internally to ensure that we give our customers the best possible service regardless of the challenges of which days fall, what. How the supply process is going to work, we are well setup to do that. And so as Andrew said, we will wait and see what the absolute demand is. But our most important thing we can control is making sure that we are ready and working with our trade customers to make sure that they have absolutely everything that they need. So when the consumers do walk through the doors that the pubs are well served. Clive Black: Clive Black from Shore Capital. Always interesting to have results from Scottish company when Celtics manager resigns. Three questions. Hopefully, one is fairly straightforward. I'll ask that first. Just in terms of your assortment, and you mentioned SKU rationalization, a, how happy are you with your assortment? And b, where are you on your rationalization journey? Roger White: We are just at the start of the rationalization -- first of all, we are just at the start of the rationalization piece. I think it's basic stuff first. We've got some very deep and very complex ranging in the business. Some of it is fully justified. Some of it is less justified. The aim would be to cut out wasteful areas which are not adding value to our customers rather than just have a target number that we are trying to get down to. How happy are we with our range? I mean, pretty happy. I mean it's -- we supply such a variety of outlets. It is important that we have that variety of range. It's just, as I said, looking through for the obvious areas where we can make improvements. And there will be some areas of our assortment, I think, that will grow, but equally, there will be other areas that we have over-ranged. So yes, just at the start. Clive Black: Okay. And then I guess you're going to get this asked repeatedly, particularly after next spring, but of the simplification efficiency program, is it sensible to suggest a fair amount of that has to go back in the business? Or should we be becoming excited about where the operating margin can go in C&C? Roger White: I think that's something we can talk about next May rather than today. What's important for us to do is to have deliverable plans and make good choices for the long-term benefit of the value creation that we can do with C&C. I can see, as I said, there are challenges that we can all see, but there are opportunities as well. And I think it's a balanced scorecard that we need to work out which ones we can unlock, how fast can we get to them and how certain can we be of them. So I'll try and answer that when we've got bankable plans. Clive Black: Okay. Good luck on that. And then lastly, and this, I think, is the most difficult one for any business. You mentioned culture. What is it about C&C's culture you have to change? And how long will that take? Roger White: That's a good question. It's not an easy one to answer. I think I would answer it by saying the business has been grown through, as I've said, through acquisition and bringing together businesses. We want to not -- we want to positively embrace our differences. We want to find consistent ways of building efficiency, driving the benefits associated with scale, but we want to unleash our ability to serve customers and build brands and embrace our differences where it's important and where it supports us. If you travel around our organization, as I have done, and I'm sure many of you have done and you go to the various operating parts of it and you ask people who they work for, they generally work for Bulmers, Matthew Clark, Bibendum, Tennent's Caledonia Breweries. They don't generally work for C&C Group first and foremost, and we need to embrace that rather than try and break it. So I see it more as trying to reestablish what's important for us and trying to get benefit from we have -- what we have -- we have 2,800 and almost 50 colleagues, and they are passionate about the business, and it's just about harnessing that. So I think you don't change culture quickly, but there is a little bit of back to the future about it rather than trying to do something that's alien. Great. Thank you all very much for your attendance, either in person or online. And we will draw proceedings to a close. So thank you all very much. Nice to see you all.
Operator: Ladies and gentlemen, welcome to the adidas AG Q3 2025 Conference Call and Live Webcast. I am Maura, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Sebastian Steffen, SVP IR and Corporate Communications. Please go ahead. Sebastian Steffen: Thanks very much, Maura, and good evening, good afternoon, good morning, everyone, wherever you're joining us today, and welcome to our Q3 2025 results conference call. With me here today is our CEO, Bjorn Gulden; and our CFO, Harm Ohlmeyer. Bjorn and Harm will take you through the highlights of the quarter, our financials, the outlook. And afterwards, we will open up the floor for your questions. As always, I would like to ask you to limit your initial questions to 2 in order to allow as many people as possible to ask their questions. And now before I hand over to Bjorn, we want to get everybody in the right adidas mood with this video. Let's go. [Presentation] Bjorn Gulden: Hello, everybody. I hope you enjoyed the live showings of what the brand has done over the last 3 to 6 months because we are actually very proud of what we have achieved. Also, very proud and happy what happened last night, where 2 of our teams, Germany and Spain, won each of the semifinals in the so-called Nations League. And we'll then need to play the final and it's always cool to have 2 teams wearing the 3 stripes play each other in the final, which happened pretty often, especially on the women's side. Also happy actually about what we did achieve in Q3. I think the momentum that we have seen globally even strengthened. And we feel that our teams in the different markets have been very active and has been a lot of positive feedback also when it gets to the activations we have for the future, for example, the workup that you see out there. What also very, very, what should I say, close to today happened was the Shanghai Fashion Week, where we showed up in China in a way that I think we've never done before. And last weekend with the ComplexCon, where we showcased both the jellyfish coming from our friend, Pharrell. And we had many, many versions of Superstar also with our partners from Hellstar. And I think all of you have followed the discussion about Bad Bunny and the Super Show, it happened to be at the same time where we had a Mercedes call up with him, which also did very well. So a lot of fashionable things happening, which is very, very positive for us. And also before we go into the numbers, important for us. We were again named the top employer for those working in the fashion from the TextilWirtschaft. And again, that's a research with ask the employees and the hearing that your employees are happy is always a great confirmation for us in management. And then the Forbes Research who looks at 400 of the biggest companies in the world when it gets to how it is to work for them when you share a woman, we also came up in the top. And again, a very positive story for us confirming that we are a good company to work for. The numbers, you've probably been through them many times. Last week, we reached EUR 6.63 billion in Q3, which is the highest quarter that we ever had, which, again, then for the adidas brand was a growth of 12% currency-neutral. Again, another very strong quarter when it gets to the margin at 51.8%, which was 50 basis points up. And then an EBIT of EUR 736 million, which then is an EBIT percentage of 11.1%, which, again, we are very, very happy with. If you then take Q3 to the 2 first quarters, you get to the EUR 18.7 billion in sales, 14% up for the adidas brand, a margin close to 52%, and then an operating profit of EUR 1.892 billion which is again about 10%. And so again, when we look back, we are very happy with these results. When you look at the regional growth, the North America grew only 8%, year-to-date 12%. I did say in the press call that if you take accessories out, you will see that both Apparel and Foot were up 14% and 11%, and that reason for the accessories being down is that we have a reset in the accessory business that will hit us this quarter. And it has to do with distribution. It also had to do with deliveries. But I don't think you should read too much into it. I think it was heavily exaggerated in some of the press. This is not something that is very crucial for our business. It is a short-term blip. And again, remember, accessories is 7% of our business, so you shouldn't worry too much about it. Look at Europe, the home market, we were skeptical last year that the growth will slow down because it was 9%, now it's back to 12%. We are 11%, what should I say, for the year, and a very strong development, again, both in our own stores and then especially on the performance side around different markets in Europe. Greater China. Again, you probably see a lot of, I would say, tough numbers from our competitors. We grew again double digit and are very happy with the development being up 12% for the year. And you probably know that the profitability also in China is improving. So we are very, very happy with the development that we currently have in China. Same with Japan and South Korea, up 11%, 14% for the year. Historically, 2 very strong markets for us where we had some issues, but very, very strong development now with new management in both of the markets, and feel we are in a very, very good way with very, very strong like-for-like numbers in our own retail in both those markets. Lat Am, still on fire. We are now a market leader in many of the LatAm markets, including Brazil. And as you can see, '21 and '24, extremely happy with that development. Emerging markets, of course, always a little bit mixed bags because it's a group of countries where you have quite some issues, but the team are our entrepreneurs and 13% and 17% confirms that. And that gives you then the Q3 number of plus 12% and plus 14% for the year, in a world, which I think you agree, is not the easiest to maneuver in. So very happy with where we are after 9 months. Wholesale growing at 10%, shows you the support from our partners. And again, happy with that. Own stores, up 13%, we are comping positive both in concept stores and in factory outlets. And we have added net around 85 stores in the last 12 months, and we will get back to that in a second. E-com, up 15% shows you that the digital side of the business is also working. And some of the pure players are actually doing better than the brick-and-mortar guys and so is also with us because we can showcase news quicker and wider than you can do in brick and mortar. That gives you the split of 63-37 and you see brick-and-mortar and e-comm than 22-15. I think we agree that, that's a globally a very healthy split. I talked about the stores. I think we have said to you now for a couple of quarter that what we are doing is that we're trying to open, I would say, impressive brand stores in bigger cities and in bigger trade communities. And instead of having 1 store buildup, we're trying to explore the possibilities in the different markets, as you can see here. And we are investing a lot in the creativity in the stores and I hope when you travel around the world that you get to see some of them extremely happy with the way we look. And they're