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Operator: Good morning, everyone, and welcome to ONEOK's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] With that, it is my pleasure to turn the program over to Ms. Megan Patterson, Vice President, Investor Relations. Please go ahead, ma'am. Megan Patterson: Thank you, Bo. We issued our earnings release and presentation after the markets closed yesterday, and those materials are available on our website. After our prepared remarks, management will be available to take your questions. Statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the safe harbor provision of the Securities Acts of 1933 and 1934. Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. With that, I'll turn the call over to Pierce Norton, President and Chief Executive Officer. Pierce Norton: Thanks, Megan. Good morning, everyone, and thank you for joining us today. On today's call is Walt Hulse, the Chief Financial Officer, Treasurer and Executive Vice President, Investor Relations and Corporate Development; Sheridan Swords, the Executive Vice President and Chief Commercial Officer. Also on the call are Kevin Burdick, Executive Vice President, Chief Enterprise Service Officer; and Randy Lentz, the Executive Vice President and Chief Operating Officer. Yesterday, we announced higher third quarter results and affirmed our 2025 net income and adjusted EBITDA guidance ranges. We also reaffirmed our expectation to recognize approximately $250 million of synergy-related adjusted EBITDA in 2025. Our third quarter adjusted EBITDA increased 7% compared to the second quarter, once again highlighting the sequential progression of earnings we anticipated this year. Compared with the first quarter of 2025, adjusted EBITDA has increased approximately 20%, driven by volume growth across our operations, steady demand for our services, and the consistent execution of acquisition-related integration strategies by our employees. We believe that ONEOK's long-term market value will be driven by our strong fundamentals, contiguously integrated assets and consistent results from our diversification efforts. Key among these catalysts are ONEOK's significant operating leverage, contiguously integrated assets, synergy earnings with the majority being within our control, and our financial strength and flexibility. So let's start with the operating leverage. We've either recently completed or are nearing completion on projects that will add nearly 600,000 barrels per day of NGL pipeline capacity, more than 200,000 barrels a day of fractionation capacity more than 550 million cubic feet per day of Permian Basin natural gas processing capacity, and an expandable refined products capacity to the growing Denver market. All of these projects are either complete, or expected to be completed within the next 1.5 years. This operating leverage is a key differentiator for ONEOK, providing the ability to capture significant earnings uplift with limited incremental investments. Our contiguously integrated assets, including our extensive NGL and refined product system provide strategic connectivity and growth opportunities. Regarding acquisition-related synergies, we remain on track to realize approximately $250 million of incremental synergies in 2025. By the end of this year, we will have realized nearly $500 million of synergies since closing the Magellan acquisition in September 2023, far exceeding our original expectation. We continue to see meaningful synergy opportunities ahead across all of our acquisitions with the majority of these completely within our control and not dependent on commodity prices. Finally, our financial flexibility, strengthens our position and is the cornerstone of ONEOK's business. A strong balance sheet and an intentional and disciplined approach to capital allocation, and cash flow generation continue to support our ability to generate long-term value for shareholders. Our established and stable customer base includes some of the largest and most well-capitalized producers, refiners and downstream customers. Our combination of demand pull and supply push earnings, and our long-standing customer relationships provide resilience through different cycles. ONEOK's strong fundamentals and integrated assets position us well to navigate near-term challenges and continue delivering results for investors and customers. I'll now turn over the call to Walt and Sheridan to provide the financial and commercial updates. Walter Hulse: Thank you, Pierce. Third quarter 2025 net income totaled $940 million, or $1.49 per share, a 10% increase compared with the second quarter. Third quarter adjusted EBITDA totaled $2.12 billion, which included $7 million of onetime transaction costs. The acquired EnLink and Medallion assets delivered nearly $470 million in adjusted EBITDA during the third quarter, continuing their meaningful contribution to year-over-year earnings growth. Additionally, we benefited from higher volumes in our natural gas liquids and natural gas gathering and processing segments. During the quarter, we repurchased more than 600,000 shares of common stock, and retired more than $500 million in senior notes through a combination of scheduled maturities and repurchases. Year-to-date, we've extinguished over $1.3 billion in senior notes through maturity repayments and repurchases. This combination of share repurchases and debt management reflect our commitment to a balanced capital allocation approach that utilizes multiple available channels to create shareholder value. Our long-term leverage target remains at 3.5x, which we expect to approach in the fourth quarter of 2026 on a run rate basis. With yesterday's earnings announcement, we affirmed our 2025 net income guidance range of $3.17 billion to $3.65 billion, an adjusted EBITDA guidance range of $8 billion to $8.45 billion, which as a reminder, excludes the impact of onetime transaction costs. Year-to-date, transaction costs included in adjusted EBITDA have totaled $59 million. We continue to expect our total capital expenditures, including growth and maintenance capital to be in the range of $2.8 billion to $3.2 billion in 2025. As we finish out the year, we remain focused on capturing additional synergies and operational efficiencies with approximately $250 million in synergy contributions expected for 2025. As discussed last quarter, we don't expect to pay meaningful cash taxes until 2029, which is a year later than we previously anticipated. Additionally, we expect our cash tax rate in 2029 to be below the full 15% corporate alternative minimum tax rate, which is also less than our historical expectations. Since the One Big Beautiful Bill, we now expect to pay more than $1.5 billion less in cash taxes over the next 5 years, and the corresponding increase in expected free cash flow supports our continued flexibility for capital allocation in the years ahead. I'll now turn the call over to Sheridan for a commercial update. Sheridan Swords: Thank you, Walt. Starting with the natural gas liquids segment. Total NGL raw feed throughput volumes increased compared with the second quarter, driven by higher volumes in the Permian Basin and Rocky Mountain region. Rocky Mountain region volumes averaged more than 490,000 barrels per day, another record for the region and a 5% increase compared with the second quarter, driven by higher propane plus volume and continued strength in ethane recovery. Gulf Coast/Permian NGL volumes averaged nearly 570,000 barrels per day during the third quarter, and 8% compared with the second quarter driven by the continued ramp-up of newly contracted volumes. In the Mid-Continent, less ethane recovery led to slightly lower volumes compared with the second quarter, but we continue to see consistent C3P+ volumes from the region. Regarding our fractionation operations. Our Mont Belvieu fractionation complex, including our MB-4 fractionator is back to capacity following the incident in early October. After initial safety reviews, we resumed operations at the majority of the complex within 72 hours. Repairs were made in operations at MB-4 resumed within 10 days following an incident. During the downtime, we were able to optimize our fractionation positions in Mont Belvieu and the Mid-Continent, as well as utilize storage. We anticipate working down any inventory build related to this incident in addition to the inventory being held over from the second quarter over the next several months. As we fractionate and sell the inventory, we will be able to recognize the associated earnings. We continue to see opportunities for ethane recovery across our system during the third quarter. Weaker natural gas prices in the Rocky Mountain region have led to greater recovery opportunities, and we expect to continue to see high levels of recovery through the first half of the fourth quarter across our entire system. Related to synergy products, we have now completed the primary Easton asset connections, including Galena Park, East Houston and our Pasadena joint venture, providing key connectivity between our Mont Belvieu NGL assets, and key Houston area refined product terminals. Additional downstream connections will be completed through early 2026. Additionally, the build-out of connectivity between our Conway NGL and Mid-Con refined product asset is on track for completion by year-end of 2025. Both of these projects are expected to provide benefits through increased transportation fees in our natural gas liquids segment, which we have already begun to realize, and also blending uplift in our refined product and crude segment. It's also important to note that these projects provide transportation and blending opportunities with third parties, expanding the optionality of these assets further than ONEOK's own blending business. Moving on to the refined products and crude segment. Third quarter refined product volumes increased sequentially, reflecting increased seasonal demand. When booking year-over-year, we continue to experience some regional supply disruptions along the system related to refinery maintenance, primarily impacting short-haul lower tariff movements. On average, refined products tariff rate benefited from the July adjustments, where we increased rates by mid-single digits as expected. As of mid-September, we've entered the fall blending season. Liquid blending volumes in the third quarter and year-to-date have been higher than expected due to successful synergy execution. Physical blending volumes have increased approximately 15% year-to-date compared to the same period in 2024. Despite tighter margins from lower gasoline prices, increased blending capacity positions for a strong upside in a rising price environment. Our crude oil gathering and long-haul pipelines continue to perform well. Third quarter crude oil volumes increased sequentially demonstrating resiliency of our Midland gathering business. Moving on to the natural gas gathering and processing segment. Volumes increased across all regions compared with the second quarter of 2025 as producers continue to execute the 2025 plans. Looking first at the Permian Basin. Volumes increased 5% compared with the second quarter, averaging 1.55 billion cubic feet per day in the third quarter. Currently, we have 20 active rigs on our dedicated acreage, driving the need for recently announced capacity expansions, totaling more than 550 million cubic feet per day across the Midland and Delaware basins. The Permian Basin continues to be a key area of strategic growth for us, and we will continue to be actively engaged and intentional in assessing opportunities to expand and enhance our integrated operations within the basin. In the Mid-Continent, natural gas processing volumes increased 6% compared with the second quarter, highlighting producer resiliency in the basin and strong production results out of the Cherokee formation in Western Oklahoma. There are 11 rigs on our dedicated acreage in Oklahoma. Rocky Mountain region process volumes averaged 1.7 Bcf per day in the third quarter of 2025, a 4% increase compared with the second quarter, and a record for ONEOK in the region. Strong well completions during the second quarter drove third quarter volumes and will continue to benefit throughout the remainder of the year. There are currently 16 rigs on our dedicated acreage. Looking forward, the current commodity price environment will likely drive more moderation and increased optimization of drilling and completion activities across the basins where we operate. However, even in a flat crude oil production environment, strong gas to oil ratios and continued production efficiency point to modest growth in our natural gas and the NGLs across our systems. I'll close with our Natural Gas Pipeline segment, which we reported another strong quarter and continues to exceed our original expectations for this point in the year. We continue to optimize the legacy EnLink asset and be opportunistic regarding natural gas pricing dynamics across our strategic assets in the Permian and Gulf Coast areas. We remain well positioned to help meet the growing demand for natural gas, both domestically and for LNG exports, with extensive pipeline network and key assets, key asset locations such as Oklahoma, Texas and Louisiana. We are directly connected to major LNG and industrial customers, and continue to work on additional opportunities with them. Additionally, we are in active discussions related to numerous potential AI-driven data center projects. The key to these projects remain speed to market, and our intrastate assets are located in premier natural gas supply and demand centers, close to many of these proposed projects, and are well positioned to meet the timing needs of the market. Pierce, that concludes my remarks. Pierce Norton: Thank you, Sheridan and Walt. Before we move to Q&A, I want to close by emphasizing that we continue to see opportunities ahead. Importantly, we're executing on our strategy to combine our strategic acquisitions into an even stronger and more resilient business. Our integrated assets are performing well, expanding our reach in key basins and demand markets, and creating an even stronger commercial connectivity across our system. Our integrated assets continue to provide stable, fee-based earnings and position us to capture opportunities across market cycles. We're able to execute our strategy because of the employees across our company. I want to recognize their commitment and contributions to our business, and our vision for ONEOK. Their focus on safety, operational excellence and innovation is a key to our success. As we look ahead, we remain confident in our strategy, our strong fundamentals and the catalysts that we expect will continue to deliver growth and long-term value for our investors. Operator, we're now ready for questions. Operator: [Operator Instructions] We'll go first this morning to Jeremy Tonet of JPMorgan. Vrathan Reddy: This is Vrathan Reddy on for Jeremy. I appreciate you guys don't want to provide 2026 specifics at this point. Curious if you guys could frame up tailwinds versus headwinds as you think about earnings growth into next year. Should we -- specifically, should we think about that mid- to high single-digit growth still appropriate? Sheridan Swords: This is Sheridan. Where we see our tailwinds, which push us into next year is obviously first is the synergies. We've put a lot of synergies in place this year, and we've got a partial yield into that. Easton being one of the big ones. We'll see a full year next year of that one also with the Conway NGL to Mid-Continent refined products, among others. We also have our growth projects coming online with the Denver expansion coming on midway through the year. As we mentioned in our remarks, we have that [ 500 million ] over 500 million a day of processing capacity coming on throughout '26 into early '27. So the stuff coming on '26 is going to be a tailwind as we continue to go forward. And then also, we think there's just a growth in market share that we'll see in the Permian and some of our other areas will continue to fuel our growth moving forward. So those are really -- as we see going forward, what's going to drive our growth into 2026. Vrathan Reddy: Got it. And then on capital allocation, $45 million of buybacks in the quarter. Could you walk through, I guess, how you think about executing on the buyback versus debt pay down or other capital allocation priorities at this point? Walter Hulse: Sure. Well, as we've said in the past, as we get closer to a clear path to our debt-to-EBITDA target of 3.5x, it's going to free up our flexibility to add some stock buybacks to the equation. We continue to be on track with where we think we need to get to from a debt-to-EBITDA standpoint. And with that visibility, we're starting to feel a little bit more flexible in our asset allocation, saw the opportunity to buy back some stock there in the third quarter and did a modest amount. We also saw a pretty nice opportunity on the bond side and executed on that as well. Operator: We'll go next now to Michael Blum of Wells Fargo. Michael Blum: Maybe we just go back to the '26 guidance. The slide in the deck, you removed the mid-single digit to high single-digit growth language. So I just wanted to make sure I understand the change there and just how you're thinking about '26? Pierce Norton: Michael, this is Pierce. What I would say is our focus is on finishing 2025 strong and carrying that momentum into 2026 year. They just went over several of those projects and the different things that are going to impact 2026. We're continuing to have discussions with the drilling plans, with our producers. We're going to be finalizing our 2026 guidance in early part of first quarter of 2026. But I'd end this way that we are very confident in our positive trajectory. So as far as guidance for 2026, I'll just ask you to stay tuned. Michael Blum: Okay. Fair enough. Appreciate that. And then just wanted to ask if you could quantify the potential impact of Waha spreads widening. Either can you capture that from your EnLink assets? Or do you have more open capacity on WesTex to capture those spreads than you have historically? Sheridan Swords: Michael, this is Sheridan. Obviously, the Waha to Katy/Houston Ship Channel spread has had a positive impact especially when you bring together our ONEOK West Texas assets, the West Texas system and the EnLink system and capacity we have on other pipelines, we've been able to leverage that to grow that. We've been able to do that not only on the EnLink side, but also on our legacy ONEOK gathering system. So it has been a positive impact going forward. We will continue to see us use that capacity as we grow our gathering and processing for our customers as we go on as well, but we have seen the ability to move gas on our capacity and also do a lot of parking loans on our system as well. Operator: We go next now to Spiro Dounis at Citi. Spiro Dounis: First question, maybe to start off with capital allocation. Curious how you guys are thinking about maybe where that next marginal dollar CapEx goes. And really, if you could just dig into some of the basins or the asset types between NGLs, gas and liquids, what's most attractive to you right here? Walter Hulse: Well, Spiro, I think we look at every project on a stand-alone basis. We've historically been able to use our strategy of building off our existing asset base that expand and extend approach, which has given us the opportunity to do some very attractive capital projects. That same strategy exists today with more assets. So given the acquisitions we've made, we've got more opportunities to expand and extend. So we look at each and every one of those is on a stand-alone basis. That said, I think that our expectation is that CapEx will trend down here over the next several years. As Pierce had mentioned in his remarks, we have a lot of operating leverage in our existing business, whether it be NGL capacity, fractionation capacity that's coming on. So we don't need to continue to expand that. So we do see CapEx starting to trend down. Spiro Dounis: Got it. Second one, maybe just going to the Sunbelt connector. I was curious to get your thoughts on the competing open season that's out there, how you think your project stacks up? And if there's enough demand in Arizona for maybe everyone to win some business here? Sheridan Swords: Yes, this is Sheridan. I mean, I would say that we feel the Sunbelt Connector is a very competitive project as we look at the other opportunity out there. Obviously, right now, we're still in the open season. We're still talking to a lot of customers. We've seen a significant amount of interest as we end there. And we think a lot of that is driven by the competitive advantage of this pipeline has is that we are already connected not only to all the Mid-Con refiners in the upper Midwest that we can pull that volume and source to this pipeline, but we also have extensive connectivity into the refining center on the Gulf Coast where we can actually do some very efficient expansions. We already have capacity between the Gulf Coast in El Paso, and we have some very efficient capacity expansion that we can leverage and continue to go forward. So we think we're going to compete very, very nicely going in there. We'll just have to see how the customers come out and where we get them signed up, and how much volume to see how -- which one of these projects will continue to be built. Operator: We'll go next now to Theresa Chen with Barclays. Theresa Chen: Following a notable uptick in volumes across your regions, I wanted to go back to the forward outlook a bit. Given the heightened market concerns around how producer budgets may be evolving in light of recent crude price volatility and understanding that the process is still underway. But can you just give us any sense of any early indications on how you expect volumes across your supply push assets to trend through the next year? Pierce Norton: Theresa, I'll take a shot, this is Pierce. And I'll let Sheridan fill in here. But I think the way we look at all of our different basins are what is the drilling activity currently, and we know what the crude price is today and gas prices. And then we also look at how much -- how many rigs would it take in each of the different basins to basically keep the volume flat. And so we feel very comfortable that right now, the drilling is there to keep this volume flat. And if that happens, then we also have our GORs that are rising in particular, up in the Bakken, the GOR is 3.1 and every 10th means something up there. So by our calculations, there's enough rigs out there running to hold the crude flat, and flat crude volume. We believe our gas volumes are going to continue to grow. Sheridan, you have anything to add? Sheridan Swords: We talked about the Bakken and we get into the Permian. We have enough forward visibility into volumes that are coming on our system today and people are completing here in the last quarter of 2025 that we will still see growth coming out of the Permian into 2026 and beyond. And as we said before, we are very excited about the Cherokee formation. It seems to have a lot of resiliency with a little downturn in price up in the Mid-Continent. So we still -- we're still very positive about our volumes going forward. Pierce Norton: And Theresa, the only thing I'd add to that is, Sheridan mentioned this, but I want to make sure that this gets across, he mentioned competing for other volumes. That's the one thing. We all focus on, what's the drilling, what's the acreage dedications. But just as importantly, there's gas that's flowing out there right now that may be going to somebody else. And as those contracts roll off, we feel confident we're going to be able to compete with those volumes as well. And most of them are going into CDPs so not a lot of capital to really connect to our operating leverage. So it's just a point I want to make sure that's made. Theresa Chen: And would you be able to provide an update on your LPG export commercialization efforts? How are those conversations going with potential customers? And what kind of interest are you seeing in the market? Sheridan Swords: Theresa, what I would -- this is Sheridan again. What I would say is that first thing is, as we've always said all along, we have supply to be able to build the stock and that supply for a long time has drawn a lot of people to us, and it continues to be that. So we have a lot of interest in our docks going forward. And what I would say on the contracting side of that, we are very pleased where we are right now with our contracting strategy and where we sit today. We still don't want to give a whole lot of details on that because as you all know, it's a very competitive market, but we're pleased where we are. Operator: We'll go next now to Jean Ann Salisbury with Bank of America. Jean Ann Salisbury: There's been some rumblings that there may be kind of a call on the Mid-Con gas complex over the next year or 2 to meet all the LNG that's ramping. Is that something that you're hearing from your customers? And I guess, Sheridan, do you have a sense of if gas egress could become a limitation there for gas and NGL growth out of the Mid-Con? Sheridan Swords: What I would say right now, Jean Ann, is we are seeing -- hearing some people maybe move to a little bit of a gassier portion of the Mid-Continent and moved through from that, which we've always said our Mid-Continent has a little bit of a gas option to it. As gas becomes more favorable, you will see some more drilling go to the gas side, which is good for our G&P and NGL area. I still think we have quite a bit of room to go of growth in the Mid-Continent before we really run out of egress out of the Mid-Continent. And I think we'll be ahead of that as well. If we see it even getting close, we'll be able to put some things in place to be able to get more gas out of the region. So we're -- that's one of the reasons we have some conviction in growth in the Mid-Continent on our volumes as we're also seeing that move to a more gassier play. Jean Ann Salisbury: That makes sense. And it seems like year-to-date in your processing and NGL volumes, Bakken is trending a bit above the guide and Permian is trending a bit lower than the guide. Can you just talk about the dynamics of that and how much has to do with ONEOK's market share in those basins versus basin growth overall versus your expectation? Sheridan Swords: Well, I think we really start with the Permian and the Permian, we kind of -- because of some larger pads were delayed in the first part of the year, we kind of came out a little bit slower than we had expected. But as those pads come on, have come on, and are going now, we are now at a volume across our system where we expected to be at this time when we set our plan together. So we're pleased where we are right now with our volumes in the Permian Basin. Up in the Bakken, we have on the NGL side, we have seen some record volumes in there, and a lot of that -- kind of that high end of that has been due to ethane recovery. We talked about our discretionary ethane that we can bring on, and we've seen some pretty wide spreads between -- with the low cost of gas, or low price of gas up in the Bakken over the summer, we were able to take advantage of that and put ethane on our system and delivered into the Belvieu complex. So we've been very pleased how that's going, and that will continue into the fourth quarter. Operator: We'll go next now to Manav Gupta with UBS. Manav Gupta: We are in the middle of this AI revolution. I think NVIDIA's market cap went and hit $5 trillion this morning. And I'm just trying to understand, in your comments, you did mention all the ways -- some of the ways you can benefit from this revolution. Can you elaborate on it? Where could ONEOK see the opportunities as we get into this data center build frenzy in the U.S? Sheridan Swords: Yes. This is Sheridan again. What we're seeing is we have been contacted by I mean, well over 30 different projects on -- for data centers. And they were putting those projects in close to natural gas pipes to be able to feed the electric generation they need for those data centers. And so we've had our fair share of look at those, and we have some where they are very close to our pipeline that we feel we have