also, of course, when we open a big store that looks like this, the numbers are also very impressive. As long as we fill it with the right product, which I think we have done lately. Footwear, again, you were skeptical. I think it was 9% in the last quarter. Now it's back again to double-digit, 11%. We have talked about the wish of growing Apparel at the back end of Footwear. So now we are doing that at plus 16%. And then the accessory issue, which, again, I explained that in the U.S., we have kind of a reset when it gets to both the sourcing because it was very China driven and the distribution and that caused that in this quarter, the numbers were negative, and that had an impact on the global accessory business. The performance accessories, meaning, for example, soccer balls is up. And I think I can promise you that you will see accessories very quickly coming back again. And I think I quoted I said we need to clean up something, but I think people, again, overdramatize that there's nothing that you should be concerned about that Accessory is only up 1%, knowing that, as you see here, Accessory is only 7% of the business. And I think we have said that when you have brand heat and you could focus on it, you should get more growth on Accessories going forward. So I think we have some reserve in our pocket, and you shouldn't look upon this negative. Footwear being 57%, Apparel 36%, again, as long as Footwear is above 50%, I think we are in good shape brand-wise. And then very, very important. Even if we have turned the company around on the lifestyle side and the heat, we have said that we have to celebrate sport. And I think when you see the activities from ultra marathon to marathon to running 100,000, basketball, soccer, cricket, whatever, I don't think we have ever been more visible in sports, and we're also producing a lot of content that is visible all over the world because that is what we want to do. That shows also up in the numbers. Our performance, meaning the Sports business is up 17%. Remember, we have told you that there are 4 categories that we need to win globally; football, running, training and basketball. I think you see in football that coming out of comp numbers from the euro last year, we are very, very strong now with our Footwear taking share, I might be arrested saying we are market leader, but that's my feeling on everything I can read. Very happy with the players and also very happy with the product. And then for those of you who follow soccer closely, the Liverpool launch was fantastic globally, although they haven't played very well lately, losing I think, 5 out of the 6 last games, the sales of Liverpool has been tremendous compared to what they used to sell. And again, I think we all know that Liverpool is a street culture city in the U.K., very relevant for the kids. We are extremely happy with that relationship and the way it was executed. Also very proud of the Ballon d'Or. You know that's where they give the prizes to the best players in the world. They give out 5 prizes. We won them all. We had the best male player with Dembélé. We had the best young player with our friend, Yamal. We had the best female player in Aitana Bonmatí. We had the best young female player in Lopez, and we actually also won the best goalie with Donnarumma also; 5 out of 5. I guess we will have to pay a heavy bonus to our sports marketing people because I don't think that's ever happened before. What shows you, why I'm proud and positive is that we were also able, the day after the Ballon d'Or to honor both Dembélé in Paris with both what should I say, outdoor marketing, as you see here and the store and the same in Barcelona with Bonmati. So again, the teams were then actually gambling on that they will win. They didn't have the insight. And we were able then to activate this overnight. So when people woke up, this was what you would see in those 2 cities. And I think this is the energy that we actually need as adidas then to win. And the same thing, we have launched the World Cup Ball. We used a lot of other celebrities and sports people to do that. I have never seen such a campaign ever done organic and I can also report to you that the sellout of the ball has been fantastic. And you have to remember, we have even started with the jerseys. The jerseys for World Cup will start to go on sale on November 6. So that's when you will start to see some impact of World Cup coming into the numbers, which will be very, very positive. Running, we have told you for the last 2 years that we are building our running portfolio up, changing both the collections and also, of course, going back again to running specialty to build credibility and the business. When you follow the marathons and the half marathons and other races you see we win half of them, very proud of what Sebastian Sawe did in Berlin. The weather was too warm; if not, he would have beaten the world record in sub 2 hours. He didn't because it was 27 degrees, but we will save that for next year. We also won the women's class with Rosemary. And again, I think it's not the weekend, where we don't win a major race somewhere because we have the best runners and the best product, that is also proven by this fact, we did set the world record on 100k. Sibusiso won in 5:59:20 and you can calculate the average pace, it's unbelievable. I think he runs 333 per kilometer. And again, with a shoe especially made for it. And again, this is part of our innovation pipeline to do extreme things that we can then feed into the more commercial line. And our Adizero line, which starts then with the Prime X and then down to the Adios Pro 4 is the best line today for racing shoes and speed shoes. And we are taking market share and we're growing this business very, very heavily. And again, this has been the strategy from the beginning that we start at the top and then we start to scale it into every day running and to comfort running. What you see here is new. This is what will go to market next year starting in February and then scaling up during the year. We have developed something called Hyper Boost, which is a new boost material, 40% percent lighter than the old Boost. Boost was the most successful midsole construction that we had, the most successful foam, but a little bit heavy. That's why we have been working for 3 years now to establish this. These are the sign directions, not necessarily the way the shoes will look, but it gives you some kind of feeling how we're going to attack the comfort training area. And then we will also use the foam as a platform into other areas in the performance side and also into Lifestyle. Don't forget that all the successful Lifestyle running shoes we had in the past, both those from Yeezy, but also NMD, for example, Ultra Boost was Boost shoes and that's why this is so crucial for us going forward. And we are very proud that we now have developed this. Training is a huge category that might be executed different from region to region, but what we are doing is that we're using our top athletes from different sports and then showcasing them in training in our products. We can tell that story everywhere. And what we also have done because training today consists of both running and strength, we have combined then the Adizero line with the Dropset line and then creating shoes that are both runnable and stable for strength, gym work, and that's then the Adizero Dropset, which you will see next year and which has received a lot of orders already from the retailers who love it, and we are very, very positive about that development. Maybe a surprise to you, we are then taking the originals into sport. We have seen, especially on the female side that we connect to that young consumer through our original line with the use of threefold and three stripes. And it was then a natural way then together with some of our retail partners then to develop a functional training line in functional fabrics and functional fit also with the design ethics of original. You see some of the samples here. And needless to say, the demand for this for next year is huge. And it's one way for us to differentiate ourselves in the training area where there's a lot of brands that have established themselves lately. But again, very, very positive feedback from the retailers around the world. Basketball, we all know we're a market leader, but we also know we have to invest in it. We have in the design and development of the product for a while now, had a very special language. And it's great to see that this language is now coming through also in sell-through. All our signature shoes are now doing well and the players that we're using are also extremely popular. And we have used them now not only in the U.S., but also in other markets. They've all been to China during the summer, and we see a lot of positive effect for them being active actually selling not only our performance product, but selling the brand as relevant in the culture. And then we have said it the way adidas did the brand, we want to be visible in all sports and also local sports that are relevant. That is why we are making products for more sports, and we also produce more content for those sports so that we get back again the credibility and authenticity that we used to have, and you see some examples of that here. In that trend is also track and field. For a while, we lost the visibility. We are now back again. And if you watch the World Championship on Tokyo, you saw we had more federation. There were more three stripes on the apparel and a lot more feet with our spikes and special shoes. That will continue because for us, track and field is the core of all sports also in the Olympics, and that's why you will actually see a wider investment for us going forward as more federations are actually able to change into our brand. Then finally, when it gets to sport, we have said to you many times, we need to be more American. We need to be a sports brand also in America. You can only do that by investing in the so-called American sports. That is, of course, starting with colleges. It is baseball, it is American football. It is also basketball. You see some of the people we have signed now over the last couple of months. We have also started to get feedback that we are attacking the clear market leader. That's not even the strategy to be visible and actually have personalities that perform. And I think that is also what we have achieved. The college sport in the U.S. is very, very special, very emotional and everybody who's gone to college is a big fan of their college and especially in American football, that is important. And you know that this college team draw attendances up to 100,000. You see that we are now starting to get a pretty impressive portfolio. And in that, what should I say, strategy of getting more visibility and getting more into the college merchandise business, we have then added both Tennessee and Penn State, which are 2 huge colleges when it gives both to the performance and also to the merchandising value. What we also have done is that we started to combine the American sports. So here, you see on the left side, Anthony Edwards and his basketball look. We have then made a clip. So Travis Hunter debuted in the NFL. He's the Heisman Trophy winner of last year. He is, I think, the only one who plays offense and defense, at least in his rookie season, and he's then playing in a clip that is designed the way Anthony Edwards basketball shoes. So a pretty cool thing, and it shows what we can do going forward in the U.S. Short about Formula 1. You know great success when it gets to the agreement with Mercedes, a lot higher sales than I think both we and the Mercedes thought, a lot of collapse, a lot of interesting stuff happening. And then on the left side, we announced that for next year, we will also do Audi. And again, we see a huge demand from wholesalers already in those 2 setups. And then, again, I'm repeating myself, but we are, of course, trying to take everything we do on the pitch in the stadium then to the street. And I think that's the magic of ours. We are using our athletes and our, what should I say, teams on both sides and are trying then to create the street culture out of not only basketball, but also other sports. We have talked about the need for doing this in football, and it's finally happening. We have never seen so high demand for soccer-related apparel as we do currently. And a lot of non-soccer fans are actually wearing retro jerseys or even the current jerseys or product that is coming out of the soccer world. And I think I've mentioned to it a couple of times that the Oasis collab, for example, are soccer pieces that have been batched up and the demand has been unbelievable for people that has not any connections to football. And then on the footwear side, EVO SL, our $150 Evo Adizero shoe without the carbon plate meant to be a running shoe, but gone widely on the lifestyle side, best-selling running shoes currently and the best named running shoes in many, many markets, a great development for us. So when do they get to lifestyle, you saw performance growing at 17%, Lifestyle now growing at 10%. Again, this was always the strategy that you build the heat through marketing and lifestyle, you sell shoes, then you hope that it will also go into performance and then you start to commercialize apparel that has actually happened. And two, the haters, who are the people who don't like it, Terrace is not over. We have grown Terrace every quarter. So Q3 was actually the highest quarter ever also of the Samba. I think the key to it is, of course, that you're not selling the white black and the black white more and more and more because you're actually putting, what should I say, a limit on it. But when you work on materials and you work on different, what should I say, Collabs and you keep the excitement in it, all Terrace shoes are doing extremely well. And especially in certain markets now, the Spezial is doing great. And as you probably know, Spezial has never been a lifestyle shoe before. So -- it's not over, and it's a huge business, and we will manage this business probably longer than many of you had expected. The Campus was more a freebie that came unplanned with the heat of the brand. We did then put a lot of shoes in the market. It worked perfectly. But we also said we will then start to limit the Campus because we were waiting for the Superstar to come. And let's face it, the Superstar is from a construction point of view and from a target consumer probably closer to the Campus than to anything else. We talked about Low Profile. Yes, it has been growing and growing. It's not as big as some people thought. But I think I can promise you that the same thing is here. You need to invest in SKUs, you need to invest in materials, then it will continue to grow also into the spring of '26. And then we have the Superstar, which we again told you we were delaying. But right now, we are pushing it for fall, especially now in Q4 and then into spring next year with global campaigns, a lot of activations. And again, although the language is global, the content is very local. And then may be new to you, you will start to see the Triple White coming back. There are clearly signs that Apparel is going more preppy and more college and then Triple White will be again coming back. And as you know, the Stan Smith is probably the typical shoe to go to when that is happening. So we have limited the pairs heavily. You won't find Stan Smith discounted anywhere, but we will start during next year then both with Collabs and loading up that shoe because we want to be ready when these things are going commercial. And then the final thing on the lifestyle that we talked a lot about, Lifestyle Running. Yes, we admit that all the brands have had a big trend, both on '90s and 2000 running and that we had many options starting with the retro thing all the way into 3D printed shoes. Many of these shoes are now starting to get volume. None of them are the winners right now, except for EVO SL. But when you look to the left, you see Adistar, where you will see the Jellyfish coming out of Pharrell. You will see takedowns of that hitting the market, and you will also start to see a lot of 2,000 retro running shoes from us with Open Mesh and Metallics, which are already selling very well, and we will start to scale them because we see that the demand is there. And then the final thing where people laugh a little bit is Lifestyle Football. We talked about it in Apparel. You will see soccer-inspired product going also fashion, where we put soccer uppers from the past or also present, and we put them on different constructions. Very different opinion if this is going to be commercial or not. We will have limited pairs in the beginning, and then we will scale it if we see the demand is there. But at least on her, it seems like there is demand there also to scale it. Then on Apparel, we have great success, especially with Her, especially very colorful, the use of 3 stripes, of course, a lot of them are not original. But I think where we have been even better than anybody else instilling innovation in materials. We have denim. We have a lot of knit constructions, and we have a lot of innovation that has not normally been in the sports industry. And this is especially where then people online has a huge success because they can showcase it very quickly, and we've been very quick to the market. Very, very proud of this. Grace Wales Bonner has helped us a lot. I think she had a huge impact on the success of the Samba, to be honest. She has now been made the head creative for Hermes Men, a great honor to her, but I'm also happy to report she will not leave us. She will continue to work with us because we have a fantastic relationship with her, and this will, of course, help us. In general, collabs, a lot of discussions. If there are too many, has it lost this interest? No, it hasn't. If you look at this page, you see some of the ones that we work with. Down left, Hellstar has been great for us in the last couple of months. I mean, Chavvaria has been great for a while. And in general, I think we all have to agree that you need Collabs. You just need to make sure that they fit the market where you're using them. and that you never do too many at the same time. Then at last, accessories. Again, I tried to explain that accessory and performance, great, including soccer balls. All markets actually done well. There is a small clash in the U.S. that we need to fix, and we will fix it. And I'm pretty sure that when we get to next quarter, you will see it fixed already. So don't read anything into it. That was not the intention. So with that background, I hand back to Harm, and then Harm will give you the more details about the numbers. Operator: This is the operator. We are not receiving audio from the speaker line. Harm Ohlmeyer: Can you hear me now? Operator: Yes, sir. Harm Ohlmeyer: Good. all right. Then I'll repeat it again. Thanks, Bjorn, for the update, and I would like to bring some more details to the financials now in the next couple of minutes. Apologies for the short technical issue here. So as always, we start with the net sales. And as Bjorn said already, record net sales from an absolute point of view in Q3 was EUR 6.6 billion. That has been a great achievement. And of course, the most important number there is 12% currency-neutral growth for the adidas brand. Of course, for the people on the call here, you always look at the 8% currency-neutral, which includes Yeezy in the prior year for the reported number, which is 3%. What we believe is relevant as well to show you the next chart, it's a lot of numbers on there, but sometimes we probably forget what percentages mean in absolute numbers. And I want to start on the upper left where we see 17% growth in Q1 for adidas brand and 12% and 12% in Q2 and Q3, so overall 14%. When we look at the absolute numbers in currency-neutral terms, we actually grew EUR 900 million in Q1, EUR 600 million in Q2, and another EUR 700 million in Q3. So we believe it's important summarize that for the first 9 months, what we actually have achieved with the adidas brand. So it's a EUR 2.2 billion in constant currencies in the first 9 months. And then, of course, you got to deduct then the EUR 600 million from Yeezy sales last year. And then you have an FX impact so many currencies, that is a negative EUR 600 million as well leading to only EUR 1 billion nominal growth that you see in the P&L being reported. We believe it's just right to show these numbers in absolute as well to actually showcase again what our brand and sales teams have achieved with great products and good execution on the sales. When it comes to the gross margin, of course, a great story as well is almost 52% or 51.8% in correct terms. It's 50 basis points above prior year. This is again a very, very good achievement. And if I go to the details and decompose it a little bit, a huge, huge credit to our sourcing organization, making sure that we get reasonable prices in strategic relations with our suppliers, still some positives on the freight side, even so some of the transportation lead times are complicated in today's world. The business mix is still positive. And also from a discounting point of view, we did a great job the last couple of years and now it's stabilizing and still very, very good sell-through of our products when it comes to the underlying drivers. Of course, you know that FX has still been negative. It's just directional when you look at the bars here, but we also talked a lot about the tariffs. Of course, they are negative in the U.S. And you see that is a new thing compared to Q2 call that we had some mitigating actions there as well. That led us still to the very, very good gross margins, 51.8%. So very good achievement, and you can imagine where it would have been without the tariffs in the U.S. When I go further down the P&L line, of course, as always, we say, we keep investing into marketing with almost EUR 800 million in Q3 and actually 10% up or 12% of net sales. Great, great campaigns, as Bjorn alluded to earlier, fantastic product launches and relentless opportunities with our partnerships, whether it's on the cultural side or on the performance side. So very, very well usage of our marketing. Also on the operating overheads, you see there's great leverage with minus 8% or 3.5 basis points. And you see for the first time since the third quarter '21 that we are below 30% when it comes to the operating overheads. Okay. Part of the truth, you might remember also that we had a release in our other operating income with the settlement of Yeezy of around EUR 100 million, and we did a donation of around EUR 100 million in the operating overhead line as well in the third quarter last year. But the real number now, forget about last year, is still below 30% on the operating overhead, which actually leads with a great gross margin to now 