the competitive advantage to be able to supply those. These are not going to be high capital type projects. They're going to be very nice low capital, nice return type projects. But we are seeing -- a good number of them that we think that we have the competitive advantage of either speed to market and how close we are to the data centers that we're going to win our fair share. Manav Gupta: Perfect. My quick follow-up here is you and your partners recently announced the Eiger Express pipeline. Help us understand the importance of this project? And why do you see the need for this project to go ahead? Sheridan Swords: Yes. On the Eiger Express project, we're really excited about that as we continue to see the demand from LNG and a lot of that demand is needed to be supplied out of the Permian Basin. We still see growth in that area. The Eiger was a nice complement to the Matterhorn. And because of the ownership we had in Matterhorn, we were able to see inside of that. And that project was FID when they had enough firm commitments from customers to be able to make an acceptable return. They've been continuing to be able to get more contracts on that. So we're very pleased where the Eiger project is going, and it allows us to put complete our integration, be able to put gas out of our gas plants onto a pipeline that we get some equity back in and be able to grow with it. So we're very excited about the Eiger project. Pierce Norton: Well, the only thing I'd add to that, Manav, is that you've got the capacity that's currently out of there. One of the reasons that you see some of these widening of the spreads is because of the tightness of that capacity. So there is extra capacity that's needed in the 10 Bcf of LNG that's been basically built down in Louisiana and Texas, primarily in Texas. It's going to need this gas. And so it's not like we're building the pipe for 10 Bcf. It's just only a portion of that. So the demand side of this thing is very positive to fill it up. Operator: We'll go next now to Keith Stanley with Wolfe Research. Keith Stanley: I wanted to follow up on Sunbelt first. So in the past, you've talked to potentially working with partners. Could that include refiners or other strategics? And are there any discussions going on, on that front that could help commercialize the project? Sheridan Swords: We've commented that we would deal with partners. And what I would say, they need to be a strategic partner. They need to bring something to it. And we're continuing to open to that. Obviously, if there's we would not comment on any conversations that are going on at this time, but we are open to a partnership as we've said before. Keith Stanley: Okay. Great. Second one, I think in the prepared remarks, you alluded to the Permian as kind of a core strategic focus for the company. Given it's a very competitive market, especially these days, do you feel like you could benefit from more scale in the Permian overall? And then separately, can you remind us where you are in the process of some of the EnLink volumes transitioning over to ONEOK pipelines in your system? Sheridan Swords: I'll start with the last one first. I mean on the EnLink volumes, I think you're talking about the NGL volumes coming off of the legacy EnLink plants that are not going to the ONEOK NGL system. We will see those start to come over. They're roughly around 50,000 barrels a day. We'll start seeing them come over from '26 through '28 in the time frame when those contracts come up and they will -- once those contracts are finished, they'll come right over to our system as well. Obviously, we like scale in the Permian because we're growing in the Permian. We're already talked about adding another 500 million a day of processing capacity in the Permian. So we like that. We like to grow it there. We like to grow organically first because that is the most economical way to growth. As we look at M&A, we look at everything out there, and we're going to be very intentional and disciplined to if we're going to do anything more on the M&A side. Operator: We'll go next now to John Mackay at Goldman Sachs. John Mackay: You talked about, I think in response to Jean Ann's question, just the ramp on kind of Permian G&P relative to the guide. Can you also just spend a minute or 2 on the crude side? I think also the year-to-date is looking a little softer versus the full year. Maybe just bridge us to the volume guidance. And then again, if you're talking about a rig environment that gets you to flat next year, how we think about that piece of the growing -- the business growing into '26? Sheridan Swords: So when we look at our crude volumes that we think about, we are down just a little bit on that piece, but you really got to break that apart into its components. Really, the area that we are down on is mostly in our low volume -- I mean, a high-volume, low-margin business that we're down on. The main business up gathering crude out there, we are within range there, and we are excited about continuing to grow there. So you got to look at our crude volume in [indiscernible] long-haul, the HDS system in Belvieu. We have some short-haul volume out in the Midland that all are down a little bit. But the core -- what I call our core business, the core business have taken it off of leases, or batteries and move it through our system is where we expect it to be, and that's really the driver behind that business. John Mackay: All right. That's helpful. I appreciate that. And maybe staying in the segment. Now it's the Easton kind of integration pretty well done. You're going to get more on the Conway side tied in next year. Are you able to frame up in kind of, let's say, like a mid-cycle environment, or what have you? This overall size of the blending business on a kind of, like, annual run rate basis at this point? Sheridan Swords: I think when you look at the blending business, you've got to be very -- there's a spread component in there. So it fluctuates from year to year. What I would say is that through our synergies and everything else, they had in my remarks, we've been able to increase the volume by 15%, which really sets you up for when prices go back to more normal, spreads go back to more normal, we'll really be able to take advantage of that opportunity continue to go forward. And as we put more of these synergy projects in place, we're going to be able to increase that money, that blending uplift that we have, being able to make sure we have volume there when we can blend and be able to get to places where before we were uneconomical to get to. So it is -- as I remind everybody is that 90% of our business is volume times fee and that last spread and commodities is only 10%. So even our blending business that we like very much so, and we're growing is still a small portion of our business. Operator: We'll go next now to Sunil Sibal at Seaport Global Securities. Sunil Sibal: So I just wanted to go back to your comments on the guidance. I realize that you are focused on ending 2025 strong. So in that context, realizing that we had MB-4 incident also, is the midpoint of the full year guidance, that $8.225 billion, still a good kind of an anchor point for -- as far as fourth quarter goals are concerned? Walter Hulse: Well, I think what we have said is that we are confident to be within the range. We've affirmed that range. And we're going to see how the fourth quarter continues to play out. But at this point, we're going to keep it in the range, and we're very confident of achieving there. Sunil Sibal: Okay. And then one clarification on Bakken. From Sheridan's comments, it seems like you mentioned that you have 16 rigs running on your system. I believe last quarter that was 15. So is there a pickup in rigs? So first of all, I want you to clarify that? And then how should we think about that number trending, especially as you go into discussions with your customers? Sheridan Swords: Yes, it is up one. I mean, there's a lot of flexibility in those rigs moving on and off, but we are up rig on our business that we like. As we think about trending into 2026, the producers are still in their budget process right now. As they continue to come out that, we hear more from them. We'll be able to reassess what 2026 looks like in terms of rig count and volumes and everything else like that. But we have good momentum into 2026, so we like, so we're optimistic. Operator: We'll go next now to Jason Gabelman of TD Cowen. Jason Gabelman: I wanted to ask one just on the quarterly results. In your disclosure, you talked about the NGL segment benefiting from -- it seemed like selling product out of inventory and refined products from timing of operational gains and losses. I was hoping you could elaborate on those comments a bit more as I'm trying to understand the underlying earnings in the quarter. And I have a follow-up. Sheridan Swords: Well, this is Sheridan. On the NGL side, we talked about selling purity products out of that. This is in our marketing business, there's different times that we have -- we may be holding product for storage and selling at a different time of the year. And so because of that, we'll maybe moving earnings across quarters a little bit. So we saw an uplift by being able to sell some product in the second quarter -- I mean in the third quarter. So it's really kind of a timing of sales as we -- on our marketing business. And on the refined products on our over and shorts. If we look out over the year, we tend to be just slightly a little bit long on volume, but we take opportunistic time throughout the year to sell our over and short into the area, and this is the time that we sold it in the second -- in the third quarter. Jason Gabelman: Okay. Got it. And my follow-up is a bit more strategic in nature. It seems like your growth rate -- your EBITDA growth rate is obviously going to slow here from very attractive rates the past few years to -- you've previously said mid- to high single digits. We'll see where it comes out next year. But as you think about attracting capital to your equity, how important is it to maintain our competitive growth rate? Or do you think that your EBITDA growth rate is not necessarily a main determinant of equity capital you could attract to the stock and there are other avenues to do that? Walter Hulse: Well, I mean, I think clearly, having a growth rate -- a positive growth rate is going to be something that attracts people to the stock. I would just kind of point you to our history. We've gone through cycles before where commodity prices have been up and down. And year-over-year since 2014, we've had positive EBITDA growth every year. We continue to see that trend. Clearly, at the moment, we need to get a little better fine point on where the producers are going to participate in the coming year before we provide a very specific number, which we'll do in the first -- beginning of the first quarter. But the business is incredibly resilient. And we are very confident that we will continue to grow into 2026. We clearly are going to be focused on our capital allocation, taking the opportunity to bring on real high-quality projects. But if you look at our cash flow profile, we should have the opportunity in the coming years to be in there buying some stock as well. So that could have a positive impact. But at the end of the day we continue to achieve that earnings growth going forward. Pierce Norton: The only thing I'd add to that is I'd encourage you to go back and look at the data for, like, crude oil prices between 2008, 2009, 2015 to 2016, 2020. It really paints the story of what Walt just said, about how we've been able to grow our EBITDA through these different down cycles. And one thing I would say because most of us have been in this business over 40 years, with every down cycle there's usually an up cycle. You don't get into another down cycle, so you have an up cycle. So it will come back, and we're confident to manage through the down cycle. Operator: Ladies and gentlemen, that will conclude our question-and-answer session. I would now like to turn the call back over to Megan Patterson for any closing remarks. Megan Patterson: Thanks, Bo. Our quiet period for the fourth quarter starts when we close our books early next year and extends until we release earnings in late February. We'll provide details for that conference call at a later date. As a reminder, our IR team will be available throughout the day for any follow-ups. Thanks, everyone, and have a good day. Operator: Thank you, Ms. Patterson, again, ladies and gentlemen, that will conclude today's ONEOK Third Quarter 2025 Earnings Conference Call. Again, thanks so much for joining us, everyone, and we wish you all a great afternoon. Goodbye.
Operator: Hello, everyone, and thank you for joining the FCPT Third Quarter 2025 Financial Results Conference Call. My name is Claire, and I will be coordinating your call today. [Operator Instructions] I will now hand over to Patrick Wernig from Four Corners Property Trust to begin. Please go ahead. Patrick Wernig: Thank you, Claire. During the course of this call, we will make forward-looking statements, which are based on our beliefs and assumptions. Actual results will be affected by known and unknown factors that are beyond our control or ability to predict. Our assumptions are not a guarantee of future performance and some will prove to be incorrect. For a more detailed description of some potential risks, please refer to our SEC filings, which can be found at fcpt.com. All the information presented on this call is current as of today, October 29, 2025. In addition, reconciliation to non-GAAP financial measures presented on this call, such as FFO and AFFO, can be found in the company's supplemental report. With that, I will turn the call over to Bill. William Lenehan: Good morning. November 9 marks our 10-year anniversary as a public company. We are truly grateful to our shareholders, advisers, counterparties, Board and team members, past and present for their support, guidance and contributions over the past decade. We are proud of the portfolio we've built and look forward to continuing our mission of creating shareholder value. Reflecting on our 10-year history, the highlights have been starting with thoughtful structuring at the spin-off, including our asset selection, modest well-covered rents, low leverage and low corporate overhead. Executing an acquisition strategy with clear underwriting standards that has led to $2.2 billion of acquisitions and annual cash rent nearly tripling from $94 million at spin to $256 million at our current run rate. Expanding the investment aperture into new sectors and tenants while conservatively sticking to healthy sectors with mission-critical real estate, taking a shareholder-friendly posture with significant insider ownership, best-in-class disclosure, thoughtful capital allocation and 10 straight years of top decile governance scores. Building a very capable organization. We began with just 4 employees and a single tenant across 418 properties. Today, we have 44 team members and 170 brands across nearly 1,300 leases. We've had very high retention along the way and heading into 2026, we are fortunate to have a bright, young and motivated team. We have more capacity than ever across the organization. Now shifting back to the current quarter's results. Following my initial remarks, Josh will comment on our investment activity, and Patrick will discuss financial results and capital position. We acquired $82 million of net lease properties in Q3 at a 6.8% blended cap rate. Over the trailing 12 months, we acquired $355 million, which is amongst our highest volume across 4 consecutive quarters. These acquisitions were funded with equity we raised on the ATM via forward issuance earlier in the year at an average price above $28 a share. We accomplished this year's acquisitions while maintaining what's become core to the FCPT brand, a focus on real estate and creditworthy tenants while avoiding sacrificing quality for volume or spread. At the heart of FCPT is also a commitment to modulating our acquisition pace when the cost of capital becomes weaker as we saw last year and then ramping back up when things improve. Said another way, we believe how you raise capital and the cost of the capital is as important as what you purchase with it. Our ability to modulate acquisitions to protect accretive spreads without weakening our portfolio quality is in our view, a strong competitive advantage of FCPT. Our in-place portfolio remains very strong with 0 exposure to the problem retailers or sectors such as theaters, pharmacy, high rent car washes and experiential retail. To that end, we have sidestepped tenant credit issues, including 0 bad debt expense this year. Our rent coverage in Q3 was 5.1x for the majority of our portfolio that reports this figure. This remains amongst the strongest coverage within the net lease industry. Olive Garden and LongHorn and Chili's continue to be industry leaders and casual dining has recently seen outperformance versus quick service and fast casual. Most recently, Brinker reported Chili's same-store sales growth of 21% for the quarter ended September 2025, which follows a full fiscal year of over 25% same-store sales. Similarly, Olive Garden and LongHorn reported same-store sales growth of near 6% for the quarter ended August 2025, truly stellar results from our largest tenants and highlights the benefit of being aligned with best-in-class operators. We continue to make meaningful progress on our stated goal of diversification. Olive Garden and LongHorn are now 32% and 9% of our rent today versus a combined 94% at spin-off, while 35% of our rents comes from outside of casual dining. This includes automotive service at 13%, quick service restaurants at 11% and medical retail at 10%. All of our chosen sectors are focused on essential retail and services, creating a prudently defensive portfolio that is also tariff resistant. The question we regularly examine is how can we best enact our strategy in the current environment. Fortunately, we have undrawn forward equity, an encouraging set of opportunities in the pipeline and below target leverage. While we don't give formal guidance, we want to provide some context on where we stand today. We believe FCPT is well positioned, and we are encouraged by our pipeline and the opportunities we are seeing on the acquisition side. The debt market has improved substantially in recent months, both with greater lender capacity and falling interest rates. We have circa $270 million in combined dry powder that is a combination of equity, debt and retained cash flow to fuel growth before reaching a mid-5x leverage target. That's still below our leverage cap. Because of our granular acquisition strategy, we can react quickly and efficiently to adjust our strategy for any major macro events or positive shifts in the rate environment. Finally, over the past few quarters, the deal-making environment has been characterized by some stops and starts. There's been less of that as of late. And looking at recent successes, we believe that we remain well positioned heading into year-end. Over to you, Josh. Joshua Zhang: Thanks, Bill. I'll start with a review of this quarter's activity. We acquired 28 properties in Q3 for $82 million at a blended 6.8% cap rate with a weighted average lease term of 12 years. Over the first 10 months of 2025, we have now acquired 77 properties for $229 million, also at a blended 6.8% cap rate with a weighted average lease term of 13 years. Despite construction costs and overall real estate inflation, we've maintained a low basis of less than $3 million per property in both Q3 and 2025 year-to-date acquisitions. Our selective approach of buying granular properties with fungible retail use, often well below estimated replacement costs have been a key factor to our company's success over the past 10 years. During the quarter, we had a roughly even spread of investment volume across our primary sectors of restaurants, automotive and medical retail. Our acquisitions included some of our existing national brands such as LongHorn Steakhouse, VCA and Mavis. We also welcome new brands such as Doctors Care as we acquired 6 of their urgent care properties. As mentioned in our transaction press release, these leases are guaranteed by Novant Health, a hospital network with over 900 locations and a AA- credit rating. Lastly, while we did not complete any dispositions in Q3, our team continues to field frequent reverse inquiries and offers on our properties. Now reflecting on our strategy. Over half of our year-to-date investment volume came directly from within our existing tenant base. In particular, we had 2 repeat sale leasebacks note in Q3, one with Christian Brothers Automotive and another with Ampler, one of the largest Burger King franchisees with nearly 500 restaurants across the brands. Both of these transactions reiterate the strength of our existing tenant relationships and our reputation as buyers. Per usual, we'll continue to balance sourcing investments via sale-leasebacks with opportunistic acquisitions from institutional and independent sellers. The goal is to buy the best risk-adjusted return opportunities rather than focus on how it was sourced. We have also received questions about increased competition in our sector. As the first 3 quarters of 2025 demonstrate, we are finding ample opportunities. Our platform now has a 10-year history of sourcing and executing granular investments at scale, providing a service to both sellers and our existing tenants. We do not plan to deviate from this strategy. As a reminder, our competition is just as often individual 1031 buyers as it is other institutional buyers. Our platform's focus on execution, reputation and track record allows us to continue to win deals. Finally, while we do not provide acquisitions guidance, Q4 is generally a busy time for our company. And as Bill noted, we have a positive outlook on recent deal sourcing. We utilize our press release regime to give the investor community real-time updates. So please be sure to watch the tape over the next few months. Patrick, back to you. Patrick Wernig: Thanks, Josh. I'll start by talking about capital sourcing and the state of our balance sheet. As of yesterday, we had $100 million of unsettled equity forwards at a price of $28.33. We note that maintaining a forward equity balance at higher SOFR rates largely offsets our carrying costs. We have near full capacity under our $350 million revolver and believe we have the dry powder to continue executing our business plan in Q4 and into 2026 without further accessing the capital markets. With respect to leverage, at the end of Q3, our net debt to adjusted EBITDA was just 4.7x, inclusive of our outstanding net equity forwards. Excluding those equity forwards, our leverage was 5.3x. This is our fifth consecutive quarter of leverage below 5.5x and remains near a 7-year low for us. Historically, we've always guided to a stated leverage range of 5.5x to 6x. We decided to lower that bottom round of leverage target to 5x to 6x to reflect our greater use of optionality, switching between debt and equity funding sources. As Bill mentioned, we have $270 million in dry powder before reaching just the middle of that leverage range, the combined use of equity forwards, debt capacity and free cash flow. We aim to be opportunistic to achieve the best cost of capital based on market conditions. We layered in 3 additional hedges in Q3, lowering our floating interest rate exposure. We now have 95% of our floating rate debt fixed through November 2027 at 3% versus spot rates today above 4%. Overall, 97% of our debt stack is fully fixed and our blended cash interest rate is 3.9%. I'd also like to provide an update on our credit facility. This past quarter, we removed the LIBOR to SOFR adjustment of an additional 10 basis points on our revolver and term loan interest rate. Our new borrowing rate on term loans is SOFR plus 95 basis points and on the revolver, it's SOFR plus 85 basis points. This will improve AFFO by approximately $600,000 per year. Including extension options, we have no debt maturities until the end of 2026, and our staggered maturity schedule will ensure we do not face a significant maturity wall at any point thereafter. Additionally, our fixed charge coverage ratio remains a very healthy 4.7x. Now turning to some of our financial highlights for Q3. We reported Q3 AFFO of $0.45 per share, which increased 3% from Q3 last year. Q3 cash rental income was $66.1 million, representing growth of 12.6% for the quarter compared to last year. Annualized cash base rent for leases in place as of quarter end is $255.6 million, and our weighted average 5-year annual cash rent escalator remains 1.4%. Cash G&A expense, excluding stock-based compensation, was $4.3 million, representing 6.5% of cash rental income for the quarter compared to 6.9% for the quarter last year. This improved operating leverage illustrates our continued efforts at efficient growth and the benefits of our improving scale. We're still expecting cash G&A will be in our guidance range of $18 million to $18.5 million for 2025. At this point, we're expecting to be towards the bottom end of that range. As we're managing our lease maturity profile, we began with 41 leases expiring in 2025, and our team has made significant progress with 90% of those tenants extending their lease or indicating intent to do so and even better 95% occupied after including 2 properties that are already leased to new tenants. Additionally, we have started to make progress on our 42 leases expiring in 2026, which now represent just 1.8% of ABR, down from 2.6% at the start of 2025. There were no material changes to our collectibility or credit reserves nor any balance sheet impairments. Our portfolio occupancy today remains strong as we have released several sites, improving to 99.5%, and we collected 99.9% of base rent for Q3. Last, we are also excited to share a meaningful new disclosure. We've always focused on transparency. And in that vein, we posted into our website under the Portfolio section, a full list of all of our properties with accompanying data on brand, location, purchase price, square footage and acreage. We believe this level of transparency will help our investor community to better understand the quality of our portfolio and our exposure to all retail brands. With that, we will turn it back over to Claire for questions. Operator: [Operator Instructions] Our first question comes from John Kilichowski from Wells Fargo. William John Kilichowski: Bill, first one for you here, just on underwriting standards. You have pretty strict underwriting standards, and we've walked through the process before. And I'm sure it's a somewhat iterative process as you develop that. But I'm curious as you're curating your portfolio today, are there any standards or sort of guidelines that you're working with that you may see -- you be willing to adjust that might open up your investment aperture and allow you to increase acquisitions from here? William Lenehan: It's a great question. I don't really foresee us lowering the scores that we pursue. There's always things at the individual brand level that we're following that informs the veracity of the scores, such as Starbucks, closing stores, things like that. But I think we're sticking with having a high-quality portfolio. And really, from our perspective, it's the cost of capital that informs the purchase price, which drives the volume of acquisitions primarily. And as Pat mentioned, because we were active on our forward at a stock price north of $28, we are in a great position there. William John Kilichowski: Okay. Very helpful. And then, Pat, you talked about this earlier, there's about $100 million left on the forward. Given where your cost of equity is today and where cap rates are today, let's say, those were to hold somewhat constant into '26, how would you think about funding your pipeline? William Lenehan: Yes, I'll take that question. I think the $100 million, you should add to that. We used the number $270 million twice in our remarks. I would add to the $100 million, $170 million of debt capacity and retained free cash flow. So that gives us a substantial amount of acquisition capacity. And I think we'll probably leave it at that for the comment. Operator: Our next question comes from Michael Goldsmith from UBS. Michael Goldsmith: Bill, you said in the prepared remarks that at least you called out the pipeline, you called out acquisition opportunities and improved debt market, dry powder. I guess, like can you assess the environment overall? It seems like it's very cooperative and favorable. And what would be your willingness to kind of accelerate activity just given the backdrop that you described? William Lenehan: Yes. I think you've got it right. We have a super capable team. Our acquisition team is bigger and more trained up and experienced than we've ever had. They've been very successful sourcing acquisitions. But we want to make sure what we buy is accretive. And so we've modulated our acquisition volume based upon our cost of capital in the past. As I mentioned, we have a long runway before we need to consider that. And it's been very fortunate that we raised a ton of equity when our stock price was attractive to do so, and we didn't originate debt at higher rates. So now we're in a great position where we can use our forward, again, north of $28 a share of forward equity, and we can raise debt in a much more favorable market at a cost of funds that's probably 150 basis points or more below where it could have been had we relied on debt in the past. So in essence, I'd look at our balance sheet as being slightly over-equitized right now, which we can get back into balance and have very accretive acquisitions because of that. Michael Goldsmith: And then my second question relates to Darden. You're calling out the first year of Darden spin-off lease maturities is in 2027. And at the same time, you did identify that the same-store sales at some of these Darden brands have remained really strong. So does that give you increased confidence in their interest in renewing leases? I'm sure you have conversations with them regularly, but just trying to get a sense of how the temperature of that has evolved through the year and as you start to have those conversations next year in anticipation of these maturities. William Lenehan: Sure. Yes, our expectations, as you mentioned, are for very high renewal rates. They're very well-covered leases. These are dramatically higher revenue sites than the average casual dining restaurant. Darden has done an exceptional job navigating increased food prices. And so there's a ton of value in Darden's menu right now. I would argue there's a ton of value in Brinker's menu. And they're taking share not just from casual dining, but they're taking the fast casual and QSR customer because their pricing is now right above where certainly fast casual, but even QSR pricing would be. So there's just a lot of value in their menu. So these sites have been curated at spin to be the sites that they're very committed to. Rents are set very low. Coverage on the Darden assets is twice what you would expect. And so -- and many of these buildings have been in operation since the late '80s, early '90s. So they are core locations, irreplaceable locations with low rents. So we would expect very high renewal. Michael Goldsmith: Good luck in the fourth quarter. William Lenehan: Thank you. Operator: Our next question comes from Anthony Paolone from JPMorgan. Anthony Paolone: Your 6.8% cap rates have been pretty consistent all year, and you talked about not having any real desire to change your scoring. But just wondering if you wanted to go to, say, 7.25%, what would those deals start to look like versus everything you've been doing all year? William Lenehan: I think the distinction between 6.8% and 7.25% is probably too fine. So if you give me permission, I'll answer the question in the 7%, 7.5% range. I think you'd start seeing assets outside of traditional net lease. So things that are either experiential like Pickleball facilities or Topgolf, I think you'd start seeing things like obviously challenged brands like Ponderosa or other things like that, brands that haven't been opening new units for a long time. I think you'd see things like manufacturing facilities, you'd see medical more office versus the medical retail that we focus on or you'd see things like it's the tenant that you might see us buy, but it's not a retail use. So maybe it's a storage facility or an office -- corporate office or that sort of thing. So we see tons of things at higher cap rates and obviously, lots of things at cap rates where we're not competitive. And our scoring system really allows us to be just passionate and analytical in how we approach it. And we definitely don't sort of calculate our WACC at a spread and say, Josh, go out and find things at that cap rate, and we'll hold our nose and buy them. By being disciplined, that's why for a decade, our occupancy and collections have been so strong. Anthony Paolone: Okay. And then I think in your comments, Bill, you maybe alluded to just looking at lots of different things. And does that suggest that you're considering some stuff outside of auto, restaurants or medical or just broadening out kind of within those categories? William Lenehan: Yes. We're always looking for other categories to explore. As you look over the last 10 years, our willingness to expand beyond restaurants has allowed us to safely grow faster. We're always looking for new ideas. The world evolves. You have to be willing to consider new things. Nothing to announce on this call, but it's something that we're continually looking at. Operator: Our next question comes from Mitch Germain from Citizens. Mitch Germain: Bill, congrats on 10 years. And I think my question is looking back. I mean, obviously, you've diversified revenues, gone into new sectors. But has your core underwriting principles remain somewhat consistent? Or have you been kind of tweaking that as the environment changes? William Lenehan: Thanks for the question, Mitch. I think you were the first research analyst to cover us 10 years ago. It's been a great 10 years. I think the answer is our basic premise is very similar from the beginning. We are not volume driven. We are not trying to scale at all costs. We try to be conservative. We try to be analytical. But I would say that over 10 years, the amount of institutional knowledge that we have has grown substantially. We tend to bring people in the acquisition group now as interns when they're in undergrad, they come to our firm after graduation, and we've instituted a very formal training program. I frankly think it's an exceptional training program. We're bringing people to the firm, training them, giving them exposure to lots of acquisitions, small dollars, but lots of swings of the bat. And I've been very impressed by the quality of people we've been able to attract over the next last 10 years. There's no question that I would be -- I would have no chance of getting an internship at Four Corners today. Mitch Germain: Appreciate that context. Just curious about Starbucks. I mean, in prior issues that some of your tenants have had, you guys seem to be coming out of many of these situations with little disruption. Obviously, that's a tenant of yours, not that big in terms of size, but clearly, they're going through some sort of reorg plan. Is any of that expected to hit your portfolio? William Lenehan: We don't think so. The -- a lot of the things that are closing are Starbucks that don't have drive-thrus and Starbucks that are in urban areas. But as Pat mentioned, we put on our website a list, I think, 31 pages long of every single tenant. So you can follow along at an extremely granular level. But Starbucks is a great example of the idea that you need to think for yourself when investing. I think a lot of people bought Starbucks with very low cap rates. Starbucks often have a kickout in year 5 of their lease. And so while they're marketed as having long lease term, the tenant has the ability to leave. That's why they're able to do so many of these closures, Mitch. So we have been cautious on Starbucks. We've been cautious on Starbucks that don't have drive-thrus, especially. Mitch Germain: Great. Look forward for next 10 years. William Lenehan: Absolutely. Operator: Our next question comes from Rich Hightower from Barclays. Richard Hightower: I apologize, I joined the call a little bit late from another call. But I guess just a follow-up maybe on the Darden upcoming, I guess, renewal option. Where do you sort of peg market rents for those properties? And how do you sort of set the balance in that negotiation coming up between obviously, very high coverage, which we're all very comfortable with and maybe getting a little more rent from a higher-performing space? William Lenehan: Yes. So just to be clear, those leases -- Darden has -- and the lease is public. It's in our spin disclosure. So it's 10 years, our lease is public. The way it works is that Darden has an option to renew for 5 years at the 1.5% annual rent growth that the entire portfolio has -- they have to tell us a year in advance. So if they don't tell us, we have plenty of time to re-lease the building. But their rental rate is accreted by 1.5% from then in-place rental rate. So the negotiation is actually not nearly as involved as a site by site, what's the rent sort of argument. Richard Hightower: Okay. That's all I appreciate that. I mean do you -- I guess, in a different world or a different structure, would you assume that market rents are significantly higher, I guess, given some of the underlying revenue growth at those properties? Or am I barking up the wrong tree on that? William Lenehan: No, I think you're right. The rents were set quite reasonably. The locations are extraordinarily strong. And in the last 10 years, replacement cost has gone up very, very substantially. But the tenant has 4 or 5-year extension rates at that 1.5%. So I would just view it as being a very high likelihood that they're going to renew. Richard Hightower: Okay. Got it. That's great. And then I guess, more broadly, I think a lot of your peers are probably getting the same question this quarter. But just maybe some broader commentary on the level of competition, the breadth and the depth of -- given some of these new private capital pools that have been raised targeting net lease specifically, who are you running into on deals? And what's your take there? William Lenehan: Yes. So we've always looked at larger transactions. In the last 10 years, we've done a handful of them. But our business model is not predicated on waiting for a call that there's a $150 million portfolio or a $400 million portfolio out there. We're always working on something, but that's not our business model. We do, do those, as I mentioned, but we -- as you can tell from our press release regime, we're doing $3 million one-off acquisitions as well. And so I'm happy that we don't rely on those larger transactions. As you inferred in your question, I think it's right. There's more competition from private equity folks who are pretty aggressive and want to scale and have sort of mandates to scale, which is typically not a very wise thing in investing, but that's where they stand. So we feel very comfortable that we can execute our business plan, have been executing our business plan in our very wide aperture of how we source deals, everything from big portfolios down to $1 million one-offs. But if we were solely looking at portfolios, I think that would be of a concern, but that's not where we stand today. Operator: Our next question comes from Wes Golladay from Baird. Wesley Golladay: With the cost of equity where it is today, I know you have the free cash flow and the debt capacity. But as we look a little further out, would you have any appetite to increase dispositions? William Lenehan: We've done very little dispositions. It's something we can think about. Our portfolio is in really good shape. So you'd largely be selling things that are very high quality. So we fortunately don't have the dynamic that you've seen with a lot of REITs that do dispositions where they're trying to sell assets that are likely to underperform going forward in order to upgrade their portfolio. Our portfolio is all -- is almost all very, very strong. We consider it. We know how to do it. We've done it in the past with very particular circumstances. But I don't think that, that's top of mind for us today. Wesley Golladay: Okay. And I think you pretty much essentially asked my next one. I was trying to see if there's been any change to the watch list of tenants that you're looking at, but it doesn't sound like there's much there of a watch list? William Lenehan: There isn't. We're in great shape. And if you know, we've actually increased occupancy, and we have very few unleased buildings, but Justin and the asset management team have done a great job leasing up some of the few ones that are tenanted. So yes, we're in great shape. And actually, because of replacement costs going up so much, tenants are coming to us proactively on opportunities to either re-tenant one of a few vacant properties, but even coming to us and saying, if you could get this lesser tenant out of the space, we'd love to take it, which is a reflection of where, as I mentioned, replacement cost has gone. Wesley Golladay: Are you seeing anything with your existing tenants that have renewals? I know you don't have that many, but maybe look at the pull... William Lenehan: You dropped off there at the end. Can you restate the question? Wesley Golladay: I was saying like are you seeing anything where your existing tenants? I know you don't have a lot of tenant renewals coming due, but where the tenant may want to pull forward a renewal just to get prices locked in? William Lenehan: Most of the time, their renewal options are contractual. So they have a cadence where they know when they need to renew by and you typically get it right before the renewal. So they can sort of make that decision internally, but they don't have to notify us typically until a year or 6 months before the lease is up. Operator: [Operator Instructions] We have a question from Jim Kammert from Evercore. James Kammert: Bill, speaking to your long tenure with many of these assets and your experience in these 3 main silos, competition is always coming and going. But I think this new property disclosure you provide are interesting. Is there an opportunity for you to densify a number of your locations? I mean it looks like they have a pretty solid acreage relative to the improved size and improved building square footage. Is that not really viable? Just curious. William Lenehan: Yes. Its acreage is one of the components of our scorecard. And while obviously, building envelope is important, typically, acreage ties to parking and having highly parked locations greatly increases re-leasing opportunity. What can often happen if you're not careful is you buy a building that is poorly parked or has ambiguous parking, relies on, let's say, a neighbor not enforcing their parking situation. And those become difficult to re-lease. So we do focus on it. It's part of our scorecard, both parking and acreage. That said, I think the opportunity to go to our tenants and say, we'd like to negotiate with you for an additional use is limited. The advantage comes in protecting the downside probably more than upside potential, to be honest about it. But that's exactly the kind of thing that you can do with this additional disclosure. Hopefully, we'll answer questions before they come up. And I think the shareholders that we've talked through it appreciate the level of transparency. Operator: We currently have no further questions. So I'll hand back to Bill for closing remarks. William Lenehan: Thank you, Claire. In summary, the portfolio remains resilient and unique, small and fungible buildings leased to sophisticated national operators with scale, which have proven resilient in uncertain times. We have evidenced that strong track record through extremely low bad debt expense, strong occupancy and collection rates. FCPT has shown to be sensitive to our cost of capital by modulating capital raising and investment when necessary. We believe that FCPT is in a very strong position to continue to execute our strategy no matter the near-term market conditions, having over $270 million of dry powder. It has been a productive decade, and we are exceptionally well positioned to continue to execute for our shareholders. Thank you. Operator: This concludes today's call. Thank you all for joining. You may now disconnect your lines.
Operator: Good day, everyone, and welcome to GE Healthcare Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. Now it's my pleasure to turn the call over to the Investor Relations Officer, Carolynne Borders. Please proceed. Carolynne Borders: Thanks, operator. Good morning, and welcome to GE Healthcare's Third Quarter 2025 Earnings Call. I'm joined by our President and CEO, Peter Arduini; and Vice President and CFO, Jay Saccaro. Our conference call remarks will include both GAAP and non-GAAP financial results. Reconciliations between GAAP and non-GAAP measures can be found in today's press release and in the presentation slides available on our website. During this call, we'll make forward-looking statements about our performance. These statements are based on how we see things today. As described in our SEC filings, actual results may differ materially due to risks and uncertainties. With that, I'll hand the call over to Peter. Peter Arduini: Thanks, Carolynne. Good morning, and thank you for joining us today. We delivered another quarter of solid results, and we're focused on executing our precision care strategy. In the third quarter, organic revenue grew 4%. We delivered robust orders growth of 6% with growth across all segments. This reflects solid customer demand for our innovative solutions, a healthy capital equipment environment and our strong commercial execution. We're now entering a new wave of innovation as a result of our increased R&D investments over the past few years. When you couple this with our focus on lean, we expect to accelerate future top and bottom line growth. Solid backlog demonstrates that our customers are investing in our new products and solutions. For instance, we're seeing robust growth in contrast media and nuclear medicine, where we're uniquely positioned to deliver end-to-end solutions for our customers. Our synergistic portfolio of diagnostic imaging equipment, radiopharmaceuticals, AI cloud and software help drive efficiencies for our customers and creates a competitive advantage for the company. Looking at commercial execution. We continue to see momentum across our business as we secured multiple large system deals in the quarter, totaling nearly $0.5 billion in future revenue. Earlier this month, we announced a 14-year Care Alliance with UC San Diego Health focused on early detection and advancing cancer care with imaging solutions and novel therapies such as theranostics. Collaborations like these exemplify our ability to leverage our broad portfolio and service capabilities to deepen relationships with customers, creating predictable revenue streams. To support this, we've strategically invested in capabilities that accelerate growth and expand margins while enhancing operational efficiency across the health care ecosystem. In addition to organic investment, our disciplined capital allocation approach has strengthened our portfolio. For example, our planned acquisition of icometrix includes digital tools to help clinicians detect and quantify potential high-risk side effects in patients undergoing Alzheimer's therapies. Global approvals of these therapies are increasing, and demand for more frequent MRI exams and our PET amyloid agent, Vizamyl, are also growing. With the integration of icometrix technologies into our MR systems, we will strengthen our unique and comprehensive portfolio to support the full Alzheimer's care pathway. This is a great example of our D3 strategy at work, smart devices and imaging, and drugs in PDx enabled by AI to create meaningful value for our customers and patients while driving sustainable growth for the company. As we continue to navigate a dynamic global environment, our teams remain agile and focused on operational improvements and actions to reduce tariff impact. We've mitigated approximately 50% of our 2025 gross exposure, and we're on track with our goal of delivering a lower net tariff impact in 2026 versus 2025 based on currently enacted tariffs. As a result of our strong performance year-to-date and the healthy capital environment trends we're observing, we're pleased to raise our adjusted EPS guidance, which Jay will expand on later in the call. Above all, we're intensely focused on delivering for our customers and shareholders. With that, I'll hand the call over to Jay. Jay? James Saccaro: Thanks, Pete. Let's start with our financial performance on Slide 4. We're pleased with our solid operational performance across the business in the quarter. Revenues of $5.1 billion increased 4% year-over-year organically, ahead of our expectations. Revenue growth was driven by strength in our Imaging, AVS and PDx businesses. We saw particular strength across EMEA and the U.S. On a reported basis, service revenue was strong, growing 6% year-over-year, driven by new and existing customer agreements. Product revenue was up 5% year-over-year, reflecting healthy customer demand and procedure volumes. We delivered robust organic orders growth in the quarter, up 6% year-over-year. On a trailing 4-quarter average, orders growth was also up 6%. We delivered strong book-to-bill at 1.06x, and we exited the quarter with a solid backlog at $21.2 billion. Taken together, we believe these metrics as well as our success with multiyear enterprise deals and high-margin innovations are good indicators of future growth. Adjusted EBIT margin was 14.8%, down 150 basis points year-over-year. We delivered adjusted EPS of $1.07 per share, down 6% year-over-year. This included approximately $0.16 of tariff impact. Excluding this impact, adjusted EPS would have been up in the high single digits year-over-year. Lastly, our free cash flow was $483 million in the quarter. Looking closer at margin performance in the third quarter on Slide 5, adjusted EBIT margin of 14.8% was down due to the impact of tariffs, which was approximately $95 million and was partially offset by favorable volume and pricing. Excluding the tariff impact of 180 basis points, adjusted EBIT margin would have expanded approximately 30 basis points. Adjusted gross margin declined 300 basis points year-over-year, primarily due to tariff impact and investments. Strong volume growth and sustained pricing momentum have helped to partially offset broader macroeconomic margin pressures. Related to investments, similar to last quarter, we had certain costs move from R&D to cost of goods sold as products move closer to commercialization, including in MR and PET. Without this shift, R&D expense would be up year-over-year, reflecting our continued commitment to innovation investment. We have a number of strategic programs underway to drive operational margin expansion. These include sourcing from lower-cost regions, developing second sources, implementing value engineering initiatives, executing targeted site transfers and achieving price increases. These efforts are not only designed to improve our margin, but also strategically reduce our exposure to high tariff trade flows, further strengthening our global supply chain resilience and margin profile. Taken together, these initiatives contributed to the 30 basis points of adjusted EBIT margin improvement, excluding the impact of tariffs, and we mitigated nearly half of the gross tariff impact. We're also driving greater efficiency in SG&A while making targeted investments in commercial capabilities, such as with Flyrcado, to strengthen our go-to-market approach and support long-term growth. These actions reflect our commitment to margin expansion and delivering sustainable value. Moving to segment performance, starting with Imaging on Slide 6. Organic revenue in the quarter was up 4% versus the prior year, driven by strong commercial execution in EMEA and the U.S., as imaging equipment remains a top investment priority for customers. Segment EBIT margin declined 260 basis points year-over-year, largely driven by tariff pressures. We're pleased that sequentially, both Imaging revenue and margin increased. We're focused on disciplined price management as well as operational efficiency and platforming improvements. Overall, we saw robust growth in the U.S. as customers continue to upgrade an aging installed base in areas such as radiology and cardiology. Turning to Advanced Visualization Solutions on Slide 7. Organic revenue was up 6% year-over-year with strong performance in the U.S. and demand for new products. Segment EBIT margin increased by 180 basis points year-over-year, driven by volume growth and cost productivity. We had strong execution in new products and commercial investments that are delivering faster growth and higher margins. This was the fourth consecutive quarter of year-over-year sales and margin growth for AVS. Our pipeline continues to focus on growing many clinical areas, including our cardiovascular ultrasound market leadership. Examples of this include our most recent Vivid Pioneer launch, which has been well received by customers and other key products for radiology and cardiology interventional procedures. In addition, AI-enabled products launched earlier in the year are contributing significantly to our revenue growth and margin expansion. Turning to Patient Care Solutions on Slide 8, orders growth in the third quarter was healthy. However, organic revenue was down 7% versus the prior year, primarily due to a product hold. This hold has now been resolved and shipments for the impacted products have resumed, positioning us for a sequential sales step-up in the fourth quarter. Segment EBIT margin declined by 680 basis points year-over-year, primarily driven by the product hold, unfavorable product mix and tariffs. With expected volume improvements and continued productivity actions, we anticipate a meaningful sequential improvement in EBIT margin in the fourth quarter. Earlier this year, we brought Jeannette Bankes as our PCS leader, and we're seeing progress around her efforts with the goal to improve growth and margin performance. She's working to drive commercial execution for recent product launches and setting the business up for sustainable growth. She brings a new perspective. And her top priorities are accelerating growth, driving variable cost productivity and optimizing our cost structure. We're confident these actions will yield meaningful results. We're also excited about new product launches and AI-driven software solutions in PCS. These build on our clinical capabilities and are expected to drive faster growth and higher margins. Moving to Pharmaceutical Diagnostics on Slide 9. We delivered a strong quarter with sales growing 10% organically year-over-year. This was driven by solid performance in our contrast media and radiopharmaceutical portfolios, both of which contribute to our growing recurring revenue profile. EBIT grew 14% while margins declined 150 basis points year-over-year due to planned investments in NPIs such as Flyrcado as well as the Nihon Medi-Physics acquisition. We're very encouraged by the growth in our U.S. radiopharmaceuticals business and in our molecular imaging equipment. Imaging and PDx work in concert. And when enabled by AI and services, we're uniquely positioned to bring value in new ways for our customers. Let's look at cash performance on Slide 10. We delivered free cash flow of $483 million with a 99% free cash flow conversion. This was down $168 million year-over-year, primarily due to higher receivables attributable to revenue growth as well as higher tariff payments of approximately $95 million. As it relates to our capital allocation strategy, our priority is to drive organic growth while evaluating a rich M&A pipeline focused on tuck-in opportunities. We'll maintain a disciplined approach that aligns with the key metrics we've discussed in the past. During the third quarter, we repurchased approximately $100 million of our shares, reflecting our confidence in our growth prospects. Our strong balance sheet, coupled with an attractive leverage profile positions us well to