11.1% operating profit of EUR 736 million. If I decompose that again from a profitability point of view, similar to what I did on the net sales, great achievement in Q1 with almost 10% already in the second quarter, 9.2%, up from 5.9% and then a very, very good achievement in Q3 with a profitability of 11.1%. That is a great achievement again to the teams. And when you look at the first 9 months with 10.1%, we actually where we wanted to be in '26. That's a great achievement in the first 9 months. Of course, we all know given our guidance that will not be sustainable for this year, but that's where we wanted to be for next year we achieved in the first 9 months. Of course, there have been some questions below the line as well, and I want to spend some time on this one to explain that more clearer. When I start with the net financial results, you see the EUR 4 million plus last year. So during that quarter, we had some stabilized currencies, whether it's the Argentinian peso, the Turkish lira or the U.S. dollar was still stronger. So we had some positive effects from an FX point of view, but also from a hyperinflation point of view. And now the comparison to this year looks dramatic with the almost EUR 90 million. But also there is now a devaluation of the Argentinian peso of the Turkish lira. We all know where the U.S. dollar is right now. So these are the effects that we had in Q3. But it's also important that -- to note that this is normalizing in the fourth quarter again. And well, I wouldn't have imagined that I talk about the election in Argentina with Milei, but we had our Argentinian General Manager here yesterday as well to give an update. So these are also important events for us as a company. So that's why we believe that election and the outcome just want to stabilize again in Q4. Similar things on income taxes, was very low last year, but also this year, it's a pretty much normalized rate with some withholding taxes in there, but that will also stabilize in the fourth quarter. So 2 notes on this one. In the first 9 months, if you looked at the numbers that the operating profit was up 48% in the first 9 months, the net income was up 52%, and that is something you should expect as well more leverage in Q4 on the net financial results. It's normalizing. And you can definitely take away today that the tax rate for the full year will be around what you have seen in the first half. So anywhere between 24% to 25%, hopefully closer to the 24%, which would definitely drive the net income faster than the operating profit and respectively, the earnings per share as well. When it comes to the inventories, also that is a topic, 26% currency neutral up. And I would like to move to the next chart very quickly because also that is something that we are not concerned about. I said it on the last call already, we went probably too low in '24 with a lot of discipline because we came with a lot of inventories into Q4 -- into 2024. So this is where we have a low level last year. We actually made the strategic decision to bring products in earlier, especially World Cup related. So we wanted to make sure that anything around World Cup related, whether it's [indiscernible] or federations available to remain and continue to remain a reliable partner for our retailers that when the demand is there and of course, where we need to ship in for the launch date that the product is already here. And you know that the supply chains are volatile nowadays. So we didn't want to take any risk. So we took them early. What's most important for us internally is that this product is current and with either current this season or for future seasons already, which means spring/summer '26. So also there, you will see an update going forward as well in the next quarter where we definitely go in the right direction again. The same is on accounts receivables. That shows the success that we have with our retail partners. It's not just about D2C, so 22% up. That is not 1:1 the growth in the third quarter, but that's where we see that we have great relations with our retailers, and that also gives us confidence for the fourth quarter when it comes to the cash generation. But before I go there, most importantly, the operating working capital, I've been on this call many, many times. We said if we get below 20% of operating working capital over net sales, we are an excellent company; if we are anywhere between 21% to 22%, we are a pretty good company, and we are still in that range, and we will definitely make sure that we stay within that range and over time, get below the 20% again. That all led with the investment into working capital that the cash got reduced from EUR 1.8 billion to EUR 1 billion. I also said on a previous call that we expect to generate a lot of cash flow in the fourth quarter. And rest assured, we still believe there's probably around EUR 800 million to EUR 1 billion of cash flow being generated in the fourth quarter, which is linked to the inventory increase for the World Cup, which will be reduced and also the accounts receivables that we will cash in, in the fourth quarter. So that's what you should rely on here as well. When it comes to cash and cash equivalents, you see the development here, which led to the EUR 1 billion and also important adjusted net borrowings have been reduced from EUR 5 billion in the second quarter to EUR 4.8 billion. And just as a side note, some of you might remember that we're maturing a bond in November and probably stay tuned for that one. We believe we want to refinance that one in due course, which we believe is also a good message to the capital market because once in a while, the last one we had in '22, we also want to test the market and be a bond issuer in the market once in a while. So that's what you should not be surprised in the next couple of weeks that this could happen. Overall, when it comes to the leverage, we are very stable, which is important for our rating agencies as well. So also no surprise there regardless of what our cash position is. So overall, very, very confident when it comes to the P&L, when it comes to the balance sheet. And with that, Bjorn will finish up with the guidance. Bjorn Gulden: Great, Harm. As you see on this slide, you have seen that many times, we are now into the third quarter, if you will say, some out of 4. We did tell you at the beginning of '23 that we think that this should be a 10% EBIT business. We gave you the different components. And it's pretty cool to see that after 9 months in the third year, we basically hit it with the numbers that you see here and are currently showing you that this is a 10% EBIT business model even if we are not doing everything perfect and even if I would say the world is not that easy to maneuver in. What is very, very crucial, I think, in the business model going forward is this, I don't know what other brands or consumer companies are telling you. But to be a global brand with a local mindset, I think, is crucial, if you are consumer-focused and for us and also athlete focused, you need to be close to the consumer. And unfortunately, there is no global average consumer, the way many consultants and agencies are trying to sell you, the consumer in different parts of the world has their own, what should I say, taste and willingness and are also influenced by different things. And that's why it becomes more and more important to be more local, especially between Asia, with China driving it between America and Europe because there are big, big differences, not only in consumer taste and facing of sports and activities, but also now in supply chain, given all the political tension we have. So again, getting the best people in the market and giving them the authority to make decisions. And in many cases, even the authority to make products becomes important. And then, of course, the role of a headquarter then is, of course, to keep the brand together to provide innovation and concepts. And of course, also maybe the most important thing to make sure that we have the right people in the markets and in the right functions and of course, also provide the systems that we need. And when it gets to creating product, I think this slide is also important for you because we are now making products in all these centers. And these centers are then in addition to having a part of the global, what should I say, creation like LA has for basketball and U.S. sports, they also, of course, have the, what should I say, the clear goal of supplying the local consumer with the products that they need, and that goes for all these centers where you see there are now 5 of them in Asia. And again, the speed to market by actually producing in China or in India is, of course, much bigger for those local markets than there are for Europe and America, where you have very little production, and it's not easy to actually find a supply chain who can make footwear for you. So I think you need to be very, very, what should I say, conscious about this development because I think it's the key to be successful. And I think, for example, our success now in China is because of this setup. We have the ambition to be the #1 sports brand and all our, what should I say, leaders in the market should have the ambition of being #1 in their market. We are, of course, aware of that we will not be #1 in all the markets that will be naive. But if you are hired in Adidas to run a market, you should have the ambition and you should talk to us what you need when it gets to investment and infrastructure to be #1, and then we will together see where we can reach it or not. There is one exception, that is the U.S. The market leader there is so far ahead of us because they've done a fantastic job living the culture, and we have not done it over the time. But we have a clear ambition there to double our business. And we do think with the story of our brand, with the history of the brand and the resources we have that we can start to be a sports brand again in the U.S. with all the things I have explained to you and then also extend that into lifestyle and culture. And that is why we also have a management now sitting in both L.A. and in Portland who has all the tools to do that. And the way we do this globally is, of course, to have the best product. I mean our pipeline and products, I think, has improved a lot. We have talented and creative people, and we have a great supply chain. It is, of course, also the way we present ourselves in the stores. We have said that we're using a lot of creativity to actually build stores that are that also connect to the local culture and to the possibility of utilizing what is allowed or not because you see many of these stores would not be allowed to do here in Germany, but the creativity in other markets we need them to utilize. And then very, very important, the activations and the visibility around the world, not only global, but also in the local markets so that you connect with the consumer and you also let the consumer be part of your activation has become much, much, much more important and all the social media and all the platforms and also actually physical events have become tremendously important around the world. And that's where you, of course, need a lot of talented people with a lot of energy, and that's what we have. So back to the end of this, the outlook, you remember our initial guidance for March, double-digit growth for our brand, if you take Yeezy out. If you include everything, high single digit currency neutral and an operating profit between EUR 1.7 billion and EUR 1.8 billion. Where we are now is that we keep, of course, the brand being at double digit. We have narrowed the high single digit to be around 9%. And then we say that our operating profit will be around EUR 2 billion. Yes, we know that we are in a challenging world. I don't need to repeat that. And we also need again to remind ourselves, we have no Yeezy, neither revenues nor profit in these numbers. And then the other considerations that you need to have is that we think that the positive side is that we're better than we expected after 9 months. And the attitude in general from the consumer and from the retailer is actually more positive than we expected. I know somebody reacted to that there were no strong order book in there. But remember, there's only 2 months left of the order book. So that's why we took it out. There is not a lot to talk about when you only have November and December open for the order book. So that's why that's not removed. There's nothing other into that number. And then the negative thing, which, again, we have to address. I mean, I know you don't like us to talk about it. But of course, there is a direct impact on the tariffs. We told you that the gross impact, meaning how much more duty it would be on the products that we thought we would sell was more than EUR 200 million, and we have mitigated for I would say, almost half of that. So now the estimated negative impact on our P&L, meaning what would the profit be higher if we didn't have tariffs would be around EUR 120 million. This is not a scientific number because it's an estimate, right? So you need to be careful when you try to say is it's EUR 117 million or EUR 123 million because we don't know. And then what we don't know, and again, I think maybe we are too honest about this because you read a lot of criticism into it, is of course, that the indirect impact of the tariffs, no one knows. And prices increases, normally consumer buys less, and that is not only in our sector, but in all sector. And that's why we don't know and are flagging it. And I assume that everybody will flag it after a while. I think maybe we flagged it early and got criticized for it, but I do think that's better to be honest about it than actually trying to hide it. And then, yes, sitting in Europe, there are quite some negative FX impacts when you consolidate your numbers, both on your top line and also on your bottom line, and that's just the way it is. And I'm sure that you understand that. The good thing about ending '25 is that we're going into another great sports year. It starts with the Winter Olympics in Italy, which again is not huge commercially, but it's a great event that will be having interest also for the smaller sports and the winter sports. And then we have this fantastic World Cup that will come in the U.S., Mexico and Canada. I would like to say one comment about that, too. We have said that this is a EUR 1 billion business or more. And people say, of course, that's on top of everything. I mean you don't know that. I mean it's obvious that it is -- some of that is additional, but it's never been an event where everything that you sell for an event is on top of everything else. So you have to have that in your mind when you do your math. And then the last slide I will show you is this. When we met the first time at the beginning of '23, we had the situation over there where we did EUR 300 million. We told you that we had the 4 years plan to get to 10%. And I do think I'm allowed to say that we're pretty proud of the development that we have done. Not everything we have done is fantastic, and we are by far not perfect. But I do think you have to admit that we've done a decent job in a very difficult market. And yes, maybe the market will always be difficult. So I will continue to say that. But the need to change things, especially in the development of products and in the supply chain and also the way you go to market and change the attitude has been enormous. And I'm very, very grateful and proud of what our people have done. So with that, I hand over to you again, Seb. Operator: This is the operator. We are not receiving audio from the speaker's line. Sebastian Steffen: We're now ready to take questions. Operator: [Operator Instructions] First question comes from Ed Aubin from Morgan Stanley. Edouard Aubin: So I guess I've got 2 questions on Footwear, Bjorn. So the first one is on Classic and Terrace. So did I understand correctly that you said that Terrace was still growing year-over-year in Q3. And if we look ahead in 2026, if you look at the Classic segment, the slide that you showed us, can Classic expand if Terrace contracts and so how you see that? So that would be question number one. And then question number two, still on Footwear, I am sorry. On the opportunity with kind of Lifestyle Running, one of your distributor a few weeks ago, JD Sports, not to name it, showed a slide showing that for them, at least Lifestyle Running is substantially bigger than Classic. So I was just wondering to what extent how much an opportunity this category? Obviously, you're already making good inroads in Lifestyle Running. but if you can help us kind of size the opportunity, that would be very helpful. Bjorn Gulden: Two good questions, to be honest. Yes, I said and I confirm that the Terrace Group was actually bigger in Q3 this year than it was in Q3 last year. And that even the Samba from a selling point of view is actually bigger than it was a year ago and that we have continuously grown what you call Terrace, these 3 shoes. Again, I think many people are surprised by it and maybe some of our own people too. But the fact of the matter is that with the innovation that we've done on design and materials, we kept it hot. And we have gazillions of different SKUs around the market when it gets to different versions of it. And of course, some market have stagnated and we stopped supplying growth, but other markets are still on a growing trend. And that was also the reason why we were careful with Superstar. And to be honest, also careful with some of the low-profile side because we didn't see the need in, as you correctly say, in the classic range to oversupply too many franchises. We are now transferring the Campus volumes into the Superstar because that's more of the same consumer. And then as I said, when Triple White is coming on, the whole Classic area will get another boost and that is typically then that we will then load on the Stan Smith. I think it's also correct what JD showed you, although it's different from market to market, what they call Lifestyle Running is substantially bigger, especially on the male side than the Classic side. But again, many of the so-called Lifestyle Running shoes might from some of our competitors then not be running. But if you look at it now, we can be very honest. I mean, New Balance and my friends from ASICS have had a big run on shoes from the '90s and from the 2000. And even Hoka and On to be honest, have with their so-called performance shoes also had a run on the Lifestyle side, maybe for an older consumer depending on where you are in the world. So I agree with you, if you cume all that, the category is actually bigger. And that's why it's been so important for us then to put more effort into the Lifestyle Running side, and we have. I mean the EVO SL was meant to be a performance shoe, but it's then gone Lifestyle also. So that's a huge volume for us. The SL 72, which is the 70s running has been great for us. And then some of the other running models have been, I would call it, mixed. What you will see now is that you will, a, see that we are coming out with products around the Jellyfish, meaning the Adistar shoe that Pharrell did with different takedowns. And then we have a series of shoes from also the 2000 with Openmesh and metallics that is already starting to sell. So we will grow in Running Lifestyle in '26, no doubt about it. Will we be market leader in any other segments? I think that's too early to say. And then we have to admit that with the success we had in the Classic, you couldn't expect that we also have the same success in Running, right? There is always a sequential effort here. And then what I'm very, very positive about is, of course, the development of HyperBoost because that form, when we go from performance into lifestyle, you have to remember that all our lifestyle Boost shoes that were new, did well when coming with Boost. And you should not underestimate that comfort and cushioning, extreme cushioning has a lot to say in that segment. So we are very optimistic about that segment, and that's why we put so much effort in actually developing HyperBoost. And yes, it's taken 2.5 years, but that's why it's also a very good product. So I think that's my answer to your 2.5 questions. Operator: The next question comes from Jurgen Kolb from Kepler Cheuvreux. Jurgen Kolb: A quick one, just housekeeping for Harm. You guided for -- you expected EUR 2 billion of roundabout cash at the end of the year. I guess, with the guidance on free cash flow in the fourth quarter, this is still on and you're quite confident to achieve that, just to double check here. And maybe on prices, I think on Reuters, there were some comments on your reaction on the tariffs in the U.S. Maybe, Bjorn, you could double check and again, talk us through what you have done so far in terms of the prices in the U.S. and what we shall expect going into 2026 in order to mitigate the tariff impact. Bjorn Gulden: I can do it first, and Harm can fill in at the back. The mitigation that we have done, which is about EUR 100 million mitigation from where we started with the EUR 200 million plus down to the EUR 120 million. How many components? One is, of course, in the sourcing in the sense that we have worked with suppliers to get better prices of some of these products. It has then been increasing pricing on new products. You have to remember that the price of a product that hasn't hit the market that is not known. So of course, that's where you can increase it without getting a negative reaction that you're increasing. We have tried to keep all carryovers at the lower price points at the same price, so no increase for the consumer, but therefore, better sourcing or more efficient sourcing and then we have increased prices on some of the expensive models because we believe that the consumer and the higher end will be less sensitive to price increases. And then again, then lifted prices on new models that have never been priced before. So that's not going to be visible for anybody else than us. And of course, some of the retailers have been part of the development. That's basically what we've done. Now I have to tell you that the price increases you see in the market and that you can read about the question is, are these prices then going to stay for the consumer or are discounts going to go up? And I think when you look at the U.S. right now, it's pretty heavily discounted. There has been some big brands that have had a lot of inventory. And I think maybe independent of tariffs, there was a lot of discounted products out there and I think that's what the jury on what's going to happen when it gets to sales, meaning the value of the product. And then the margin on the product when it gets to discounting, I think the jury is still out on that because we need to take and counter at the end of the year and then especially at the