execute on our capital allocation strategy. Now let's turn to our outlook on Slide 11. Given the strong performance year-to-date and healthy capital investment trends, we're updating our guidance for full year 2025. We continue to expect full-year organic revenue growth of approximately 3%. Based on where our rates are today, we expect FX to be a 50 basis point tailwind to revenue. Adjusted EBIT margin for the full year is unchanged in the range of 15.2% to 15.4%. We remain focused on innovation, productivity. And G&A optimization to drive long-term margin expansion. We expect our adjusted effective tax rate to be in the range of 20% to 21% for the full year. For adjusted EPS, we're raising the lower end of our guidance range and now expect to deliver between $4.51 and $4.63 per share for the full year. Based on the current environment, we continue to expect tariffs in 2025 to impact adjusted EPS by approximately $0.45 for the year. Finally, we expect to deliver free cash flow of at least $1.4 billion for the full year, which includes the tariff payments. With that, I'll turn the call over to Pete. Pete? Peter Arduini: Thanks, Jay. Turning to innovation. We've invested more than $3 billion in R&D since 2022 to deliver differentiated products and solutions that exceed customer expectations. Our R&D and go-to-market execution is enabling accelerated growth and margin improvement. A great example of this is in AVS. In 2024, we launched AI-powered systems across the entire segment. We've had strong customer adoption for these products. For example, in image-guided solutions, we redesigned our Interventional Cardiology system, Allia, with a more powerful tube, reduced footprint and onboard AI capabilities. It's ideal for ambulatory surgical centers and office-based labs, allowing us to partner with customers and win new deals in a rapidly growing ASC setting. In addition, our ultrasound portfolio underwent a complete refresh. We integrated advanced technology like Caption AI and are upgrading our entire fleet of our clinical subsystems into common platforms, which has increased the margins of these new products compared to prior models. All of these are driving revenue growth and margin accretion now, and we expect that to continue in 2026 and beyond. Moving to the middle row on the chart, where we featured several products that are commercially available in 2025. In PCS, we're excited about three new products, a completely refreshed anesthesia delivery system, a monitoring platform that allows us to compete in new ways outside the U.S. and CareIntellect for perinatal, a SaaS offering designed with clinicians to provide real-time insights in labor and delivery. It's the first of many clinical and operational applications that we expect to deliver faster growth, higher margins and recurring revenue for PCS. Feedback on Flyrcado is strong with exceptional image quality, half-life benefits, healthy reimbursement and new global guidelines to increase clinical confidence. As a result, our prospect list is expanding. And we're going slow to go fast, so that customers get the best experience as this pharmaceutical has many years of strong growth opportunity in front of us. In September, we signed an agreement to distribute Flyrcado through CDL and an outpatient cardiology leader accounting for about 1/3 of the current U.S. PET procedures. Our commercial and clinical teams are working closely with their CDL counterparts to begin transitioning their customer volume in the coming quarters. We're also encouraged by the strong backlog of new PET systems that will support imaging tracer growth. In Imaging, it's great to see the pipeline coming together after 4 years of investment. The new products will bring unique capabilities to the market and be key enablers for our sales teams to drive faster growth and higher margins in the Imaging portfolio. We're entering a new wave of innovation across the enterprise, and these are some of our boldest ideas yet. We're confident that we have the right innovations across all of our segments, a strong commercial strategy and a clear path to accelerate revenue growth from these new products over the medium term. In summary, we feel good about our third quarter performance and the disciplined execution that has helped us effectively navigate a dynamic environment. I'm proud of our teams as they work to offset costs and manage through macro challenges. We're pleased that despite a $0.45 tariff headwind, we expect to deliver adjusted EPS growth for the year. We remain fully committed to our total company medium-term targets shared at Investor Day and feel good about the underpinnings that support that growth. The fundamentals of our business remain strong. Globally, we continue to see a healthy capital equipment market, and tenders are improving in China, with the recovery ongoing. While PCS had a challenging quarter, with new leadership and fresh eyes on the portfolio, we expect to see significant improvements in this segment. Lastly, as planned, we will introduce a significant number of new AI-enabled products, solutions and services at RSNA. As we discussed at our last investor conference, these new products are expected to drive significant growth over the medium term and play a key role in margin expansion, plan to join us in Chicago on December 1 and 2. Now let's open up the call for questions. Carolynne Borders: [Operator Instructions] Operator, can you please open the line? Operator: [Operator Instructions] And it comes from the line of Lawrence Biegelsen with Wells Fargo. Larry Biegelsen: Congrats on a nice quarter here. I wanted to start on China. I heard your comments earlier on tenders improving in China. Any additional color on what you're seeing, how you're thinking about growth there this year and next year? And I know you won't comment on media reports, but can you comment on how you're thinking about your business in China long term? And if you'd consider ways to mitigate the risk or exposure to that market? And I had one follow-up. Peter Arduini: Yes, Larry. As I said in the prepared comments, we're seeing the stimulus kind of tender activity improve and the recovery in the market is ongoing. I think that's kind of the headline. Last quarter, I spoke about our second-half China sales being lower than the first half, and that's playing out as we expected. Our new leader in the role there, Will, is doing a really nice job. He's been focused on making investments in market access capabilities and renewing our focus on clinical selling. And where we've implemented those changes, which we're going to be going across the whole country with them, we've seen positive progress both in ultrasound and imaging. And so look, the market has been challenged over the past 2 years due to stimulus as well as the anticorruption campaign. That said, we don't see any structural reason to prevent China market returning from growth. Look, to your last point that you made, look, we like the China business. It's one of the largest health care markets in the world, a significant portion of the population needing better access to care. We're optimistic about its long-term potential. I would say, we constantly look at our segments, our countries, our products and assess their growth, their margin and ultimately, their fit in the portfolio. It's just kind of how we run our business, is what we do. Larry Biegelsen: That's super helpful. Pete, for my follow-up, the press release, the slides talk about revenue growth acceleration. It sounds like you're still confident in achieving your [ '26 to '28 ] revenue growth target of mid-single-digit organic growth. I just want to confirm that. And how much do you need China to recover to hit that goal? And is mid-single-digit growth on the table for next year? Peter Arduini: Yes. Look, I would just say, over the medium term, we feel good about mid-single digit. Our views are the mid-single opportunity hasn't changed for us. Since we spun in 2023, we've invested, as we mentioned, significant amount in R&D. And it takes time for that to pay off. I think the example that we gave with AVS is a great example of how that's paying off. New products that have a faster growth profile because of leadership features a better cost position, so it has higher profitability. And that same model will apply to Imaging and also PCS. So we're excited about RSNA coming up because you're going to see a lot of these new products coming out that will carry that capability that we just mentioned. So I think that's the broader point. But relative to China, consistent with what I've said in the past, if China remains roughly flat and stable market, all of our goals relative to mid-single digit are intact. Jay, you may... James Saccaro: Just Larry, in '26, we're in our operating planning process right now. So a lot of work to be done there. But I think it's safe to say this year, our expectation is to grow approximately 3%. We pointed to record backlogs, outstanding book-to-bill order growth at 6% for the last 4 quarters. So we feel very good about the commercial momentum and the innovation momentum. And so as we look at '26, our expectation would be to grow faster than 3%. So stay tuned for our earnings call in February. But at this point in time, we feel very good about the progress that we've made. Operator: Our next question is from Travis Steed with Bank of America Securities. Travis Steed: Congrats on a good quarter. Maybe the first question I have is maybe talk about some of the strength in Q3 and why it reiterate the full-year revenue guidance and not let more of that flow-through for Q4? Peter Arduini: Thanks, Travis. We were definitely pleased with the commercial performance in the third quarter, and it's evidence of all the good progress that we're making both from innovation and also a go-to-market standpoint. We previously said 2% to 3% in the third quarter. We delivered 4%. And I would say a lot of that comes from our AVS business, where we're seeing the dividends of all the innovation investment pay out, along with some great work in the field. We did see some particular strength across EMEA and [ U-Scan ], really driven by a healthy CapEx environment and the procedural trends there. So overall, definitely pleased with the third quarter. As we look at the fourth quarter, our current expectation is 3% to 4% growth, very much aligned to our expectations in July. There's a bit of a benefit from the PCS, some of that coming back in the fourth quarter, that product hold. But as we did the analysis, historically, we've seen about a 9% step-up from Q3 to Q4. We're modeling at the midpoint, that 9% step-up. The other thing we look at when we do revenue forecasting is we look at this idea of secured rate. Remember, about half of our business is recurring and the other half is equipment related. And for the equipment related, we have a portion of that business that has delivery dates in the quarter. And so at this point in the quarter, we have about 80% of the 50% secured. So we feel very good about where that sits relative to historic levels. It's consistent with that. Having said all of that, what I would say is our confidence in achieving the 3% has clearly increased based on the strong performance that we saw in the third quarter. Travis Steed: That's very helpful, Pete. And then Flyrcado, just make sure you're on track for the $30 million in this year, and how you should think about some of the puts and takes as that ramps over 2026 and 2027? Peter Arduini: Yes, Travis, look, we're excited about this opportunity with Flyrcado. Things -- opportunities like this only come around every once in a while. I mean the customer feedback on Flyrcado has been great, exceptional image quality over any other type of perfusion capabilities, the longer half-life unit dose model, all this kind of making a significant game-changing innovation for nuclear cardiology. And as I said in the prepared remarks, we're going slow to go fast. So for us, it's crucially important at this stage of the launch that customers have an excellent experience and are getting their processes and capabilities in place that they can convert a majority of their patients to Flyrcado over a reasonable time period. So in 2025, we're going to be short of the 30 million. But with the progress we're making, we're really excited about the opportunity in '26 and beyond. So obviously, the question is, so why slower ramp in 2025? Look, we made a deliberate decision to prioritize the customer experience rather than short-term revenue. And look, we've slowed the launch for two reasons. One is on the supply side, remember, each of these products is delivered by a local contract manufacturing operation. And we're working to achieve a consistent 95%-plus yield, which will deliver that exceptional experience to customers. It's taken some time to get to that level, but we're close to achieving that consistently now, which is a very good point. Second, we're working with our customers on their workflow, which is a combination of their billing and patient processes at site. And so where we sit today, we're seeing week-over-week improvement on the number of patients treated with Flyrcado, and we expect that ramp considerably to move forward faster in the fourth quarter. So look, with significant interest building, our opportunity funnel is actually exceeding what we initially laid out. We expect Flyrcado to have a significant meaningful impact over time. And this positions us really well on our midterm expectations for $0.5 billion by 2028. If we were able to take 25% of the PET myocardia perfusion market and converted to Flyrcado, that would lead to roughly $1 billion a year. And so hence, why this launch taking it at the right pace, we believe is super critical. Operator: Our next question is from Joanne Wuensch with Citibank. Joanne Wuensch: I have two. I'm just going to put them upfront. Could you please give us an update on the timing for Photon Counting? And how we should think about that ramping? And then the second question has to do with the Patient Care Solutions franchise. How do we think about going from down high single digits this quarter to reaccelerating over the next couple of quarters? Peter Arduini: Thanks, Joanne, for the question. Yes, on Photon Counting, we remain on track to our plans that we have laid out. As you've seen on the slide that I referenced in our deck with the new wave of innovation, we actually have it there listed on the page; I think it's no surprise that we're ramping up here to be able to talk about it at our biggest radiological show here in the near future. So all of our plans relative to FDA submission our plan is to be able to communicate and talk about it in more detail are on track. And again, I would just say, I'm, again, very excited about our approach. We are the most unique approach within the marketplace. It's the reason that we went this direction, is not to follow the crowd, but to bring something that's going to have a significant impact in the marketplace, not just on the image quality changes, but actually how CT is used. And that's where we believe our deep silicon approach is going to make a significant difference in what's called spectral imaging. So that's where we are. And we hope we'll see at the RSNA to see more of these technologies that I mentioned here on the page. Jay, maybe you can talk a little bit about PCS. James Saccaro: We were disappointed with PCS performance in the third quarter. And really, this comes down to a product hold. We did take quick action to be ready to ship units as soon as possible. Our regulatory team did a great job navigating the pathway here. And the good news is that we're back in the market shipping. We'll recover some of this in the fourth quarter. Some will bleed to next year. But overall, we feel good with the product back on the market. Of the 7% sales decline in the quarter, about 5 of that was tied to the product hold. And the margin was also significantly impacted. In fact, about half of the margin decline year-over-year related to this product hold, we had a big tariff impact as well of about a couple of hundred basis points. So as Pete said or I said in my prepared remarks, we're really excited to have Jeannette onboard, a seasoned leader, and she's looking carefully at the portfolio, the opportunities to drive growth and enhance margin. That will start to pay dividends in the fourth quarter, so we will see a meaningful improvement here. And then we'll also continue to pay dividends as we migrate into next year. Operator: Our next question is from David Roman with Goldman Sachs. David Roman: Appreciate all the detail on some of the new products here. Maybe first, we could go into AVS and specifically talk about some of the opportunities as we see procedure volumes like in EP potentially start to move into the ASC. I think in your earnings presentation from last year in the second quarter, you laid out all the key products that GE provides to support an EP lab. But maybe what are you seeing specifically on the opportunity in the ASC setting for EP? Peter Arduini: Yes, David. Thanks for the question. I would say, look, part of this started with this discussion when we talk about D3, it's not just a slogan, it's about how we operate, which again is this whole part of leadership products that can plug and play across the disease state -- focus on a disease state. So again, cardiology is a broader area, but a specific disease state might be electrical issues with the heart, to your point, and how they're addressed and then how digital and tools can bring that together. And so for the first part for us was having a lab that wasn't just competitive, but was leadership. And I would argue this is really our first cath lab in a long, long time, that is a leadership position. And so we're seeing the uptick of that. So look, when it comes to electrophysiology, we see the opportunity that's out there, pulse field ablation, all the excitement that's in the marketplace. We want to be the partner of choice. It's a one-stop shop to be able to make that happen. And so Phil and the team, I think, have done a really nice job. We're uniquely positioned with the Allia Pulse. Its small footprint, its ability to play in ESCs. The Vivid Pioneer, our brand-new cardiovascular ultrasound platform does a lot of early assessment, esophageal work while the procedure is going on. And then our Mac-Lab new version, which is the AltiX, which is the recorder for all of this during the EP procedure. Those all work together. And then we have partner relationships with many of the device companies that their products were more integrated with ours. So you couple that with the new reimbursement that's coming out that fundamentally takes what was 80% of the acute care reimbursement and makes it available in the ASC, we're really set up well to take advantage of that growth. And again, we want to be able to come to an institution and say, you want to really grow your EP business work with us. Whoever used on the device side, we can make it easy for you to stand up. And in many cases, that's really what we're starting to see come through. So that's kind of how we look at electrophysiology. I would say, structured heart has a similar framework to it as well. David Roman: Very helpful. And maybe, Jay, just on the margin side, trying to understand, how long this transition between R&D and COGS takes place? And maybe if you could just unpack a little more operationally what's happening. I think on the last call, you started talking about this, it sounded kind of like an accounting dynamic, but I think it's actually more of an operational dynamic. So how long does this kind of transition last? And how should we think about the trajectory of underlying gross margins in R&D going forward? James Saccaro: Sure. Maybe maybe let's just talk overall about the gross margin, and then we can get into the specifics of this aspect of it. Overall, in the third quarter, our gross margin was down 300 basis points year-over-year. About 180 basis points of that relates to tariff expenses. And then we had 60 basis points of really reclass or movement between R&D and cost of goods in the quarter, and that's about a little over $30 million. Now overall, this is good news because from our standpoint, as products move closer to commercialization, we start to report those projects through -- those product expenses as cost of goods versus R&D. And so it's net neutral to adjusted EPS. We actually have about 12 products, material programs that are moving very close to commercialization stage. Pete talked about that extensively during his remarks, you'll see that on full display at RSNA. And remember, about 70% of our total engineering and product program spend sits within R&D. The remaining aspect of 30 sits in COGS. And so overall, I think it's important to note, R&D spending or project spending was up for the quarter, but we did see this dynamic. This dynamic will continue somewhat in the fourth quarter, and there will be some impact of this next year as well. But it's safe to say we will see margin expansion in the fourth quarter sequentially, north of 50 basis points of gross margin at the midpoint. And we'll also see -- remember the third quarter also did have an impact from the product hold at a company level, that was about 20 basis points. So overall, the team is intensely focused on margin expansion and gross margin expansion, in particular this particular item does sort of cloud, what I think is a solid overall story. If you point to the bottom line, we saw 30 basis points of margin expansion in the quarter, excluding tariffs. We'll see more than that in the fourth quarter on our way to achieving the full-year expectation. Operator: Our next question is from Patrick Wood with Morgan Stanley. Patrick Wood: First one is really on the ultrasound side of things. Obviously, one of your peers has [ vice ] fund with the FDA. I think we all [indiscernible] through this before with Cleveland and CT. Any implications for you when you think about the competitive market on that side and how that could evolve? Peter Arduini: Patrick, I -- we just saw the information as well. So I don't really have any comment. And there's really no effect in third quarter. The strength of our AVS in Q3 was really about really strong go-to-market execution in our field teams. And then products that we mentioned, the Vivid Pioneer and the Venue point of care and LOGIQ, all of those new products. Patrick Wood: Got you. Makes sense. The other one is actually your MUSE platform has like a 50% market share, if I'm right, on the ECG side of things. And I know you guys have -- you've got a partnership with AliveCor and a few other bits, but is there any interest on the longer-term cardiac termitary market? There's a lot of the perhaps players outside of things. Because that strength on the ECG side on the software end feels like that would pair well. Is that something you ever thought about? Peter Arduini: Yes. So Patrick, I think, uses to your point, it's the significant position relative to recording of all EKG data really around the world, and we have this AliveCor mode, which is portable handheld device that individuals would use, and that can be recorded in the base. Today, we have customers that actually after an EP procedure when you use their sent home, they'll be sent home with the AliveCor device. And they do spot checks on themselves to make sure how effective the ablation actually was. That data all connects directly back into our system. So that's there today. But I think that where you're going with this is exactly a big part of when we talk about CareIntellect, the perinatal example is one of those where we're connecting all this information and serving it up in a way that makes it very easy to use for that caregiver. So in the case you brought up would be in the cardiology world, perinatal play is obviously in labor and delivery. But I think you're going to see more and more of these departmental solutions come out from us here in '26 under the branding of CareIntellect. So thanks for the question. Operator: Our next question is from Vijay Kumar with Evercore ISI. Vijay Kumar: Congrats on the next gen here. Pete, maybe my first one for you. I saw you guys signed a distribution agreement with CDL on your pharma diagnostics side for [ Flyrcado ]. Is -- my understanding was CDL represents maybe -- or serves half the U.S. market. Is that the right assumption? Have they started shipping this product? And do they have the capability to ship this on a weekend? So I'm curious on how the partnership is evolving. Peter Arduini: Yes. No. Look, CDL and their group, CardioNavix, is a large part of the U.S. PET market, and they actually have a full distribution reach into individual cardiology offices typically with rubidium. But our strategy is working along with them is to obviously convert many of those customers over into Flyrcado. We're just getting started. As you know, we announced earlier this quarter. It typically takes a 60-, 90-day window cycle to move through. But all of the customers that have seen it on their side are very excited about it. I think the economics, the clinical capabilities, all of those play out to be a really positive opportunity. And so a higher percentage of that conversion of that group moves us very close along our goals that we've laid out over the medium term of $0.5 billion. And so they're a key part of it and starting out quite well. Vijay Kumar: Understood. And then just my related question on -- if I just look at your equipment book-to-bill, capital book-to-bill, if you will, last 7 quarters, you've ranged it around 1.12. And I know fiscal '25, some of the revenue recognition was impacted by timing of delivery, which was pushed out. So when you look at '26, Pete, is there anything unusual about delivery dates on these orders? Any change in cancellation trends? Or cancellation trends been stable? James Saccaro: Yes, Vijay, we're definitely happy with the performance in terms of equipment book-to-bill, in terms of overall book-to-bill, in terms of record level of backlog. And then importantly, this trailing 4 quarters orders growth, which we think is perhaps a better indicator of performance than looking at on a quarterly basis. And so as we approach 2026, we think the setup is pretty good. We guided to approximately 3% this year. We will -- there's a lot of work to be done to finalize our plan, but our expectation is we'll grow faster than that next year. And a lot of that comes down to the strength of the capital book that we currently sit on today. Vijay Kumar: And just, sorry, on cancellations here? James Saccaro: Cancellations is normal levels. We haven't seen any major changes in those in cancellation rates, Vijay. Operator: Our next question is from Matt Miksic with Barclays. Matthew Miksic: So one follow-up on the sort of rollout of some of these new systems next year Photon Counting and total body. Just wondering if you could -- I know it's a '26 question, but talk a little bit about for launches like that in midyear and end of year, what does that look like in terms of capturing orders, capturing interest, building a pipeline? Is that ahead of that, understanding that your customers are where these are coming also? And just what's the shape of that? And then I have one quick follow-up. Peter Arduini: Yes, Matt. Obviously, each of the products is unique based on their regulatory approval files. Some might be approved in Europe first, some might be in the U.S. So there's a little bit of mix of that. But the first part is to be able to make the announcement and get customers understanding when it's coming. To your point, there are certain products like full body PET and Photon County, we've been more transparent that are coming. And so a big part of this is when they come out is if they already have an order for an existing system and they want to upgrade to the other, how can you do that? Many of our design features have been done so that the footprint matches the predicate product the best it can. So there's minimal site disruption that can help with faster turnaround. In most cases, we've done that with our products that we're coming out. But we typically have a fleet discussion with our big customers about what products do you have, how are you evolving your products. This is a