end of Q1 where most of the products that are then being sold are actually with a higher tariff on the buying price. So I think that's all I can say to you because everything else is just 100 assumptions, right? We actually feel that we told you very early that the gross impact of this in the financial year of '25 will be EUR 200 million plus. We have reduced it to EUR 120 million, so we think we have done a good job. And remember, we were very, very early telling you that we have removed China sourcing almost completely from the U.S. So we're not exposed to this 100% duties that he has done as of November 1. So let's see what the other people say, and then we can compare notes. We feel we've done what we could do. And again, I actually feel pretty good about it. But how the consumer then in the end reacts on everything happening, I think it's too early to say. Harm Ohlmeyer: On your question on the cash on the balance sheet, the EUR 2 billion. I said to the last time, and I confirmed it earlier in the call, will it be exactly EUR 2 billion, depends a little bit on FX and a little bit on the timing. So I wouldn't have sleepless nights if it's EUR 1.9 billion or whatever, but the goal is still to collect on the receivables, and that's what we plan for. So whether it's EUR 1.9 billion or EUR 2 billion, you know, don't get sleepless nights over it, but we want to get close to the EUR 2 billion, that's correct. Operator: The next question comes from the line of Geoff Lowery from Rothschild & Co Redburn. Geoff Lowery: Just one question, please, on China. Could you talk a little bit more about what's powering the performance in terms of product and distribution? Obviously, you've done tremendous cleanup work there over the last couple of years, but the outperformance against the market is looking really very marked at this point. Bjorn Gulden: The strategy in China has been, of course, to compete both against the success of the local brands and, you know, to the Western brands. And we figured pretty quick out that to do that, you need to have more local initiatives and utilize that you have factories in the market so you can go to market quicker and you can actually work with less inventory. So we developed this creation center in Shanghai. We put together a team of Chinese management that also used to work for Adidas in the past and has then worked in other brands to learn how local brands do it and then come back again. And we have, you know, as we speak, between 50% and 60% of the product that we sell, especially on the apparel side, is designed and developed in China. So they are not the same product as you would then design and develop for America or Europe. On footwear, most of the model are franchises that comes out of the global range, but they might be tweaked when it gets to materials. And then there are certain pockets of product that are only for China, also in the lifestyle, even in originals, and especially in performance. We see that the local brands have brought a lot of quality into price points between [ EUR 80 and EUR 100 ], where we were not competitive. And we have then used the creatives and the developers and the factories to develop them competitive products against that. And we have in those, you call them third, fourth, fifth tier cities where the local brands are dominating, we have started opening stores then which focuses on, I call them this value products and have a special offer for them. I think our success when you look at double digit growth and also the margin that we have is because that we have changed that model to be local and that we give the authority to very, very good people. And I also have to say that the energy, I think the LatAm team and the Chinese team are probably the two teams that has, in a market, the highest energy when it gets to actually chasing business, when it gets to where the consumer is. So I would say that's the reason for the success. And I also think it's the only way in the future to get success. I don't think you can sit in neither in the U.S. nor in Europe and just design a collection and tell them to sell it. I don't think that works anymore. Operator: The next question comes from Wendy Liu from JPMorgan. M. Liu: I have two, please. One is on the World Cup. I think, Bjorn, you previously mentioned that it will be a EUR 1 billion opportunity. Would you mind sharing a bit more details about the drivers behind this EUR 1 billion, and how does this compare with previous World Cups? This is number one. Number two, I wanted to go back to the 10% EBIT margin target you had for next year. If I look at this by region, it looks to me like it was really like North America where you probably still have a bit of gap. And then I look at Q3 numbers, 12.4% EBIT margin in North America was actually better than previous couple quarters in last year, despite you have this tariff headwind and you no longer have [ EV ]. So I just wanted to ask what were the drivers and what are your expectations about North America EBIT margin into 2026? Bjorn Gulden: The EUR 1 billion, I think is the number that we have said that we assume that World Cup can bring when we look upon both what we're selling of replicas meaning connected to the teams and cultural relevant I would say products around World Cup. I think the discussion that some analysts have had is this then fully in addition and what I said is that you can never say it's fully in addition because you have to remember that the stores, when you put World Cup product in, you take something else out. So you can never say it's fully, what should I say, in addition. I wasn't at Adidas in the previous World Cup, so I'm not sure, but I would assume that this is 40% or something higher than what we had before, just to give you a ballpark number. And the number is not final. As I said, we launched the ball three weeks ago. It's been tremendously successful, so we might actually take more orders and produce even more than we planned. We are launching the replicas for the home jersey on the 6th of November, so we will see the reaction to that. I will not be surprised when I look at demand around the world that, that will also increase, so the business might even be higher. And we are pretty sure that we will do EUR 1 billion, and I would not be surprised if it is more. When it gets to the 10% EBIT target, I think we've talked about that from a global point of view, and it was the assumptions in '23 that we will keep basically the mix of the business when it gets to D2C and wholesale the same. And with, of course, the development in certain markets that are higher than they are today, You know that the U.S. market, to get really profitable in the U.S., you need scale, and you can clearly see that our profit margin in the U.S. historically has been lower than our major competitors, and that is just because of scale. The improvement that you have seen this year already compared to last year is, of course, that we are doing a better job. The local, what should I say, development, the investment in American sports, the performance in our own stores, have improved the EBIT margin in the U.S. Having said that, there is a huge upside to that if we get more scale. So it's clearly a target for us and also our American management, of course, to grow over proportionally in the U.S. and then put some of that into the leverage when it gets to getting a higher EBIT margin. I think that's my feedback. Operator: The next question comes from Warwick Okines from BNP Paribas Exane. Alexander Richard Okines: I've got one on gross margins, one on costs, please. On gross margins, discounting was a fairly neutral dynamic in Q3. Have you reached the limits of what you can do in full price? And then secondly, on operating costs, I wonder if you could just comment a little bit more about what's happening there. Have you been taking OpEx out of overheads, and if so, have you got any examples of that, or is the cost story more about leverage and the movements in currency? Bjorn Gulden: You know, the gross margin, that has different components because when it gets to the D2C business, we have been very strong on sellout on inline products. The only place where we've been a little bit more promotional has actually been on e-com. And that is because e-com in general has been, you know, I would say aggressive on discount. And we were probably too restrictive on it last year, mainly because we didn't have enough product. And this year, we've been better in supplying product, we have decided to follow certain events more aggressive. But it's not hugely different, though, because the full price sellout has been very strong. The other discount where you don't control, of course, is what are the retailers doing. And depending on how much inventory is in the market from other competitors, and I do assume you are aware of that big competitors have a lot of inventory that the retailers have discounted, And then, of course, that hurts your full price sale because if you are at full price on EUR 100 shoe and the competitor is on 50% on EUR 200 shoe, then, of course, you will sell less. That's just the math. And we hope, of course, that the inventory level in the trade will go down so that the discounting will be slower. But again, that's outside of your control. On lifestyle products and on the new performance product, I would say that our sell-through rate has been very good. But of course, in a very heavy discounted environment, you had sometimes a slower sell-through because of the discount level in general. But that is very different from market-to-market. But sell-through on full price for us has not been the problem, and I think you see that also in our margins, so we're actually very happy with that. When it gets to the cost, I'm looking at you, Harm. Harm Ohlmeyer: Yes, Warwick, good question. There's probably three things I would like to mention. First, I mean, we have been very, very disciplined in the organization around the world because we believe in the past there was a culture of you need to have more people in order to grow the business. And now we put it the other way around. If you do more with one account, whoever the account is, it doesn't mean you need to have more people, right? And even if you, you know, develop the products, you know, I mentioned earlier, the Oasis product is more a batched up, you know, you know, soccer products and you don't need more people in order to do an Oasis range, right? So we put a lot of discipline in, you know, what are the commercial opportunities without asking, you know, for more people. So that has been very disciplined. Secondly, as we said, we have simplified how we run the company overall. We have empowered the markets. It's a new operating model. And we, of course, there were some tasks that we used to be in headquarters that are now being taken over by the markets or there have been duplications, right? And you know that we had a volunteer relief program at the beginning of the year, so that is definitely something that is contributing to that as well. But it's first and foremost simplification of our processes, avoiding duplication. And of course, if you do that, we need fewer people, and that's what you see continuously in the P&L quarter by quarter. Yes, you have a good point. FX helps as well. I mean, that brought the absolute number down in that quarter. But at the end of the day, I want to highlight again, Q3 is a very clean quarter when you look at this here, and that shows you