big part of what our field teams do a very good job with and having customers be thinking about what budgetary dollars that they need to be having, thinking about which products are probably need to be upgraded based on age, but also based on what you want to do. I think back to the question about EP, if that's a focused plan for you, what are you going to be doing with your fleet? So in many cases, customers have been already thinking about that. But until we actually announce it and give dates on availability, which RSNA for us tends to be one of those milestones in radiology; that's when people really then start doing the final planning. Matthew Miksic: Got it. Okay. So for at least maybe one of these that might be next year at RSNA and then that kind of makes it official from what you're saying that sounds like. And then other thing -- go ahead. I'm sorry. Peter Arduini: This year at RSNA, we're going to talk a lot about all of our big launches. So I would say, expect to hear a good dozen of high-impact products that we'll be talking about at RSNA. Matthew Miksic: That's great. Look forward to it. And just I know AI is sort of one of these big broad topics that sort of means a lot and nothing, sometimes, at the same time. But just I really admire, I think a lot of folks recognize how much work you've done on sort of approved the software's device applications and roll out an investment in this area. In the results that you're printing and the growth that you're showing, where and when and how do you think this is playing through your growth and engagement with your customers? Is it growth? Is it in, I don't know, defensive ability to defend accounts, to go deeper in accounts? Just as general, where do you see the value that you've invested playing out in the economic returns and growth in your business? Peter Arduini: Yes, Matt, I'll just give you two quick examples. One is AVS this quarter, you're seeing it. It's loaded all of these products with different official intelligence capabilities that result in superior performance versus competition. So we actually are getting better price and higher capture rate. So if you look at this quarter, we were actually up in margin as well. That's also due to the redesign that we've had to leverage what we've called platforming. So the combination of those two together has been able to enable that. The second phase -- and then all of these new products, like the ones I mentioned for RSNA are going to have that same type of AI inside. This CareIntellect platform is a big deal for us because this is where we start actually having a departmental solution that starts connecting multiple modalities or multiple data flows to bring kind of longitudinal solutions. And so we're just entering into that phase. This labor and delivery is the first one. But I would argue relative to broader SaaS and stand-alone applications, that's really our first wave that we're going to see bigger capabilities coming out there. And again, price and added capture rate where we're winning share, typically, it comes back to a really good device. But honestly, the AI and the software components of it is making the differentiation in the eyes of customers. I don't know, Jay, if you got anything. James Saccaro: Yes, sure. At the Investor Day, Matt, we talked about digital revenue expanding from $1.2 billion to $1.8 billion by '28, and we're well on track with respect to that. It remains an important growth engine. And I would say, implementation is going really well. Notably, we went from 85 AI-enabled FDA device authorization last year to 100. So we're pleased with where we sit with AI-enabled devices. It's an important unlocker. But what we're seeing is, as Pete said, a lot of this is just a great way to differentiate our portfolio of products. Operator: Our next question is from Robert Marcus with JPMorgan. Robert Marcus: Great. Two for me. First, I want to start with the high-level question. It's about a year since you gave the long-range plan at the Analyst Day last November. Just wondering on year in, how you think you're stacking up versus it? Do you feel like you're still on track? And any puts and takes you want to highlight, as we just think about the outlook on growth and margins? Peter Arduini: Rob, thanks for the question. Look, I think relative to mid-single-digit growth is as I've mentioned before, we feel quite good about the ability to be able to achieve that. This year, there's been added complexities with tariffs and things that we're navigating through, but we're navigating that well. And so from a margin standpoint, to be in the 17% to 20% plus range, we also feel very good about. I think the underpinning of that is what we're being able to do within the field with our commercial teams. I think our go-to-market execution has been very good, both in large enterprise deals and individually at the street level. Some of that then comes back to this product portfolio. What we said and when we would launch products, we're right on to those dates, whether it be on the pharmaceutical side or be on the device side. All those are lining up, as we laid out in that Investor Day back in November. So again, it's one of the reasons that we're very excited about this RSNA, big radiological meeting in Chicago, December 1 and 2, because that's going to showcase many of the products where we had some honestly, gaps in the portfolio and secondly, how those gaps are not only filled but we come with a product that's actually significantly different than what competition has. So that's kind of where we stand there, and we feel quite good about it. Robert Marcus: Great. Really helpful. One quick follow-up on Flyrcado. It sounds like it's going a little slower this year, still confident in the long run. Maybe you could just give us a little more on what GE HealthCare can do to help streamline the workflow conversion. There's obviously a change at the hospital level on what they need to do and how to source it. So maybe just help us on what investments you're doing to help advance that. And do you think you could be back on track to your goals in 2026? Peter Arduini: So the short answer is absolutely back on track to our goals in 2026. And it starts with the opportunity funnel, meaning people that want to buy and convert to Flyrcado is much larger than we initially envisioned. So that's point one. And again, why is that? That comes back to anyone that sees this product that's from an image quality standpoint, and its ability to aid diagnosis is second to none. So it starts with that. I think the economics now are clear on the private pay side as well as on the Medicare piece. And as far as how the models work, they actually work quite well for customers. So all of those things are in place. And as I previously mentioned, getting the CMOs running, we have the recipe. But now the recipe is kicking in place to have 95%-plus, between now and the end of the year, we're going to ramp that at the right level of speed. So again, what does that mean? Well, you get a customer, new customer and they might be only doing 1 to 2 patients. You want to have those 1 to 2 patients have great, great experience. And then maybe 60 days in, they move to 12 to 15 patients. And that ramp can happen very, very quickly once they have their process in place. The processes, Robbie, are no different than what you would think in other areas. When you have a new product you bring in and a drug, you want to do your first billing to your private payers. Do you get the billing back? That process is working well, your flow about how you actually do the reads. So your cardiologist in your department referring for these procedures, the right software on the systems. Those are the things that we now have a really tight structure in place to bring people up. In the case of like CDL, they have all that in place. So their ramp is actually a much faster capability than someone, lets just say, that's new to the area or had an oncology practice and now you're bringing up as a cardiology brand. So we're very confident that our ability to ramp this. And again, the most important thing is do customers look at this and say, it's a game changer. And so I think that's the key. And then lastly is the cardiology, ACC came out with guidelines that basically say this is the best direction to go for myocardial perfusion. So we've got all of those tailwinds. And again, the conversion factor here, I think, will ramp up rather quickly. But we wanted to obviously kind of lay out where we actually are for the year and talk about why it's so important to do this the right way and be deliberate because in the long run, this has clearly the potential to be a $1 billion drug at some point over in the future. Operator: And our last question comes from the line of Anthony Petrone with Mizuho Americas. Anthony Petrone: Congrats on the quarter here. I'll stick with Flyrcado and one on tariffs. Maybe, Pete, to expand, you mentioned a larger PET and maybe possibly PET/CT backlog. Maybe how much of that is being driven by Flyrcado? Does the existing installed base within GE of PET/CT systems, does that support this getting to $1 billion? Or do you need some of that on the capital side to be released in order to sort of let Flyrcado flourish here a little bit? And then quickly on tariffs, it stood at a net negative $0.45 headwind for this year. All else equal, the company was talking about mitigation efforts into '26. How much of the negative [ $0.45 ] can be offset into 2026? Peter Arduini: I'll take the Flyrcado piece, and then maybe, Jay, you can touch on the second part on the tariffs. I think, look, without adding any more PET systems, I think I mentioned this prior is that if we were to just take 25% of the current pet myocardia perfusion market, just 25% of it, that's roughly $1 billion of Flyrcado revenue without one other scanner at it. And those are already in cardiology. To your other point, though, we are seeing the amount of PET systems increasing. Now some of that is in cardiology for sure, but some of it's also in -- across the board in oncology because of the new molecules that are coming up, some of the new diagnostics capabilities that we actually have as well. So we're seeing both of those. But I think to your point, it's super important to understand just with 1/4 of the conversion of the PET MPI today away from rubidium to Flyrcado, that gets you to $1 billion, which, again, why it's so important that you manage the ramp appropriate and customers have a world-class experience when they do, the ability to convert a higher percentage of their patients over can happen rather quickly. James Saccaro: Sure. Quickly on tariffs, overall, as you noted, we're $265 million in tariff impact this year. We expect less than that next year. We're going through our planning processes right now to get the fine-tuned answer in terms of what the impact will be. But it's safe to say it will be a tailwind. We're looking at things like structural changes to supply chain, continuing to work on U.S. MCA certification using free trade zones and then, of course, some selective pricing. But working together, we expect tariffs to be a tailwind next year to earnings growth. Operator: And that concludes our Q&A session for today. Please proceed with any closing remarks. Peter Arduini: Just thanks, everyone, for joining today, and we look forward to connecting with you those that will be attending the RSNA or one of our upcoming conferences. Operator: And this concludes our conference. Thank you for participating, and you may now disconnect.
Operator: Hello, everyone. My name is Greg, and I will be your conference operator today. At this time, I would like to welcome everyone to today's Entergy Corporation Third Quarter Earnings Call and Teleconference. [Operator Instructions] I will now turn the call over to Liz Hunter, Vice President of Investor Relations for Entergy Corporation. Liz? Liz Hunter: Good morning. Thank you, Greg, and thanks to everyone for joining this morning. We will begin today with comments from Entergy's Chair and CEO, Drew Marsh, and then Kimberly Fontan, our CFO, will review results. In today's call, management will make certain forward-looking statements. Actual results could differ materially from these forward-looking statements due to a number of factors, which are set forth in our earnings release, our slide presentation and our SEC filings. Entergy does not assume any obligation to update these forward-looking statements. Management will also discuss non-GAAP financial information. Reconciliations to the applicable GAAP measures are included in today's press release and slide presentation, both of which can be found on the Investor Relations section of our website. And now I will turn the call over to Drew. Andrew Marsh: Thank you, Liz, and good morning, everyone. Today, we are reporting strong financial results as well as continued progress on business and regulatory matters. Starting with our quarterly financial results. Our adjusted earnings per share was $1.53. With our results to date and our biggest quarter behind us, we are narrowing our guidance, raising the bottom by $0.10. We also remain well positioned to achieve our long-term growth outlook. Kimberly will review the financial details in a moment. Turning to the business. Last quarter, we achieved the first quartile Net Promoter Score for utility residential service for the first time since we began tracking this metric. We're pleased to report that we've maintained our first quartile position. We are keenly focused on meeting the needs of our 3 million customers, and we believe our strategy will carry this momentum forward. Our focus on the customer starts with keeping our rates as low as possible. And again, we aim to maintain our average rates well below the national average through the remarkable commitment and creativity of our employees and a culture of continuous improvement. Today's share of wallet is roughly the lowest our customers have seen over the last 20 years. We expect it to stay in that range over the outlook period. Of course, there is more to it than that. We proactively manage the effect of fuel volatility on customers' bills, through fuel hedging programs and mechanisms to defer fuel costs during peak prices. And for individual customers, we have developed tools to help them manage their bills, such as approved bill discounts for low-income seniors, payment options like average billing and payment timing, energy efficiency services and customer assistance programs like Power to Care and LIHEAP advocacy. I'm proud to highlight that our digital LIHEAP platform recently received a Silver Best Practices Award from Chartwell for excellence in serving vulnerable customers. This tool streamlines access to energy assistance and provides real-time updates for customers in need. And as we've worked to attract new hyperscale data center customers, we ensure that they pay their fair share of energy infrastructure investments, while bringing other significant benefits to our communities, such as jobs, property tax payments, direct municipal infrastructure investment and workforce development. This is consistent with their stated intent to be good neighbors. For example, at the recent groundbreaking announcement, Google said that they will protect energy affordability for existing customers by covering the full cost of powering the data center in West Memphis. They're also committed to making a significant community impact, including a $25 million fund to accelerate local energy efficiency efforts and workforce development. In September, Entergy Mississippi announced a new customer-focused initiative known as Superpower Mississippi. The initiative includes a $300 million investment to harden the grid and improve reliability with the goal of reducing outages for customers by half within 5 years. We're able to add this investment for grid improvements at no additional cost to Entergy Mississippi customers because of new revenues from Amazon and other large industrial customers investments in the state. Haley Fisackerly, our CEO in Entergy Mississippi, recently noted that customer rates would be 16% lower than they otherwise would have been due to these large customers, and that includes the incremental Superpower Mississippi investment. In customer growth news, in late September, Sempra reached its final investment decision for Phase 2 of its Port Arthur LNG project. In addition, a colocation data center, AVAIO announced an investment in Entergy Mississippi service area. While these were included in our probability-weighted sales forecast, these developments continue to build confidence in our long-term outlook. As a reminder, we probability weight potential industrial customers in our plans, except for very large businesses, like hyperscale data centers, which we don't add to our plans until there is a signed electric service agreement. Because of our vertical integration, natural Gulf Coast advantages, thoughtful regulation, a long history of successfully working with large industrial projects and now MISO's expedited connection mechanisms, we continue to see strong demand from businesses looking to locate in our service areas. This includes data centers, but also customers from traditional industrial segments. Our data center pipeline has continued to grow and now is extending to -- from 7 to 12 gigawatts. This is based on active conversations with customers for whom we reasonably could expect to sign agreements within the next year or 2. With line of sight on incremental opportunities, we've added 4.5 gigawatts to our agreement for the purchase of power island equipment, including steam turbines, combustion turbines and heat recovery steam generators. This addition represents 6 units that will be delivered in time to support commercial operations in 2031 to 2032. In total, we now have secured more than 19 gigawatts of capacity, 11 gigawatts of which is accounted for due to growth or other supply needs. That leaves 8 gigawatts for additional growth. We secured other critical equipment, including transformers and breakers, and we secured 90% of materials required for our planned transmission projects through 2030. We also have agreements with EPCs for the generation projects through mid-2029, and we have line of sight for additional projects. We're also well positioned for solar projects. For our owned projects, we secured approximately 75% of our critical equipment, including generator step-up transformers, high-voltage breakers and solar modules. We also have clear line of sight to the remaining 25% through our existing supplier relationships. In July, FERC approved MISO's Expedited Resource Addition Study, or ERAS process. We have since submitted 9 interconnection requests for 12 plants into the new process. 8 of these plants in our ERAS submission are in our plan and 4 are available for incremental growth. ERAS has worked well to support speed to market for customers trying to come online as quickly as possible as well as help us respond to the national security priority for rapid energy deployment to win the AI race. We expect to start receiving our first project approvals by the end of this year. With standardized designs for our generation projects and our transmission lines and our history of successful execution on large projects, we remain confident in our ability to manage our operations and execute on our capital plan. We are also well positioned to serve potential new customers above our current plan. For a customer base that continues to grow, perhaps it is no surprise that our system as well as Entergy Arkansas and Entergy Texas hit new peak loads in July. Our system performed well during these high load periods. Responding to that customer growth, Entergy Texas remains on track for the completion of the Orange County Advanced Power Station next spring. The plant's decommissioning -- actually, not decommissioning -- the plant's commissioning -- we're just getting started with that one. The plant's commissioning is underway and first fire is expected in December. Our other large generation and transmission projects are also on track. Last week, Entergy Mississippi broke ground on the Vicksburg Advanced Power Station. We also support customer growth, including the large customer that Entergy Mississippi signed this past February. Entergy Louisiana recently announced selections from its baseload generation RFP to support customer growth. That includes 2 combined cycle resources that will be self-built. For accelerated resilience, we expect to file Phase 2 plans in Louisiana and New Orleans within the next several months. This timing allows us to maintain operational momentum with our resilient investments. To date, our operating companies have invested about $580 million in approved resilience work. We've completed 32 line hardening projects, upgrading more than 13,000 structures. And we have hardened 10 existing substations to mitigate the impacts of both hurricane force winds and storm surge. In addition, Entergy Texas was recently awarded $200 million in grant funding by the PUCT from the Texas Energy Fund for resilience projects with no cost to customers. The grant will allow for the hardening of more than 8,000 distribution poles covering 338 miles as well as hardening 16 transmission lines. We appreciate the proactive support from our state regulators and legislative bodies to improve the storm readiness of our system for the benefit of all customers. With the customer growth opportunity before us and excitement throughout our service areas, we continue to work with our stakeholders, including regulators, elected leaders, community leaders and local vendors to meet customers' needs and to improve their outcomes. In August, the Louisiana Public Service Commission approved the settlement for generation and transmission resources needed to serve Meta. Meta's generational investment will bring significant benefits, including jobs, workforce development and state and local tax income. In addition, as the LPSC Staff highlighted at the business and executive meeting, contracted minimum bills ensure that Meta is paying the incremental cost to serve them during the contract term without imposing costs on other customers. These features provide benefits to support keeping rates as low as possible for Louisiana customers. Last week, the Louisiana Public Service Commission also approved the 200-megawatt Bogalusa West Solar project, which was the first project approved through Louisiana's accelerated solar approval process. In Arkansas, the Public Service Commission approved the Generating Arkansas Jobs Act rider. This rider enabled by the legislation this past spring, allows recovery for new economic development related and other customer-critical generation and transmission investments outside of the formula rate plan 4% cap. Additionally, it includes recovery of carrying costs on CWIP during construction, thus lowering cost for customers. Under the new rider, Entergy Arkansas filed in early August for the Jefferson Power Station approval. Also under the new rider, Entergy Arkansas filed for approval in September for Cypress Solar, a solar and battery storage facility to support economic development via Google's recently announced data center. Moving to Texas. In September, the Public Utility Commission approved the Legend combined cycle power station and Lone Star, a simple cycle peaking unit. They will provide efficient, reliable power to support the rapid growth in our Southeast Texas service area. While the commission approved the generation, it also implemented a cost cap at our filed cost estimates totaling $2.4 billion, including transmission, carrying costs and contingency. As I noted earlier, we have already contracted with the EPC and secured the long lead time equipment, which comprised a significant portion of the construction costs. The Texas Commission also recently approved 2 large transmission projects that serve growth and improve reliability and resilience of the system. SETEX, the Southeast Texas Area Reliability Project at $1.4 billion 500 kV line and the Legend [ that's handling ] 230 kV line, which will serve industrial customers in Port Arthur, including Phase 2 of the Sempra LNG project. Separately, Entergy Texas filed for an increase in its DCRF rider. We expect a decision from the PUCT by the end of the year. These are exciting times in Entergy and exciting times for our industry. We are delivering unprecedented growth for our region and economic development that benefits the customers and communities we serve. At the same time, we are answering the call to support our national security through our rapid response to the energy needs of companies working to win the global AI race. All that while keeping rates as low as possible for our customers. The EEI Financial Conference is in a couple of weeks, and we'll share additional color regarding the strong foundations underpinning our differentiated growth story. Notably, our long-term customer sales growth outlook is robust, including continued support from both traditional industrial and data center customers. We are well positioned to support speed to market through our supply chain positioning, design choices, stakeholder engagement and strong balance sheet. And we are successfully executing on critical issues that our existing customers care about, including keeping rates as low as possible and deploying resilience and reliability investments. We look forward to continuing this conversation with you at the EEI Financial Conference in a couple of weeks. I'll now turn the call over to Kimberly, who will review our financial results for the quarter. Kimberly Fontan: Thank you, Drew. Good morning, everyone. We had another great quarter. I'll now walk through our financial results as well as our guidance and outlook, and I'll provide a look ahead to EEI. Starting with earnings. Our adjusted EPS for the quarter was $1.53 as shown on Slide 4. Primary drivers were strong sales growth and the effects of investments made for our customers, partially offset by higher other O&M and other operating expenses and an increase in our share count from settling equity forwards. Earnings contribution from sales growth was positive even with weather being milder this quarter compared to last year. Weather-adjusted sales for the quarter were once again very strong, increasing approximately 4.5%. Industrial sales were the largest contributor with more than 7% growth, primarily from new and expansion customers that continue to ramp up their operations. Slide 5 summarizes our credit ratings and affirms that our credit metric outlooks remain better than rating agency thresholds. In the quarter, S&P issued credit reports on each of our operating companies and Entergy Corp. Moody's also issued reports on Entergy Mississippi and Entergy New Orleans. Both agencies affirmed all ratings and outlooks. Last quarter, we discussed the nuclear tax credits earned in 2024. Since then, we have completed transactions to monetize these, which netted more than $535 million after transaction costs. We continue to work with our regulators on how and over what time period we will provide these benefits to customers. We expect this to happen over an extended period of time. As a reminder, because the value of nuclear PTCs is highly dependent on average revenue per megawatt hour, we do not include cash benefits in our cash flow or credit metric outlooks beyond 2025. We'll talk more about our credit at EEI, but I'll give you a quick preview. Our credit metric outlooks are strong with FFO to debt above our thresholds throughout the outlook period, achieving our 15% target during the period. Our financial health is bolstered by all the work we've done, including the structure of our new large customer ESAs to protect existing customers and our credit, improvement in our pension funded status, constructive regulatory mechanisms and conservative planning assumptions. All of these have strengthened our balance sheet and created benefits for our customers. We continue to see strong underlying fundamentals and flexibility to meet our objectives. We are rolling forward our outlooks to 2029, shifting our 4-year capital and equity plans forward, as you can see on Slide 6. Our updated capital plan for 2026 through 2029 is $41 billion. The equity associated with that plan is $4.4 billion within the 10% to 15% range of the total capital plan. Our capital and equity plans include alternative financing assumptions, which shifts the capital outlay for some projects beyond our 2029 outlook. This better aligns the cash outflow with when assets are placed in service. We have been proactive in addressing our equity needs, selling forward contracts through our ATM as well as the block transaction we executed in March. We've taken significant price risk off the table and have ample time to raise capital, including through our ATM program. For our 2026 through 2029 equity need, about 45% is already contracted, which takes us well into 2027. Through the third quarter, we have settled approximately $800 million of equity forward. In October, after quarter end, we settled an additional approximately $330 million or about 5.7 million shares. We are using these funds to continue to invest for the benefit of our customers. Our adjusted EPS guidance and outlook are shown on Slide 7. As Drew mentioned, with solid results through the third quarter, we are narrowing our 2025 guidance range, raising the bottom by $0.10. Higher-than-planned revenue from weather as well as other planning updates have enabled us to manage the business and flex spending in areas that benefit our customers. Our Flex program helps us ensure that we deliver predictable adjusted EPS growth year in and year out while meeting our customer needs. Looking beyond 2025, we continue to see very strong growth driven by our customer-centric capital plan. Our adjusted EPS through 2028 remains unchanged. And as we add 2029 to our outlook period, our long-term compound annual growth remains strong at greater than 8%. Drew and I, along with our operating company leaders will be in Florida in less than 2 weeks, where we will talk about our strong customer growth story as well as our plans to invest in reliability and resilience to better serve our customers. We have a solid base plan consistent with our strategic objectives. As Drew discussed, we have a strong customer pipeline, including 7 to 12 gigawatts of data center opportunities, and we have secured critical equipment to bring additional customers online. Today, we have provided our adjusted earnings per share outlook and a high-level view of our preliminary capital and equity plans through 2029. At EEI, we will provide more details on these outlooks. We are excited about the opportunities before us and look forward to talking with you at EEI. And now the Entergy team is available for questions. Operator: [Operator Instructions] It looks like our first question today comes from the line of Shar Pourreza with Wells Fargo. Constantine Lednev: It's actually Constantine here for Shar. Congrats on a great quarter. Maybe starting off on the updated CapEx plan and kind of the 4.5 gigawatts of the power island equipment. Is that directly associated with some of the more visible load in the current pipeline, you anticipate any incremental CapEx needs that would require regulatory approval before making into the '29 plan? Just how should we be thinking about the upside here? Kimberly Fontan: Constantine, it's Kimberly. The $41 billion includes the capital that's needed to support the load that is in the forecast. The 4.5 incremental gigawatts that Drew referenced would support additional customers that could come online. So we referenced 7 to 12 gigawatts in the data center. That's up from 5 to 10 in the last quarter. And we've added, as you noted, additional plant power island equipment in order to support that. To the extent that those customers in that pipeline reach agreement, we would expect that you would need supplemental capital to support that, and that's what we plan ahead for here. Constantine Lednev: Okay. Perfect. And then maybe shifting to the longer-term outlook, kind of with the large load growth solidifying and under contract, you're locking in kind of the CapEx plans and the associated equipment. Do you see any opportunity to potentially guide on the longer-term EPS growth outlook beyond 2030 just as you kind of gain that visibility? Kimberly Fontan: As you know, we added 2029 here. Certainly, good visibility through that period. If we're able to land additional customers that we'll provide you that visibility there. But going beyond that, I think we'll just -- there's good visibility here, including individual outlooks by year, but we do think we have long-term opportunity over beyond this period. Constantine Lednev: Okay. Perfect. And just a quick follow-up on kind of the generation needs, kind of more broadly. Do you see customers agnostic to the resource mix? Or is there still a push for some renewable components as we've kind of seen with hyperscalers demanding for nuclear SMRs and other technologies? Kimberly Fontan: We talk to our customers about all kinds of supply. Certainly, we've lined up here. Drew referenced both gas resources as well as renewable resources. We do have a pipeline of opportunity around renewables based on customer needs, but we also continue to look for ways to meet their needs to ensure that we are speed to market as well as meeting clean needs. So we think it's an all above the approach over time. Andrew Marsh: Yes. And Constantine, I'll just add that we are building this gas generation, but we have expectations that we will also do carbon capture at some point, and we are working on that actively. We have RFPs out in -- for some of our assets in Mississippi and in Texas to test that. We still have FEED studies going on at our Lake Charles Power Station in Louisiana. And we're exploring various options to figure that out. And we're supported by our data center customers that are wanting to achieve those same objectives. So we think we're well positioned to figure that out over time, but we don't have anything specific to announce today. Operator: Our next question today comes from the line of Jeremy Tonet with JPMorgan. Jeremy Tonet: Just wanted to dive in maybe a little bit more on the forward outlook as well. I think some of the commentary might have highlighted the capital shifting out closer to plant COD and maybe that kind of spills over into past the plan period. So just wondering if you could talk a bit, I guess, on the momentum across the plan and where -- how that looks after the plan, given I think you've said in the past how this accelerates into the end of the decade. Kimberly Fontan: Jeremy, it's Kimberly. I guess just to clarify, $41 billion through 2029, I referenced some plant that closes outside the period. Some of that is alternate finance. So you don't see the spend in this period and all the spend would go out when that closes. So that was that reference there. But certainly, with the additional equipment that we've secured in the pipeline that we see, we would expect investment to continue well beyond this period. Andrew Marsh: Yes. And we do have turbine slots that are delivering for commercial operations in '29, '30 that still have not been announced as overall projects. So there are still opportunities that could add additional capital in the out parts of our current outlook period. Jeremy Tonet: Got it. That's helpful. And maybe just pivoting to Arkansas here, if you could comment a little bit more, I guess, on the ramp for Google there, the project there. And just wondering any more color you might be able to provide as well as local stakeholder views and, I guess, commission priorities, how that all kind of fits together at this point? Kimberly Fontan: Yes. That project is obviously in early stages. It was filed in September, but the customer is continuing to move forward with the ramp as we would expect. As you know, there are minimum bills associated with all of these large customers that help support during the construction period. But I don't see anything different on that ramp than where we have been similar to all of our other customers. Andrew Marsh: Yes. And people are excited in Arkansas for that project. At Google's groundbreaking last month, the governor was there and numerous local leaders, including the Mayor of West Memphis. And there's also the 600-megawatt solar facility and 350-megawatt battery that are going to be part of supporting Google. And that investment is traveling through the Arkansas Commission's docket as well. So we expect to work through that process with the various stakeholders. But there -- at this point, there's a lot of support in Arkansas for the economic development that this opportunity brings. Jeremy Tonet: Got it. And maybe just taking a step back overall, I guess, commercial discussions here with hyperscalers. At this point, I guess, how would you describe the tone or pace of discussions here? Is there more or less urgency to sign up incremental load at this point given the success that you've had so far? Kimberly Fontan: Well, certainly, I would point to the raise of the -- from 5 to 10 to 7 to 12 gigawatts around our increased customer conversations. Those conversations cover all the things that we've talked about before, speed to market, getting to claim, and also how the stakeholders and bringing the stakeholders along. As Drew said, in Arkansas, very excited about that transaction in Arkansas. So we think the conversations continue to be strong and continue to support our incremental increase in that pipeline. Jeremy Tonet: Got it. One last quick one, if I could, on the transmission side. Just given some of the load shed events due to storm activity earlier in the year, wondering how you think about the opportunity to deploy more transmission, enhance flexibility, such as increasing connectivity into Mississippi. Just wondering how you see the opportunity set at this point. Andrew Marsh: Yes. We do still see a robust transmission opportunity, but it will be customer-driven based on how the grid needs to adapt to continued growth in our service territory. Right now, we have a very robust over 400 miles of 500 kV line. We have a lot of 230 kV transmission that we are also building. We're getting ready to file in Louisiana, the Babel to Webre line. I think I talked about that last quarter, which is part of that 500 kV system, and we have approvals pending in Texas and in Louisiana on transmission right now. So there is the possibility for significantly more. We have quite a bit coming through the MTEP process that's seeking MISO approval by the end of this year. And then depending on the growth, there could be additional investment opportunities out there. So we are expecting continued significant transmission investment going forward. Operator: And our next question comes from the line of David Arcaro with Morgan Stanley. David Arcaro: I was wondering, let's see, you might have said before, but I may have missed it. What's the time frame for the 4.5 gigawatts of the power equipment that you secured? And I guess I was wondering, is this a stepping stone? Are you still actively working to secure additional power equipment in a similar way? Andrew Marsh: The timing for the extra 6 units would support commercial operations in 2031 and 2032. So that's about -- we're using our standard design of 750 megawatts, that's what comes out to a little over 4 gigawatts. So that's the plan. And I can't remember the last part of your question, David, remind me. David Arcaro: Yes. Curious if this is a stepping stone. Are you still actively in discussions and working to increase your access to gas turbine supply beyond that 4.5. Andrew Marsh: Right now, it matches what we see as our customer needs. So if there continues to be growth, then we may continue to go into the market and seek additional turbine access. But I think that's where I would put it right now. It's meeting our expectations of potential growth that we see in the near term. We're also looking at a number of other things. We continue to monitor new nuclear and look into that and talk to our customers about that. We are also -- as you saw with the Google transaction, there's potential for solar and battery. And then we're also looking at a number of upgrades on our system to provide incremental supply. So there's several things that are out there that could still drive incremental generation capacity even beyond just gas turbines. David Arcaro: Got it. Great. And I was curious just to get your latest thoughts on the potential to expand nuclear capacity in your service territory and any reaction or impacts to your thinking from the recent Westinghouse and U.S. government announces -- I mean, announcements that we've seen. Andrew Marsh: Yes. We -- thank you for that question. We're actually excited to see that there is some investment going in. What the industry really needs is to get to end of a kind to manage the construction risk. And so we're excited to see someone moving forward. And so we certainly applaud the work that Brookfield and Westinghouse and Cameco are doing with the Feds to figure this out. Obviously, there's still a lot of details that need to come out about that. So we're anxious to get into that conversation with them at some point about what exactly they're doing and how they're shaping all that up. But we're excited to see that it's moving forward and has an opportunity to really move the industry forward. So with all that being said, we still have a lot of interest in our service territory from our stakeholders to bring new nuclear into Texas, Louisiana, Mississippi and Arkansas. Each state has some sort of commission or task force or something like that, looking at how do we bring new nuclear in, and we're a member of all of them. So we continue to actively look at it. We haven't -- as we said in the past, we haven't figured it out yet. And -- but there is a lot of interest from our stakeholders, and so we continue to explore it. Operator: And our next question comes from the line of Angie Storozynski with Seaport. Agnieszka Storozynski: So I was just wondering, we've all read about the Manhattan sized data center in your Louisiana service territory from Meta. So how much of that is currently covered by ESAs and reflected in your pipeline? Andrew Marsh: So right now, the only thing that we have in our outlook is the signed ESA that we previously announced basically about a year ago almost now. So that project has been publicly said by Meta to be 2 gigawatts of compute. And so anything beyond that is not currently reflected in our outlooks. And we wouldn't comment on any specifics of the size or timing of any project, just like for that potential opportunity, even though we know that they've been posting about it. But we wouldn't comment on it consistent with our ongoing policy for not commenting on specific customer opportunities. Agnieszka Storozynski: And it's -- but again, is it because it's -- the ESA hasn't been signed? Is it because it's beyond the planning horizon when this investment would need to happen? Andrew Marsh: Well, it's not necessarily because the ESA hasn't been signed. We wouldn't comment generally about ongoing negotiations with anybody. But as it relates to putting large data center projects into our capital plan, we would need a signed ESA to do that. That's been our policy because these projects are so large, they have such an impact. It doesn't really fit with our probability weighting methodology that we've had forever. So we still use that methodology with our more traditional industrial projects, like steel mills and LNG terminals and petrochem facilities and the like. But for these really large data centers, it's either all in or all out. So we haven't included anything in our outlook to support any large data centers at this time. Operator: And our next question comes from the line of Sophie Karp with KeyBanc Capital Markets. Sophie Karp: A couple of questions for me. On the regulatory front, given all of the demand from large, large customers and all the trends that we know about, do you envision that you will need something more beyond your regular formula rate plan proceedings to accommodate that growth and recovery, of course. Andrew Marsh: I didn't catch all of that. Sophie, you're breaking up a little bit. Do we need something beyond, what exactly are we talking about? Sophie Karp: Yes. Do you think that you will need a regulatory proceeding that goes like beyond your regular formula rate plans reviews to accommodate all the growth that you have on the system? Andrew Marsh: Yes. It depends on the jurisdiction. Thank you for that clarifying. It depends on the jurisdiction. In Mississippi, they have the law that allows for very large economic development projects to move forward with the presumption of the certificate -- effectively the presumption of the certificate of convenience and necessity. Of course, we still ultimately have to go back through regulatory approval for formula rate plans and the like in Mississippi. So it's not like the commission is not involved, but you'd be able to kind of move forward there. And in the Louisiana and in Arkansas, Arkansas just passed the Generating Arkansas Jobs Act, which allows for an expedited process. And so we're actually using those processes right now. So we still continue to go through the process in Arkansas, and we'd expect the same in Louisiana. So I think we'd be using the same processes that we have today, both in Louisiana, Arkansas and I guess, in Mississippi, although Mississippi is very different for those large economic development projects that we've used in the past. And -- but they would all be somewhat expedited given what we've seen and the interest from the various stakeholders in each jurisdiction. Sophie Karp: Got it. Got it. And then my other question was the 12 gigawatt pipeline, could you help us and break it down by, I guess, the stage it's in, like how much of that is in the ESA stage versus the slightly earlier maybe in the process? Kimberly Fontan: Sophie, it's Kimberly. I would not think of that as signed ESAs. That is opportunity in the pipeline. It's in various stages, but not all the way to the end. As Drew mentioned earlier, we don't include in our forecast until we get to certainty around the signed ESA. So that would not be in that 7 to 12 gigawatts that we gave. Sophie Karp: Okay. Got it. So this is all incremental to ESAs that you have in your plan? Kimberly Fontan: That's right. Andrew Marsh: Yes. And I would just add that our actual pipeline goes well beyond that. I think these are ones that we feel like we would reasonably see come to fruition in the next year or 2. Operator: And our next question comes from the line of Paul Zimbardo with Jefferies. Paul Zimbardo: I had a clarifying question following up on David's a little bit. Could you explain the comment on the 8 gigawatts for additional growth from the power commitments above the plan? Because I recall it was 7 gigawatts from the second quarter call, and I know you said you added 4.5 gigawatts. But does that mean you execute against some of that incremental opportunity? I was just a little confused on that piece, if you could clarify. Kimberly Fontan: Sure, Paul. I would think about in the second quarter call, we said 15 gigawatts, 8 was in the forecast through '28, 7 was for growth. We now have 19.5 gigawatts compared to that 15, and 8 is for growth. So that delta is what I was referencing earlier around it's either in the forecast or it's in the forecast, but the capital closes outside the period, so you're not necessarily seeing that. So that's how you get to that 8 gigawatts of incremental growth. Paul Zimbardo: Okay. Very clear. That's my thought. And then I know you talked a lot about the renewable side today, and obviously, Google is doing solar and storage. Are there any -- and we focus a lot on the turbines, of course. Are there any commitments in megawatts, gigawatts on the renewable side, solar and storage that we should be thinking about also as kind of upside opportunities to the plan to serve hyperscalers? Andrew Marsh: Yes. I think we would expect that there would be additional renewables associated with large hyperscaler deployment in some way. We've certainly seen that with each of our announcements thus far. AWS had, I think, 600 megawatts of solar associated with Google similarly. And then Meta also had 1,500 megawatts of solar. So I would expect that there would be some solar out there commitments as well. Paul Zimbardo: Okay. Great. So we should think of that as kind of upside to the gas gigawatts that you talk about? Andrew Marsh: Yes, potentially. I mean there's also -- there's a lot of solar projects out there. So there's also still potential for PPAs, but we would want to try and compete to land some of those projects ourselves for our own capital deployment. Operator: And our next question comes from the line of Anthony Crowdell with Mizuho. Anthony Crowdell: I think one, just maybe a follow-up. On the 4.5 gigawatts, I guess, of the additional power equipment, is that incremental to what's on Slide 14 of, I guess, you have 7 CCGTs listed that is incremental to that? Andrew Marsh: Yes, it would be. I'm looking -- okay, we got Slide 14 pulled up here in the room. And yes, it would be incremental to the ones that are there. There are other ones that we -- that are part of our overall 19 gigawatts that aren't on that page before you get to the 4.5 that we added. But yes, the 4.5 would be incremental to what's on that page. Anthony Crowdell: Great. And then just on -- and I think you touched on in your prepared remarks on EPC availability. It doesn't seem like there's any issue getting craft labor contracts to build all the generation. Just if you could provide any color whereas we've seen other large projects that maybe have struggled in the size of all of these projects. It's kind of tremendous, but yet no issues on labor. I just wonder if you give any color on that. Andrew Marsh: Well, I would say that there are real challenges with labor. I don't think that it's certainly not easy to get the labor lined up. There is a real need for skilled craft of all types, and that hasn't changed. And the result has been that there are increasing costs associated with these combined cycle projects. And so that's -- and we've been hearing about that trend. It is very real. Our projects aren't immune to that, but we're working through it with the EPCs. Anthony Crowdell: Great. Congrats on a great update. Operator: And our next question comes from the line of Andrew Weisel with Scotiabank. Andrew Weisel: If I can first piggyback on Angie's question about the massive data center build-outs. I don't need or expect you to comment specifically on Meta's Hyperion project, but how are you thinking about the potential for some of these data centers to build on-site power generation themselves? Have you been talking to them about their interest in self-generating versus buying power from your utilities? I know your CapEx and earnings outlooks are based on real signed contracts, but how are you thinking about that going forward? Andrew Marsh: Well, I would say that in order to manage transmission costs, we are actually building generation in many cases, very close to where the customer is located. So maybe it's not on site or behind the meter, but it's very close. So you can see that with the Meta project and stuff like that. So I think there's -- in some ways, there's a distinction without a difference from a physical grid perspective. And then secondly, I would say that these customers, while they certainly have the wherewithal to do their own generation, they prefer to put their capital into something else. And so even see that with, I would say, Meta's recent financing of their facility where they're leasing it back in North Louisiana. They have a lot of capital needs. So if they could avoid putting capital into generating stations, I think they would probably prefer to do that. So while it is possible that they could go behind the meter, I think competitively, we are well positioned to support their growth by putting our own plants nearby getting essentially the same benefits and supporting the capital that's not making the capital deployment somewhere else to support them on our books rather than having them have to carry on their own balance sheet. Andrew Weisel: Okay. Then in Arkansas, I believe you're planning to file a rate case early next year. You talked about the hyperscalers helping with customer affordability and paying their fair share. Can you maybe preview the filing a little bit in terms of customer bill impacts and what role Google might play in that case? Andrew Marsh: Yes. I don't -- I can't give you an update today. The team is still working on the case. So I don't want to get out in front of them. But I think in Arkansas, as we look out over time, you see similar types of things that you've seen in the other jurisdictions where the benefits associated with the large new customer help out the existing customers. And so we would expect to lay that out as part of the rate case going forward. And frankly, within the ongoing conversation that we're having right now with the existing processes over the formula, the special rate contract that we filed for in Arkansas for Google. Operator: And our next question comes from the line of Alex Kania with BTIG. Alexis Kania: Just maybe trying to tie around this 4.5 gigawatts of incremental. I was just wondering if you could maybe tie that with the comments made a little bit earlier on the ERAS queue as well. Is that 4.5 gigawatts, does that tie to those extra incremental, I feel like 4 projects in the queue? And then maybe more broadly, if the ERAS process right now is working as intended and seemingly should be able to kind of help for the forward needs? Andrew Marsh: Yes. The 4.5 gigawatts, those extra 6 turbines are not yet represented in the ERAS queue. Those are -- the things that are in the ERAS queue would be much more near term than those. Those projects are, as I said earlier, are searching for COD in the 2031, 2032 time frame, and the projects that we have in the ERAS queue would be coming in much earlier than that. So hopefully, that answers your question. Alexis Kania: Got it. So in some ways, then those extra turbines in the queue would represent incremental nearer-term demand if the opportunity arises? Andrew Marsh: That's correct. Operator: And our next question comes from the line of Steve D'Ambrisi with RBC Capital Markets. Stephen D’Ambrisi: Drew and Kimberly, just kind of again on some of this discussion around the dispatchable generation. Can you talk a little bit more about the alternative financing agreements that you guys are using? And just can I extrapolate what that is, the sizing of that, if you've gone from 8 gigawatts that I think was committed in 2Q to now the implied 11 gigawatts in Q3. Does that 3 gigawatt increase, is that basically what's being alternatively financed and falls outside of the plan? Just can you give a flavor of the timing around that and the magnitude? Because it seems like that would be a $6 billion to $7.5 billion of spend that could come in 30 or 31, which would look like it would drive an outsized amount of growth. Kimberly Fontan: Steve, it's Kimberly. I wouldn't think of it as a direct correlation between that alternate financing and the 3 gigawatts that you referenced. First, we added an extra year, so you rolled forward to 2029. And you can see the run rate of that is consistent with where we've been in each of the prior years before that. So that's your biggest piece. There is some alternate financing. We talked about that actually in our Legend filing in Texas as a way to help with the overall cost, but also time that closing with when that asset goes into service and throws off cash. So we haven't sized that. We'll have a little more visibility into that at EEI. But I think your numbers are a bit outsized relative to what you have here, and I would think more about the 2029 addition. Andrew Marsh: Sorry, Steve, just to add to that, all of these projects that we are bringing on that we've contracted for, for these turbines, we expect to achieve commercial operations by 2032. So they're all coming pretty fast. And you could see a number of them on that Page 14 that we were referencing earlier. But there's a whole bunch more in the next few years, just beyond that, if everything comes together on the schedule that we've laid out with the turbine orders. So there is quite a bit of capital just over the horizon from 2029 to support that kind of potential build-out. Operator: And it looks like there are no further questions. So at this time, I will now turn the call back over to Liz Hunter for closing comments. Liz? Liz Hunter: Thank you, Greg, and thanks to everyone for participating this morning. Our quarterly report on Form 10-Q is due to the SEC on November 10 and provides more details and disclosures about our financial statements. Events that occur prior to the date of our 10-Q filing that provide additional evidence of conditions that existed at the date of the balance sheet would be reflected in our financial statements in accordance with generally accepted accounting principles. Also, as a reminder, we maintain a web page as part of Entergy's Investor Relations website called Regulatory and Other Information, which provides key updates of regulatory proceedings and important milestones on our strategic execution. While some of this information may be considered material information, you should not rely exclusively on this page for all relevant company information. And this concludes our call. Thank you very much. Operator: Thanks, everyone. Again, this concludes today's conference call. You may now disconnect.