that we can be below, you know, 30% when we have the right top line, right? So that's why I believe regardless of any comparison or path or whatsoever, we show in, you know, with a good top line, we have a clean, you know, cost as well, and that brings us below 30%, and we are not done. Operator: Next question comes from Robert Krankowski from UBS. Robert Krankowski: I've got like two questions. Just first one on the top line, second one on margins. We are almost in 2026 and given your strong confidence around the World Cup, the running category, the lack of easy now in the base, anything that you can see and or any reason why you shouldn't grow double digit in 2026? And then second one on gross margin, like again, we are looking at the gross margin close to 52%, so upper end of your guidance. And next week, we are going to see all the benefits probably of the mix with upper strong growth, as well as some of the transaction effects coming. So how should we think about the gross margin range? Is it more now 52% to 53%, for example, in 2026? Any comment would be really appreciated. Bjorn Gulden: You should be a sales guy, right? I think when you look at '26, we're not guiding it yet. It's the same thing always. We are very conservative when we look into the future because we don't want to disappoint you. We want to bring Q4 behind us. We want to see what's going on in the world. When you look at the industry and you look at what we think we have in the pipeline, I think you're right. But the external factors is; a, how is retail reacting to the uncertainty? How is the consumer reacting? And what other political tensions are getting into the way? Who knows? And the reason why I showed you the slide at the end of the presentation, where we've gone from EUR 300 million EBIT to EUR 2 billion, is, of course, that we think we have; a, taken risk in the sense that we bought enough and marketed enough to actually get there, because growing double-digit three years in a row is, of course, a risk in an environment. And secondly, in the transition to the new business model, you have to remember we changed a lot. So I think it's about, again, how confident are we that we can continue to grow in an environment that they're uncertain? And how can we make sure that we have a base in our organization and the way we work that is aligning to this growth with a new business model? And I think that's the only risk factors. I'm 100% convinced that Adidas is a brand that can stabilize over years a double-digit EBIT. And that the growth to take market shares should be double-digit in most markets, depending, again, what else is happening. And I don't think I can say something else than that because you're going to arrest me, you know, first quarter if something goes wrong, right? When it gets to the margin, is it 52% to 53% again? That, of course, depends on where we are growing then. Are we growing in the e-com side ourselves and in the D2C because, you know, we can do that? Then you're probably right. Are we growing in the markets with high margin like China? Then you're right. The growth for us in the U.S. is, of course, the one with the lowest margin. That's the way it is. So it depends, again, on the mix going forward. But in principle, when we said 50% to 52%, we did not believe that we already would be at 52% now, right? So we have achieved this margin higher or quicker than we thought, and not because of the mix but because of the success in the growth and maybe also because all the brands then didn't have the success that we had. So, again, there's many factors. And, of course, you always want us to be very accurate, but it's very difficult because there's so many variables. We are taking shares, I think, in all markets currently. We have a pipeline of products that we believe in. But of course we do not know these external factors. And of course we don't know what the competitors are doing, especially when it gets to being aggressive on discounts and pricing. So I think that's all I can give you. And I'm looking around if someone wants to add anything. Operator: Next question comes from Aneesha Sherman from Bernstein Societe. Aneesha Sherman: I have two please. The first one's about your running business. It's been growing at strong double digits all year in contrast to the slowdown that we're seeing in some other big running brands. Can you remind us how big your running business is and are you seeing any pressure on order books for 2026 given how competitive this category is becoming? And then related to that, my second question is around marketing. So marketing, you've ramped it slightly through the year. You're still guiding for that 12% level, but we've now seen some big competitors ramping up marketing, trying to gain share. Do you still think 12% is the right level given the increase in competitive intensity, or is there a possibility you might push that up a little bit higher next year? Bjorn Gulden: I don't think Harm will give me more than 12%, to be honest. And I'm not even sure if increasing it will make you more efficient. I mean, marketing is a funny thing because the number itself doesn't necessarily mean that you're better. And I think even in our 12% is not like we will look back and say all the 12% we had were invested the best way. So I think there's room within the 12% to actually do it better. My marketing people will kill me now for saying it, but I think that's the case. So we don't have any plans or needs right now to go above 12%. The beauty would be if we could find ways of actually taking the percentage down, but we also don't have any plans about that because we have said that investment level, when it gets to having the assets, you know, we invest about half of the money in actually having relationship with federations, with teams, with athletes and celebrities and the rest to activate them. And so far, I think that that's been a decent number. If that is changing, I mean, you say people are ramping up, and we don't really see that because, yes, there are some brands who are ramping up, but there's also someone who's slowing down. So when it goes to the competitiveness by actually signing things, I feel it's pretty stable. The best athletes and the hottest celebrities are always getting more expensive. But when you look at the width of it, I don't really see any big differences. The running business, your question is, again, an interesting one. And to quantify exactly how big running is depends on what shoes do you put in there. But I would say it's around EUR 2.5 billion, which, again, when you put that into the context, you will see it is a pretty big running brand. But again, we have created that mostly on the higher end of the pyramid and on the speed thing. And if you look at competitors that have been very successful, they have been much more in the everyday running and especially in the comfort running. And I think we learned from that, and that's also why this hyperboosting is so important for us because we really, really believe that there are Adidas consumers that love a brand who didn't have the products available that they would like to buy from us. And all research that we have done shows that. And we believe that the sector of comfort running, because heavy cushioning, instep comfort, and all those things are also things that people are looking for in their non-performance, what should I say, shoes, meaning in the lifestyle and comfort area. So this hyperboosting is for us very important. We might be a little bit late to the game in your eyes, but we didn't have it ready yet, and that's why we waited. And again, since we were growing anyway and running on the high-end side, we also didn't see the necessity of it. And the third thing is you have to remember we went out of running specialty, meaning that we didn't have any, what should I say, activities and relationships with running specialty because previous management thought we could go D2C on it. To build that back again, a; to hire people to be in the running communities and also to get the specialty to buy into you again, is, of course, something that takes time. And in many, many markets, we were totally out, and the share we have in running specialty in many markets are still very low. And as we're building that with more innovative products and more visibility, of course, we see huge potential in the running category. So that is the category I think that has the biggest potential in performance side to grow in. Operator: The next question comes from Piral Dadhania from RBC. Piral Dadhania: My first question is on the top line, and my second question is on share buyback potential. So sorry to have to come back to this, but could you just help us understand perhaps for the first half of 2026 whether the wholesale order books, which make up like 60% of your revenue base, is showing double-digit revenue growth? I think when you took over, Bjorn, you talked about 10% revenue growth through cycle. So is there anything, aside from obviously the external macro, which is very uncertain, but I think that's true for not just your company but your competitors, is there anything beyond that within your control that would lend itself to a different outcome for '26? And then the second question is just on the buyback potential. I think it's fair to say that the Adidas share price and equity valuation doesn't appear to be fully reflecting all the strong execution and the performance that you're delivering, including relative to peers. I think, Harm, that the initial targets when you guys all took over was to reduce the leverage to 1x net debt to EBITDA to build up a gross cash balance to close to EUR 2 billion, which it looks like you'll achieve either by the end of this year or into the first part of next year. So do we think that a good use of growing free cash flow, especially as the working capital position starts to wind down, as you suggested in your prepared remarks, may be useful in sending a positive signal to the equity markets and to start buying back your stock at a discounted valuation? Bjorn Gulden: I mean, the simple answer to your first question is no. There's no reason why we shouldn't only internal-wise get to the double-digit growth. I think that's fair. And buyback is not my area of speciality, so I give it over to Harm. Harm Ohlmeyer: Piral, thanks for acknowledging that the capital market didn't get our story in full. And that's probably true. So we actually, we look at that when you look at the share price, right? But, first and foremost, we say we want to invest into the operational business. What we have done, you have seen that in the operating working capital. Secondly, you want to be a solid dividend payer, which is always on the 30% to 50% of the net income from continued operations. And then of course, you know, I have a good, good analogy. And what I said, I was one to have EUR 2 billion of cash on the balance sheet. We either, you know, achieve the year end or with some rounding, you know, getting there in Q1. Yes, there are always some cycles from a working capital point of view. But you're absolutely right. So, but that's definitely something we will look into next year when it comes to share buyback, not this year, unless we believe we want to be opportunistic here or there, and then we want to do something short-term, right? But right now, let's get to the EUR 2 billion first and then look at that for next year. That's probably the most logical answer. But we always, you know, look at that opportunistic as well. Operator: Next question comes from Thierry Cota from Bank of America. Thierry Cota: Actually, two questions on Q4 and H2 '25. You've said your implied guidance leads to 6% to 7% organic growth rate in the fourth quarter. So what do you think would be the factors of such a slowdown versus Q3, especially when the Yeezy headwind drops to about 1%. And the second question would be on the EBIT. The EBIT guidance, the new one for '25, implies about EUR 100 million EBIT in the fourth quarter. So what do you think would be the drivers of such a decline versus Q4 '24? So you're on your decline when you remove the one-offs that you saw last year. And I would like to ask, would that be linked to the DNA, which it seems was pretty low in Q3? So is there a catch-up that we could expect in the fourth quarter and impacting negatively the EBIT? Bjorn Gulden: Well, I think as always, Q4 is this quarter where people react to different things, and we are always careful guiding for Q4. It's always the same because we are dependent on that retailers take their order book. We are dependent on what happens when it gets to discounting on the digital side. That's why I think historically you always see me guide very, very conservatively on Q4. I think that's the only reason. And, you know, there might be in the way that we are trying to improve ourselves that we will also have some one-offs that we will do in Q4. So I think it's just a conservative outlook and the need not to say anything that we actually disappoint you because that's always in the way we talk. And then I think there was a question to you, Harm, wasn't there? Harm Ohlmeyer: Yes, there's nothing specific on the depreciation that you called out, and that is not the reason for the Q4, but I want to echo what Bjorn said. I mean, when you get ready for '26, we have achieved a lot in the first nine months, and there's nothing specific we look at last year as well, or even going back in history, what our Q4 was. There's some seasonality in this one, but there's nothing specific we want to call out. So as Bjorn said, I want to make sure that we achieve what we say and then get ready for the World Cup here. Thierry Cota: Sorry, just a follow-up. The DNA again was particularly in Q3. Was there any particular reason for that? And should we expect a rebound in fourth quarter? Harm Ohlmeyer: I'm not aware of any specific reason, quite honestly. Let me come back to you then, Thierry, but I could not say there was any specific in Q3 or anything special for Q4 relative to Q3, but -- and if you look into this one, I'm not have anything specific. Operator: The next question comes from the line of Andreas Riemann from ODDO BHF. Andreas Riemann: Two topics here. One is tariffs. In the past, you stated that the market for takedown versions of tariffs would be larger than the market for original versions of Samba or Gazelle. So today, you didn't mention that. So how relevant are those takedown versions at this stage? And then what markets is the penetration of the takedown versions already quite high? This will be the first topic. And the second one on the cash flow, Harm, you mentioned the EUR 800 million or EUR 1 billion to be generated in Q4, that operating cash flow, right? That's from my side. Bjorn Gulden: Yes. I think I quoted that because normally, when you have higher end price points, the market for the takedowns is bigger, I have to tell that the sell-through of the higher end, meaning the originals, has been so high. So still, the higher end is actually bigger than the takedowns. Having said that, if you look at the family channel, of course, they have followed all these trends. So you will find takedowns of all the [ Terrex ] shoes in the market. But it is true that in this case, and it might have to do that, you know, the original classics and [ Terrex ] are, you know, between EUR 100 and EUR 120. So it's not expensive, expensive, that the higher end of the market has actually been bigger than the takedowns. That might change as we are converting more of the takedowns also into the same materials as we do upstairs. But to be honest with you, because we've been so successful upstairs, we haven't pushed the takedowns as much as I thought that we had to. So this is more of a, what should I say, coincidence in the sense that it has worked so well in the distribution upstairs, also in our D2C, that the need for doing takedowns hasn't been there. So I think this is a very unique situation, to be honest. Harm Ohlmeyer: Yes. And to the second question, we indeed talked about operating cash flow, you're right. Sebastian Steffen: Maura, we have time for 2 more questions. Operator: Next question comes from Anne-Laure Bismuth from HSBC . Anne-Laure Jamain: Yes. My first question is regarding the FX. So can you tell us or help us to quantify what would be the tailwind from FX on margin in 2026? My second question is related to tariff. Actually, regarding the tariffs in Vietnam, a final trade agreement is expected soon. So is there any industry expectation on Vietnam tariff changes for the sportswear industry? And maybe your last one regarding the performance in the U.S. So you talk about the reset in accessories. So is it a one-off impact? So does that mean that all things being equal, you can return to a double-digit growth rate in Q4 -- thank you very much -- in the U.S.? Bjorn Gulden: Well, the tariff for the U.S. hasn't changed. They came out and said they keep it at 20% and then negotiate in categories that might be exempt. But there's nothing new on that. So all products currently is at 20%. And we are not assuming any reduction because that would be dangerous. But, of course, we hope with Vietnam and other markets that shoes and apparel would be exempt. But that's not the case. And I think that came out actually yesterday for many markets, if I'm right. And then when it gets to the US, the accessory business that is not performance-oriented has been, I would say, first of all, a lot China sourcing. So, of course, that had to change. And secondly, it's been in the distribution that you're trying to upgrade. So, It's not a one-off in the sense that there is something you do from today to tomorrow, but I think there's good, good chances that that will come up again to double-digit increases. There's nothing drama in this, to be honest, and maybe we didn't explain it well, but it did hit us in Q3 for those reasons, and then there are plans actually to improve that very quickly. There is also no inventory sitting anywhere to clean up. I think people under or overestimated the impact of this. So I think accessories being global is 7% of our business, and we have said all the time that it should grow quicker over time. It's kind of the last thing in the sequence of footwear apparel that accessories come. And we grew it 1% now, and I do think that in the future when we get to '26, we should see double-digit growth there. I think that's my only answer to it. And don't read too much into this because it is not a big, big thing, to be honest. Harm? Harm Ohlmeyer: Yes, When it comes to the FX for '26, I understand you all want to have a concrete percentage or number for your spreadsheets, but I can just promise you there will be tailwind, given where we're hedged. But there's more than just the U.S. dollar. There are other currencies as well, whether it's the Japanese yen. I talked about Argentinian peso, Mexican peso, the other currencies as well. We have sizable markets, meanwhile, not just in Latin America, but around the world. But also, assume it will be tailwind when it comes to Euro, U.S. dollar. We also are fully hedged already for spring-summer '26, but there are also some open hedges. We normally hedge only 80% of our exposure, so it also depends on where the spot rate is, and we always run a simulated hedge rate if you would close it today, but of course we are waiting. It will be more tailwind if the dollar goes to $1.25, then we probably struggle on the translation again. But overall, we are going very positively from an FX point of view into '26. That's all I can say. Operator: Today's last question comes from the line of Anna Andreeva from Piper Sandler. Anna Andreeva: Happy to have made it. A follow up on North America. Great to hear about the double digit strength in footwear and apparel during the quarter. Can you talk about how lifestyle is performing versus performance in the U.S.? Is Terrace still growing in the U.S.? And what are you seeing with sell-through in Run Specialty and other wholesale partners? And then separately on gross margin, improved very nicely sequentially in the region, despite the tariffs. Maybe talk about what drove that and sustainability of that as we get into the fourth quarter. Bjorn Gulden: I think it's fair to say that the growth in the U.S. has been more lifestyle-driven than performance. I do think it's fair to say that for us to be a real sports plan in the U.S. we need to continue to invest, to get better distribution of a market share in the sports trade is very low. And you're asking about the Running Specialty. We were almost out of it. So we expect actually over the next 18 months to see a pretty high growth when it gets to Running Specialty because you're coming from a low base. And we are a hundred percent sure that the investments that we're currently doing in American sports, connecting to both college and professional sport will help us to get much better distribution with the [indiscernible] of this world and the academies and also in the specialties. So I think it's fair to say that it's obviously been lifestyle-driven so far. Anna Andreeva: Terrific. And on gross margin as a follow-up. Bjorn Gulden: Yes. As I said, I do think that the gross margin in the U.S. is, of course, dependent on that you get good distribution and that you avoid discounting. I do think also that the margin in general in the U.S. has to do with scale. There is an upside on margin in the U.S., no doubt about it. You have seen improvement, and that has, of course, to do that we have had better sell-through, and we got more of the right product into the wholesale business and we have run especially our factory outlet much better than we used to do, but that has clear an upside. So we see optimistic. Okay. If you take the tariffs out, which, of course, is then the negative side of it. But everything being equal, we should be able to build gross margin and actually our operating margin in the U.S. over time because we have not run that market optimal, to be honest with you. Sebastian Steffen: Thanks very much, Anna. Thanks very much, Maura. And of course, thanks very much to Bjorn and Harm. And thanks very much to all of you for participating in our call today. . Before concluding today's call, I would like to highlight that we will be welcoming a group of investors here at the World of Sports next week. We talked quite a bit about our excitement about our product pipeline, be it Hyperboost, be it our new Original sports line, be it the Superstar, but also the material updates within tariff. So if you're interested in experiencing that, then please let us know, and we'll be happy to host you next week as well. If you have any more questions to ask, then please feel free to reach out to Adrian, Philip, myself or any other member of the IR team. And with that, thanks very much again for your participation. We wish you a good and golden autumn season and look forward to chatting with you soon. Bye-bye.