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, and welcome to the Equity Residential Third Quarter 2025 Earnings Conference Call and Webcast. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Marty McKenna. Please go ahead, sir. Marty McKenna: Good morning, and thanks for joining us to discuss Equity Residential's third quarter 2025 results. Our featured speakers today are Mark Parrell, our President and CEO; Michael Manelis, our Chief Operating Officer; and Bret McLeod, our CFO. Bob Garechana, our Chief Investment Officer, is here with us as well for the Q&A. Our earnings release is posted in the Investors section of equityapartments.com. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. Now I will turn the call over to Mark Parrell. Mark Parrell: Thank you, Marty. Good morning, and thanks for joining us today. I will lead us off with some broader commentary, then Michael Manelis will provide color on our third quarter revenue performance as well as what he is seeing in the markets today, followed by Bret McLeod, our new Chief Financial Officer, who will address expenses and our NFFO guidance, and then we'll go ahead and take your questions. Our third quarter results reflect the resilience of our business. Despite what is generally a mixed macroeconomic picture, we continue to see good demand and excellent resident retention across most of our markets with results strongest in San Francisco and New York, where continuing high demand has meant modest supply. We see our existing residents as having a generally stable employment situation and good wage growth. When last reported, the unemployment rate for the college educated, our key renter demographic, was 2.7%, considerably below the national average. This is consistent with the experience at our properties as we see continued improvements in delinquency and no other signs of customer financial stress. We have also seen incomes rise for our new residents by 6.2% year-over-year, a healthy rate of growth. Finally, we continue to see residents react to the uncertainty in the economy and the quality of our properties and people by renewing with us at record rates. In fact, we reported the highest third quarter resident retention in our company's history, allowing us to maintain high occupancy rates in the mid-96% range. In sum, our existing customer is financially healthy and happy to stay with us. On the new customer acquisition side, we began to see weakness in traffic during the back half of September. This was most pronounced in Washington, D.C., but did manifest itself in other markets as well. The best way to think about this is for us to say that our normal pattern of a seasonal decline in traffic began one month earlier than usual. In fact, everything this year feels like it was pulled forward. The leasing season started earlier than usual and peaked earlier than usual just as the normal seasonal pattern of traffic decline began earlier than usual. This acceleration of seasonal patterns, weakness in Washington, D.C. and some minor delays in the rollout of an other income initiative that Bret will discuss in a moment, led us to adjust down the midpoint of our annual same-store revenue guidance by 15 basis points to 2.75%. In terms of market commentary, Michael will speak in a moment on specifics in D.C. and elsewhere, but I did want to make a general comment on San Francisco, where we have 15% of our net operating income. After a prolonged recovery, we are excited by what we are seeing in San Francisco, particularly the urban core, where we have more exposure than our competitors. As we talked about at our Investor Day earlier this year, we thought San Francisco had the opportunity to be a strong performer in 2025, and that is exactly what is happening in this, the epicenter of the AI technology revolution. As a result, we expect San Francisco to be our best-performing market this year. At our Investor Day, we also spoke positively about the Seattle recovery story, and we do see improvement there, but due to higher supply levels in Seattle than San Francisco, this improvement is occurring at a slower pace. Conversely, but as we generally expected, we are seeing very different conditions in our higher supplied markets, specifically Denver, Dallas-Fort Worth, Austin and Atlanta, where we have about 11% of our NOI. In these markets where the slowing job picture is meeting continued high levels of supply, we see a significant lack of pricing power. And to be clear, the supply pressure includes both recent new apartment deliveries, which are pretty well tracked by all the data providers and the continuing pressure from slow lease-ups of already completed properties as well as the first round of lease renewals at properties that were delivered a year ago, where landlords are struggling to remove lease-up concessions when going through the renewal process in places with many choices for consumers. This not yet fully stabilized supply is less well tracked by data providers and is not as well understood by investors, but is certainly impactful. Over time, all of this supply will clear the market, and we remain comfortable with the cost basis at which we acquired the assets we own in these markets. We also are positive on longer-term return prospects in these markets, complementing our portfolio diversification goals. But as we've said on prior earnings calls, we do expect to see an elongated recovery in these markets. Switching over to capital allocation. As you saw in the release, we have been active in buying our shares with the company repurchasing approximately $100 million of its stock during the third quarter and subsequent to quarter end. We see our company with its high-quality asset base and sophisticated operating platform and forward growth prospects as greatly undervalued versus asset prices in the private market. Also, we closed on one acquisition in the quarter, a 375-unit property in Arlington, Texas that has been in process for some time. This property was just completed in 2023 and is a nice complement to our Dallas area portfolio. We sold 2 deals in the quarter, 1 in suburban Boston and one in suburban D.C. These were older assets averaging nearly 30 years in age. These transactions all traded right around a 5% cap rate. As you also saw in our release, we have lowered our acquisitions and dispositions guidance for the full year to $750 million of each from $1 billion of each with the vast majority of these transactions already completed. As I just discussed, with private market assets often trading at sub-5% cap rates and at or above replacement cost, our stock presents a compelling value at current levels, making us selective and limited in our acquisition activity for the time being. Dispositions of properties to fund the buyback will occur over the next several quarters, and we'll focus on properties with lower forward growth potential or where we are overconcentrated. Before I turn the call over to Michael, I want to reiterate how excited we are about the forward prospects for our business. Our internal tracking shows deliveries of competitive new supply in our markets, declining 35% or by about 40,000 units in 2026 versus 2025 levels. The results we are seeing in San Francisco and New York demonstrate the earnings growth power of our business when we are operating in markets with sustained demand and low levels of competitive new housing supply. We believe more markets we operate in will trend in that direction in 2026, assuming the job situation is reasonably constructive. For example, our internal tracking shows 2026 new apartment supply in the Washington, D.C. market that is competitive with our properties will be declining by over 8,000 units or down 65% to below 5,000 units, a level we have not seen since at least the great financial crisis. With portfolio-wide occupancy of more than 96% and occupancy nearly 97% in some of our key markets, we think this sets us up well for another year of solid performance in 2026. And if job growth reignites, we could see some very good results. In sum, we continue to see the current and future drivers of our business is healthy and the forward momentum is solid. And with that, I'll turn the call over to Michael Manelis. Michael Manelis: Thanks, Mark, and thanks to all of you for joining us today. Our third quarter results reflect solid demand with outsized performance in San Francisco and New York. Currently, general macroeconomic uncertainty remains as a result of tariffs, lower job growth and more recently, the government shutdown. These factors make forecasting demand a little bit more challenging today than it was 90 days ago, but what has not changed is the excellent setup we have going into next year due to the dramatic reductions to competitive new supply. Breaking down our third quarter operating results, our renewal rate achieved for the quarter remained strong and was up 4.5% with nearly 59% of our leases renewing and both of these were in line with what we thought would happen through the quarter. Our centralized renewal process and intense focus on customer satisfaction has helped deliver the lowest reported third quarter turnover in our history. Across our portfolio, the average length of stay has increased by nearly 20% from 2019 and retention is at record levels. As secular trends and our focus on enhanced customer experiences have driven increased retention, the positive impact on same-store revenue growth from renewals has become more significant. Our unique value proposition and customized renewal experience reduces costs associated with vacancy and new customer acquisition like marketing and concessions, while enhancing customer satisfaction and removing the friction costs on our residents who choose to remain with us. This strategy optimizes overall revenue and improves customer satisfaction despite potential short-term variability in new lease change, which is an output that is greatly impacted by who moved in or out. With that said, new lease rates at negative 1% came in lower than we expected and resulted in a 2.2% blended rate increase for the quarter, which was at the low end of our range. As Mark described, pricing trends peaked in July this year at a level that was both lower and earlier than normal. Prices stayed relatively flat through August and started the seasonal descent in September, which is typical. But we did observe some late quarter pricing softness, mostly in Washington, D.C., which I will describe in a minute, which impacted our new lease change. For the entire portfolio, physical occupancy remained high at 96.3% for the quarter, driven by solid demand and strong retention in our coastal markets, excluding D.C., which gave up some occupancy at the end of the quarter. Let me take a minute and highlight a few of the markets that are driving performance. The recovery in San Francisco, particularly downtown, is real. As the epicenter of all things tech, workers have returned to the market and drove high occupancy and very good rate growth on both new lease and renewal rates. This strength was supported by the positive trends we observed in our migration data with just over 4% more move-ins coming to us from outside both the MSA and the state of California. In addition, we have a very favorable new supply setup in the market in 2026 with only about 1,000 units of competitive new supply being delivered. San Francisco will be our best-performing market in 2025 and most likely again in 2026 as we are just now approaching 2019 rent levels in our downtown portfolio, while median incomes in the market are up 22% since 2019. Similarly, New York continues to be a strong performer. Job sentiment in the market has been good and competitive new supply has been and will continue to be very low, which should position us to deliver above-average revenue growth again next year. I would note that our combined exposure to urban San Francisco and New York and the positive demand and supply outlook in 2026 is particularly unique to EQR and should be a relative strength for us versus peers next year. While D.C. will end up having a strong 2025, the year has certainly been a tale of 2 markets. The strength we saw early in the year carried through most of the third quarter. But as I mentioned, in late September, we definitely started to see some softness in demand and pricing power. A combination of federal job cuts and the National Guard deployment followed by the government shutdown has created a lot of uncertainty in the local market. Most of the pressure is being felt in the district and in pockets of Northern Virginia. In these areas, our current operational focus is preserving occupancy. And while we aren't experiencing residents turning in keys due to job loss, our overall turnover in the D.C. market did increase slightly in the quarter, and the volume of leasing activity has slowed as the overall market still needs to absorb the nearly 13,000 units delivered this year. The good news is that in 2026, competitive supply in D.C. will drop 65% and remain low for the foreseeable future, which is a marked change from the past decade. Add to that our sense that in the long term, the federal government will continue to be a job engine regardless of the near-term headwinds of temporary cuts or shutdowns. Overall, we feel very good about D.C. as a market in the long term. Shifting to Los Angeles. The city continues to face challenges and remains a wildcard as we head into 2026. We continue to see overall market weakness driven primarily by slowdowns in the entertainment industry. And although the quality of life issues are improving, they are still not where we would like them to be. We have demand, but less pricing power, particularly in the urban portfolio, where we continue to feel the impact of new supply in our Downtown, Koreatown and Mid-Wilshire portfolios. Our suburban submarkets of Santa Clarita, Inland Empire and Ventura County are performing well. As in many of our coastal markets, supply will be lower in 2026, but we will need to see a catalyst for demand in order for us to have pricing power return. Our hope is that with the upcoming World Cup in 2026 and the Olympics in 2028, that there will be long-term incentives for the quality of life to improve in L.A., albeit from a low base. In our expansion markets, which currently represents only 6% of our same-store NOI and 11% of our total NOI, high levels of new supply continue to impact operating results in Atlanta, Dallas, Denver and Austin. Atlanta is faring the best of the 4 and Denver the worst. Our same-store portfolios in both Atlanta and Dallas should see improved results and perform better than the broader market next year as we add our recently acquired more suburban assets to the same-store portfolios next year. Before I turn it over to Bret, let me take a minute to highlight our current activities around innovation. In the third quarter, we deployed our AI-driven application processing tool, which has already delivered a 50% reduction in the overall application time. We currently have about half of all applications being completed within 1 day, and this process includes a more robust, comprehensive ID verification process that should help reduce fraudulent activity going forward. Overall, I am really excited about the opportunities in 2026 as we continue to implement AI in other key areas of the resident experience. Next month, we will begin testing a new service application module that is designed to improve service request intake, provide self-service tips, optimize team schedules and ensure qualified team members address tasks efficiently in a single visit. This is a great example of how we are focused on increasing the utilization of our workforce, while at the same time, creating a more seamless and responsive experience for our residents. I want to give a shout out to our amazing teams across our platform for their continued dedication to our residents while embracing change to further enhance our operating platform. Our portfolio will end 2025 well occupied with a strong platform that combines automation, centralization, along with a local team that knows how to keep our customers satisfied while getting a larger share of the demand pool, whatever that level may be in the markets. And with that, I will turn the call over to Bret. Bret McLeod: Thanks, Michael. Before I walk through our updated guidance, I first wanted to say how excited I am to be here at Equity Residential working alongside Mark, Michael, Bob and the rest of our talented corporate team. It's been nearly 100 days since I joined the company, and I'm even more impressed with the organization than when I started. I'm comfortable stating that because one of the first things I did here was hit the road and visit many of our communities and hard-working associates across the country. My early travels included some of our top-performing markets, such as San Francisco and New York, where I saw the quality and location of our assets firsthand as well as the innovative operating platform Michael and the team have established. I visited Seattle, where we are set up well for 2026, benefiting from local return-to-office mandates and continued AI investment growth. I also traveled to Dallas, one of our larger expansion markets and witnessed constant examples of the outsized demand growth dynamics that are driving our positive long-term thesis on that metro area. I'm grateful to all my new colleagues for helping me get up to speed so quickly. With that said, let me provide some color on the guidance adjustments we made this quarter, which continued to reflect a stable and resilient business outlook, albeit amidst some macroeconomic and employment uncertainty, as Mark and Michael described. We've adjusted the top end of our full year same-store revenue outlook down as a result of third quarter same-store blended rate coming in at the lower end of our prior range and what we have seen in early fourth quarter trends. In addition, a portion of other income growth related to bulk WiFi that we expected to realize in the second half of 2025 has rolled out slightly slower than planned and will now be pushed into 2026. That said, we still saw strong quarter-over-quarter growth in other income of 9%, demonstrating our ability to continue to pull multiple levers to drive overall revenue. The combination of these 2 factors resulted in a revised 2025 same-store revenue range of 2.5% to 3% with a midpoint of 2.75%, which matches the midpoint of the range we guided to at the beginning of this year. We've held same-store expenses steady at 3.5% to 4% for the full year and continue to see sub-inflationary trends on payroll, insurance and real estate taxes, partially offset by higher utility expenses, particularly in California. I would remind you that our 2025 same-store expenses are approximately 40 basis points higher this year due to the continued rollout of bulk WiFi, which sits in repairs and maintenance, but is positively contributing to outsized other income growth for the remainder of the year and will continue to do so as we move into 2026. The net result of these same-store revenue and expense adjustments is a revised annual same-store NOI range of 2.1% to 2.6% and a midpoint of 2.35%, 15 basis points higher than our original 2025 guidance, but 15 basis points lower than the midpoint we provided in the second quarter. For normalized FFO, we've tightened our range of both the top and bottom end and are estimating full year 2025 NFFO per share of $3.98 to $4.02, leaving the midpoint unchanged from Q2 at $4 per share. Slightly reduced same-store NOI should be offset by expected continued improvements in lease-up NOI and lower property management expense. With that, I will turn it over to the operator and open it up for questions. Operator: [Operator Instructions] We'll now take your first question coming from the line of Eric Wolfe with Citi. Nicholas Joseph: It's Nick Joseph here with Eric. I appreciate the comments on the peak leasing season and totally understand that the timing of each year is a bit unique. But I guess in the past, when you've seen rent growth falling at this time of the year, how do you approach the forecast for next year's growth? And how do you decide whether these are more temporary factors affecting rent growth or it's something that's more likely to persist going forward? Michael Manelis: Yes. Nick, this is Michael. I mean that's a great question. I think what I would start with is just say, as what we felt coming out of that peak leasing season and looking at some of the decelerations that occurred in that later part of September as carried through October, we basically just took kind of that seasonality through the rest of the year. And how it kind of manifests itself into next year, there's still a lot of seasonality to these blends. And I think I'm going to stay away from kind of giving the exact kind of guidance or outlook to next year. But we do expect to start out next year well occupied with some embedded growth that looks very similar to kind of how we started out this year. And I think the wildcard for us is really going to be what does that intra-period kind of rate growth look like. And for us, in many of these markets, it's going to be when does that consumer sentiment turn positive again. We have such a great setup with the reduction of competitive supply being so much lower in many of these markets. It's not going to take much of a catalyst from that sentiment change or any kind of catalyst in the job growth in these markets to really fuel that intra-period growth. So I think for us, I'm going to stay away, like I said, from giving you the guidance, but we're modeling right now for continued deceleration for the back of the year, but still feel pretty good about the setup and the outlook into next year. Nicholas Joseph: I appreciate that. And then just in terms of capital allocation, you've done $100 million on the buyback so far. Given where the stock is today, what are the factors? Or how are you thinking about really leaning into that and doing it at a much more meaningful scale versus other opportunities with your capital allocation? Mark Parrell: Nick, it's Mark. Thanks for that question. There's really 2 inputs. I mean one is the attractiveness of our other investment opportunities, which is predominantly buying existing assets or building new assets versus the stock. And obviously, we voted for the stock over the last quarter and bought that. There's also the availability and cost is the other factor of the capital we need to acquire the stock, and that's really only 2 places. We either have to issue debt or we have to sell assets because as you well know, as a REIT, we just can't retain much in the way of earnings. We pay a really nice $1 billion a year dividend already. So our lean right now is to continue to do asset sales of these lower return profile assets or assets where we have an over concentration in the submarket, kind of improve the forward growth potential of the business and arbitrage the private public markets and continue to be thoughtful about buying more stock. But exact levels and stuff are just dependent on where the stock price goes and the opportunity set goes, and we'll be open to that. But I just want to remind everyone, and again, I know you know this, Nick, but there are real tax gain limits. We have a lot of embedded gain in our assets. We've done a lot of good investing over the years, and our assets are worth a lot more than their -- the basis is a lot lower the tax basis. So there'll be a lot of gain. We also did 1031s. I'd also point out, I want to be careful on not descaling the company too much. There's a lot of fixed costs in running a public company of this size. So we just want to be thoughtful about that, but we're very open to additional buyback activity in the quarter. Operator: Next question is coming from the line of Steve Sakwa with Evercore ISI. Steve Sakwa: I was wondering, Michael, if you could provide any color on just kind of where the earn-in sits today as we kind of head towards the end of the year? Michael Manelis: Yes. So I think maybe I'm going to just start off and let me define or clarify embedded growth, which is kind of also referred to as that earn-in. And it basically just means that you're freezing the rent roll on 12/31, you annualize all the leases in place with no changes to occupancy or vacancy loss throughout the year. We started 2025 out with approximately 80 basis points of embedded growth on the same-store set. And while that was slightly below the historical average of 1%, it was still a pretty solid position for us to start off the year. Given the current momentum that we see now and some of that deceleration that I just referred to that we modeled, we now expect 2026 to start out in a relatively similar position than we did this year. And our view is a little bit lower than what we thought 90 days ago. And this is really just a result of us taking down that trajectory of the fourth quarter given some of the deceleration that we saw begin in kind of late September. And I do want to call out because I know a lot of you guys have these models. And while the math is not perfect, right, rough estimates, you start out with about 50% of the expected full year blended growth. But in 2026, we're going to also be folding in some of the assets in the expansion markets. And while these assets are clearly performing better than the same-store assets in those markets, they're not performing better than the overall kind of coastal same-store portfolio. So it's going to be a little bit dilutive to that embedded starting point. But again, I think at the high level, we would say we're going to start out 2026 in a relatively similar position as we did in 2025. Steve Sakwa: Great. That's helpful. And then maybe just going back, it sounds like with the slowdown in the seasonal trend, it sounds like there's a bit more pressure on kind of the new lease trend and kind of top of funnel demand. I'm just curious if you're seeing any change in behavior on the renewal side? And have you had any kind of real change in the renewal success? Or are you seeing really -- is most of the weakness really happening on the new lease side of the business? Michael Manelis: Yes, Steve, this is Michael again. Great question. So I think what we noticed in select pockets of markets in the renewal process, there tended to be a little bit of hesitation. So a little bit more back and forth. And again, we have centralized are -- we have a centralized renewal team handling all of these negotiations or conversations, and it's really allowed us to execute these various strategies. But we noticed a little bit more kind of back and forth, a little bit of this hesitation. Right now, for the next several months, our quotes have been sent out in the marketplace. We typically send out renewal offers about 90 days in advance. Those markets -- those quotes were sent out about 6%. And sitting here today, we got a lot of confidence in our process. We would expect to have achieved kind of net effective renewal increases to land right around 4.25%. This is typically a time where we're going to lean into retention, and we'll tend to negotiate a little bit more as we hit the shoulder part of the season. But I think we saw a little bit of that hesitation, but we still have a lot of confidence in our process. And again, we're seeing really strong resident retention occur. It's just taking a little bit more kind of back and forth, a little more effort to secure those leases. Operator: Next question is coming from the line of Alexander Goldfarb with Piper Sandler. Alexander Goldfarb: Two questions. Bret, maybe I'll start with you and kick it off. And by the way, nice job on your Blue Jays last night. So -- this may predate you, but I think you guys did converts back in 2006. Once again, they seem to be all the rates. You guys have some mid-3% debt coming due next year, just curious where your headset is on the potential to reenter the convert market or if your view is, hey, we did it 2 decades ago, we had an experience. We haven't done it since, and that's the message is that you guys may just stick with traditional. Just trying to understand, especially given some of the receptiveness we've seen from some other large REITs pricing converts pretty tightly. Mark Parrell: Alex, it's Mark. I'm going to start here. It is historical context that Bret lacks, but certainly understands converts very well given his experience level. So when we did that back in '06, we did that in part because we were working with the Lexford portfolio sale and buying into lower cap rate, higher growth markets like New York. And so this was a little bit of an asset matching exercise for us, and the terms were pretty appealing. So I do think converts are an interesting tool. I think there are times, they're very beneficial. If we got our hands, for example, on a portfolio where it was a big lease-up effort that we were going to have or a big renovation effort, and it was pretty material, you might match fund that with some converts. The accounting disclosure converts is pretty favorable now. And then if it succeeded, the convert holders would benefit, the existing equity holders would benefit and it would all make some sense. Otherwise, we're an opportunistic and infrequent issuer of converts. It's a little awkward to be buying your stock back and issuing converts at the same time. So we'll just have to balance that out. Alexander Goldfarb: Okay. And then the second question is on AI. A lot of discussion on whether it's sort of a net job creator or it's maybe a job eliminator or it's just obviously different headlines on layoffs and stuff. So in your key AI markets like New York and San Francisco, are you seeing a ripple effect where the AI job hiring is benefiting other related industries and you're seeing net overall job growth? Or are you seeing sort of the reverse where AI job growth is ending up with other positions in those markets being eliminated and replaced by AI? Mark Parrell: Yes. What an excellent question. It's Mark. I'm going to suggest that Michael just tell you what he's hearing from people on site and in the markets and give you that intel. And then I'm going to sort of give you what we've been thinking about on the AI side and employment in the long run. But I'd tell you it's very -- of course, very unknown at this point. So Michael? Michael Manelis: Yes. I mean I think one of the best indicators we have is when we drill into some of our migration data, which is where our new residents coming to us from, what industries are they working with. I wouldn't necessarily say, Alex, that this is all driven because of AI that we're feeling. But when you look at San Francisco and New York, San Francisco clearly saw in migration, 4% more of our move-ins coming to us from outside the state of California, outside kind of that MSA, which basically is telling us there's a lot of kind of excitement going on. I mean this is the epicenter of tech. So even though you see the big guys kind of really dominating the headlines around AI, there's a lot of other start-up industries. There's a lot of businesses now that are benefiting from just an overall shift in the technology strategy of companies. And I think we're benefiting from that. New York, what was interesting for us is we saw a slight uptick in that migration pattern coming in from outside that MSA. But what was cool on the outbound side, people that were leaving our portfolio were staying in the state and in the MSA at a higher degree than what we saw before, which gives us confidence that kind of that market is going to be doing really well for us next year. Mark Parrell: Yes. Just to tack on just -- yes, one last thought on the AI side. I mean, clearly, there's been a lot of talk about whether AI is going to get rid of a lot of white-collar jobs. No one knows the answer to that question. A lot of the comments about vast displacement are being made by folks, Alex, as you know, who greatly benefit from the AI boom. And so it's a little bit about talking your own book. That said, I do think AI is an interesting tool. And I think it's going to change the relationship between colleges, students and employers. Right now, I think the unspoken deal is colleges turn out smart people with good general skill sets, but not necessarily work-ready skills. And I think what's going to happen going -- and you spend a year or 2 teaching those people your vocation, their vocation, and then they're pretty productive for you. I think colleges are going to have to put at a premium teaching people, data analytics and AI skills. So they're going to show up with the equivalent of second or third year employee skill sets and be able to move forward. You know the kind of people that we have at our properties. These are highly educated folks. These are often Gen Z and millennials that are digital natives. They understand technology. They will learn AI, and they'll learn to use it better, I would argue, than anyone else. So my sense is the market will adapt to this, and I'm not a believer in the -- no one will have a job theory of AI employment. Operator: Next question is coming from the line of Jana Galan with Bank of America. Jana Galan: A question for Michael, following up on your San Francisco comments. If you could speak to your prior experience in that market when demand starts to accelerate, how quickly can rents increase? And then does seasonality still hold or kind of not as much given the growth in jobs? Michael Manelis: Yes. I mean, obviously, any time you have supply-demand kind of imbalance, and in this case, in San Francisco, you have very little competitive supply and you have more demand coming into the portfolio, that creates this opportunity for rent growth. And I think I alluded to in my prepared remarks, we're just now getting back to 2019 kind of rent levels in our portfolio. But when you look at incomes in that market, it's up 22% since 2019. So I think historically, what you see is any time you have this imbalance and you have strong demand, less supply, you're going to be in a position of pricing power. I don't know that it's going to completely abate any kind of seasonality trends. So you may see some softening in very strong numbers still like in the fourth quarter or in the first quarter, but we clearly have an opportunity in front of us, and this is exactly what we kind of highlighted earlier in the year at our Investor Day. This recovery is taking hold, and we're really excited to see it kind of playing out at this pace. Jana Galan: And a quick one for Bret. On the WiFi expenses, you mentioned it was kind of a 40 bps delta in 2025. Is there additional expense related to this initiative in '26 or that will kind of just be smoothed out? Bret McLeod: Thanks for the question. No, that's primarily for this year. So right now, we're just looking forward to getting the revenue after we've had the expenses run through this year. Operator: Next question is coming from the line of Brad Heffern with RBC Capital Markets. Brad Heffern: Can you give your perspective on what you expect to happen in D.C. over the next 6 to 12 months? And how much of an impact has a shutdown historically have? And how much do you expect this one to have? Michael Manelis: Yes. Brad, this is Michael. So maybe I'm going to start. I just want to give a little bit of color as to what have we observed in D.C., how did the various submarkets kind of appear today? And then I'll kind of shift it as to what we would expect for the balance of the year or turning into next year. So first and foremost, I think what we observed in that first or second week of September is a little bit of that hesitancy that I described on that renewal process, but also taking hold with prospects. There was just a little less sense of urgency to buy and sign on the dotted line and commit to kind of move-in dates. So that manifested itself as we worked our way through September into October with just a lower volume of kind of new leases occurring. The retention side held up strong. When you look at D.C. today, if you peeled out our D.C. market, we have a suburban Maryland portfolio doing very well, right? It's 97% plus occupied. It's got rents slightly on top of where they were last year. You go into the Virginia portfolio, go deep suburban into Fairfax. I got good occupancy, and I got rents up a couple of percent, start coming in towards D.C. in that Virginia portfolio where you've got a more urban concentration competing with the supply. And I've still got solid occupancies, but I got pockets where I don't have pricing power where I had to start utilizing concessions. And then you get into D.C., Northwest D.C., along with D.C. kind of the district central area, I've got occupancies that are running 95%, 95.5%. I've got concession use that has clearly increased in the last 4 weeks, and I got net effective prices that are down 4%. So we've modeled that out for the rest of the year. I wouldn't -- we're not seeing kind of folks that lost their job with the government turning in keys. We're not seeing kind of any of this increase in lease breaks. You're just seeing an overall slowdown in the top of the funnel and this willingness to commit to a lease. And I think for us, we'll have to expect that to continue through the balance of the year. I think consumer sentiment is tricky, right? It can shift on us very quickly and turn back positive. You can get past the government shutdown. You can get some confidence back in hiring. And then that market is going to be really well positioned again because we just have a huge decline in competitive supply coming to our advantage next year that it's not going to take much for us to have pricing power. The trick is exactly when does that inflection point take hold. Brad Heffern: Okay. Got it. And then on San Francisco, you've called out the difference in rent growth and income since the pandemic a couple of times. Do you think we're in sort of a multiyear above-average growth environment where we might see that differential narrow quite a bit? Or is there some component of rent having outrun fundamentals in the past and now we're seeing sort of a catch-up as well? Michael Manelis: I mean I think our view clearly, when you look at the recovery is that we have some good years in front of us in that market. Technology is advancing quickly. That market is clearly at the center of that. You see the migration patterns. You see the incomes going up. You see rent levels that are still at a really good discount relative to historical standards. So that, when you put it all in the blender, tells me that we should expect some outsized kind of growth for the next couple of years there. Operator: Next question is coming from the line of Adam Kramer with Morgan Stanley. Adam Kramer: I think, Mark, in your opening comments, you used the word elongated, talking about sort of the recovery in the expansion markets. So I wanted to maybe double-click on that. I'd be interested to hear if that's more of a lease growth comment, if that's sort of relative to expectations about the seasonal curve that maybe you don't expect a normal seasonal curve there in the expansion markets in '26. And I guess just more broadly, any color on market rent growth expectations? I know it's still early, but market rent growth expectations for next year, maybe coastal versus expansion markets would be really helpful. Mark Parrell: Yes. Thanks, Adam. I'll start and Michael or Bob may contribute as well. So I was alluding in part to the fact that though people are very aware of deliveries in these expansion markets, in these Sunbelt markets, they don't really think as much about how long it takes to fully absorb, which in a highly supplied market, can it be at least one renewal cycle. And that was the other point I made in the remarks. So I want to give some perspective, like we're not prescient about all this, but I think we were rational about how quickly absorption would occur and pricing power return to landlords. The assets that we bought a couple of years ago in these markets, when we were looking recently at their performance, we were within 1% of our underwriting on NOI. So I think what we just had in mind was that concessions would persist, that rent growth would be minimal to negative for a while that, that was just what happens when you're in a very heavily supplied situation. And then you'll get out of it and you'll roll. But I think that inflection point, people have kept wanting to put that inflection point on the date that deliveries declined, and we just didn't believe that. That is, I guess, sums up how we underwrote differently. We were more focused on the full absorption, the full amount of the supply being just part of the normal volume in that market and not pressuring existing owners very much. I would expect coastal markets to have higher same-store revenue growth by a fair margin next year. All the low leases that were written this year are going to be in next year's rent roll and are going to pressure those numbers. You may see and we expect to see some improvement, I hope earlier next year, but it could be later depending on the job situation in the second derivative and that rate of change number on new lease and otherwise. But it all comes from a really low base. So again, I think it's a certainty that coastal markets will have higher same-store revenue growth and every market is a little different because they've written better leases this year and that those are going to affect next year. I think the opportunity in the Sunbelt markets, including our expansion markets, is to start to maybe stabilize occupancy and maybe start to move up -- reduce concessions and move up new lease levels. But I think it's just going to be more of higher cash flow late in '26 and into '27 more so. Adam Kramer: Great. That's helpful. Maybe just a little bit of a wonky one here, but just wanted to ask about the -- some of the same-store pool changes with some of the kind of prior year acquisitions folding into the same-store, going into next year. Maybe if you could just sort of quantify what percent of -- and I think you mentioned it earlier, but just what percent of the same-store pool today is expansion markets and what that's going to look like next year and then maybe some of the specific assets that are going into the pool as we go to next year? Bret McLeod: Yes. So great question. I think maybe stepping back for a minute when we think about just same-store results and kind of the sets we have. Just a reminder, we have 3 same-store sets. So we've got the quarter versus same period last year, call it about 75,000 units. current quarter versus last quarter, which is sequential, that's about 80,000 units. So there's about a 5,000 unit difference there. Year-to-date, same period, that's about 74,000, 75,000 units as well. So I think as we look to next year, my guess is it's about a 5,000 unit increase that goes into our same-store set in 2026, and that's primarily coming from those expansion markets. Mark Parrell: Yes. Just I think that's exactly right. And it's Mark. All I'd add there, Adam, is this is something Michael said. A lot of the assets we're adding are suburban assets in Dallas, suburban assets in Atlanta, suburban assets in Denver that by and large, are going to look better than the performance of the assets we already own in the same-store set, which because we brought them early, we got pretty good basis, but they tended to be urban assets, and they've not performed as well as our suburban portfolio has in the last year or so. Though when they weren't in same-store, they did pretty well. So some of that is less observable to you. So anyway, I would guess that you're going to see 4,000 to 5,000 more units in the annual same-store set that Michael will give you guidance on in 3 months. Operator: Next question is coming from the line of John Pawlowski with Green Street. John Pawlowski: Michael, outside of the D.C. Metro, what other markets do you see a real cooling of demand in the last month or 2? Michael Manelis: John, it's a little bit hard to hear you. Are you just asking where else did we see a decline in demand in the last month or so, other markets? John Pawlowski: Yes, outside of D.C. Metro. Sorry for the quiet voice. Michael Manelis: Yes. No, that's okay. I think I would put Boston kind of into this mix as well for us, which is we've been watching kind of Boston. It's a very seasonal market in general. But I think what we've seen right now is just a little bit more softening than you otherwise would have expected. And when we started this year, we thought this urban core of Boston was going to do better than the suburban. Again, we're 70% urban in that market, 30% suburban. It's absolutely playing out that way where the urban portfolio is outperforming the suburban. But it's just not as robust as what we would have thought. So we've kind of taken down that fourth quarter projection as well. And I think I even alluded to some of this on the last quarter call, which is we clearly had headline risk there. And I think right now, what we're seeing is a confirmation that a weaker biotech sector, pullback in university and research funding, immigration challenges are all just chipping away at this overall demand levels in the market. And I think right now, when we turn the corner and we start off next year, I still think the urban portfolio is positioned to outperform the suburban. But we got to get through some of these kind of near-term demand driver vulnerabilities that we're seeing right now. John Pawlowski: Okay. Second one for me. Bob, could you spend a minute or 2 just helping frame like what type of changes are you going to be incorporating in the underwriting process now that you're at the helm of the investments organization and just generally how your approach will be different either philosophically or the data you're using the processes. Could you just spend a few minutes talking through how the investments work and how you're underwriting properties and markets are going to be different in the next 5 to 10 years versus the last 5 to 10 years? Robert Garechana: Yes. I don't think there's anything that's like particularly like wholesale change in terms of strategy, et cetera. But I think you pinpointed something that is a huge opportunity that Alec was already really starting on, which is just this data-driven mindset. So I think you guys probably see it in your own investment space where there's just incredibly larger amounts of data sets, and there's better ways of analyzing that data and relational data around that. And we're fortunate to have a long history of our own data set that we can work together in making kind of better decisions. So I think it's just continuing to lean into something that frankly started before my transition and that I hope to accelerate. And I think that's part of the excitement of the opportunity for me personally is to kind of take it to, call it, EQR 3.0, 4.0, whatever iteration you want to say. And we're fortunate to be on a platform where we have a lot of data and a lot of skilled people who know how to do this. And so that's the excitement if you can't hear it in my voice. Operator: Next question is coming from the line of Michael Goldsmith with UBS. Ami Probandt: This is Ami, on with Michael. What impact, if any, do you expect from the announced Amazon layoffs? How exposed is your portfolio to the specific submarkets most likely to be impacted? Michael Manelis: Yes. Ami, this is Mike. I'll take a shot at that. So first and foremost, I think this is one of the benefits you have of us having a diversified portfolio that you kind of derisk some of this kind of direct pressure from any one employer. That being said, if I looked at the entire portfolio today, again, we capture employment data at the time of application. So we don't follow somebody once they move in as to where they're currently being employed. But if I just looked at that snapshot Today, we have about 3% of our units that had residents employed at Amazon at the time they moved in with us. I looked at the concentration across them, obviously, markets like a Seattle, where you have a heavy employment base from Amazon. We have a higher percentage there. But for us, that gets very isolated. We have 3 properties in South Lake Union, where we have a high percentage of Amazon employees. I also want to just call out that we've been through this before with these kind of layoff announcements and looking at some of the stuff that's hitting the press now about Amazon. It is more dispersed across several markets. This is not a light switch. It's not immediate. These are very kind of well-skilled, employed individuals. Many of them will receive severance packages. I think in the case of Amazon, they're given 90 days to go find alternative roles within the company. I looked yesterday even at a couple of markets like in D.C., they still have 300 positions posted. So it's not like they pulled down all their available positions either. So I look at this and I say, look, anytime you have these big headlines that take away from the top of funnel demand, that's not a positive, right, in today's day and time where we're looking for job growth. But comparing that to isolated pressure, I just -- I don't see this as a big concern for us. Ami Probandt: Okay. That's helpful. And then next question is on leasing concessions. They're still at a relatively low level of rents, but on a year-over-year basis, they jumped up pretty materially. What are you offering in terms of concessions? And are they concentrated in certain markets? And last question, are you offering any concessions on renewals? Michael Manelis: So this is Michael again. Very, very limited concessions are being used into our renewal process at all. I think on a cash basis in the third quarter, we did use more concessions than we originally expected. I will just put this in terms of days per move-in. So in the third quarter move-ins, we averaged about 7 days of rent being concessed, and that increase was clearly targeted into occupancy liens in some of these markets like D.C. and the expansion markets are pretty heavy use of concessions right now. As we think about the fourth quarter, I would expect that concessions on an absolute dollar basis will drop off a little bit just because the sheer volume of transactions on the new lease side drops off. But when I look at that relative to move-ins and days being concessed, my guess is we're going to tick up one day and probably be in a position next quarter to say that we've concessed about 8 days per move-in for the folks that moved in, in the fourth quarter. Concessions right now are sticky in some of the markets. Even in like a market like Seattle that has some decent demand, you just see some more widespread use happening. And I think this is just a function of where you had supply delivered in 2025 and you're still working through the absorption of that supply, many of the owners of those types of assets increased concessions heading into the fourth quarter and many of the stabilized assets in those submarkets followed suit. And that's kind of what we're feeling. Operator: Your next question is coming from the line of Haendel St. Juste with Mizuho. Haendel St. Juste: My question is on the 4Q '25 blend guide, 50 basis points. I was hoping you could shed some light on the range of expectations there for, say, your weaker coastal markets like D.C., Boston, L.A. as well as some of your better markets like San Fran, New York, Seattle. Michael Manelis: Haendel, this is Michael. I'm going to stay away from giving kind of any like specific market numbers relative to blends. I'll tell you, the trends that you see are probably manifest and going to continue in the fourth quarter. San Francisco is going to be one of the better performing markets, same with New York. You clearly have seasonality in these stats. And I think everybody needs to remember, even if you went back and looked at like 2019 data, you have material declines in the fourth quarter just based on seasonality in it by itself. So markets like Boston will be more negative in the fourth quarter than they were in the third, even when the market is performing well. So I think for us, rather than go kind of market by market, I would expect to say that the trends that you see in the fourth quarter or the pecking order is probably going to continue into -- or what you see in the third quarter is probably going to continue into the fourth quarter, that there will be continued deceleration probably across most of the markets. Haendel St. Juste: Got it. Fair enough. And I don't know if I missed it, but did you give new and renewals for October? Michael Manelis: We did not give that, and we're not going to give any kind of spot month kind of stats. I think I gave some of my remarks around the renewal side of the business that the quotes are out in the marketplace, and we have a lot of consistency there and would expect about 4.25% achieved renewal rate increases in the fourth quarter. Operator: Next question will be coming from the line of Rich Hightower with Barclays. Richard Hightower: Mark, I think just to maybe put a finer point on some of the comments on the expansion markets. I guess with some of the absorption dynamics that you described, I mean, do you expect a normal seasonal curve next year starting in? Or is it going to look different kind of in the way it looked this year? And then similarly, can we expect positive market rents given the trends that you're seeing sort of extrapolating? Just to be clear. Mark Parrell: Well, every portfolio is different and every market is different. So you could have people less and more optimistic because of their portfolio composition in a specific place. And again, we don't report to be experts on every submarket in every location. And there's a lot of places in the Sunbelt like Phoenix, we don't do business at all. So we wouldn't have a perspective on that. I think the answer to that is this job growth thing. If we, as a country, see decent job growth next year, I think the markets will have their normal seasonality. Most markets across the country have less supply in the coastal markets, particularly we've highlighted a lot less supply. I think if we see job growth, I think we are off to the races in our coastal markets. And I think you'll see the recovery begin in our expansion markets in a more profound way than it has so far. So my bet is that this is a pause in jobs, not a significant and long-lived downturn. The big question, to be honest, is whether the pause continues in and through the leasing season. If it gets better in the third and fourth quarter of next year, that's nice, but we will have done and our competitors will have done a lot of their leases by then. So I think, Rich, it's just a question of whether when you start to get to April and May, you're feeling better about the job situation. There's reasons you should, right? I mean the Fed, we expect in a few hours is going to lower interest rates. There is more certainty on the tax and regulatory side than there was even 6 months ago. There appears to be more certainty even on the tariff side, though that is a dynamic input still. So there are a lot of things that look a little better known. And I think maybe employers will be a little more risk on in the new year. So we'll just have to see. But I think the job thing is the key to the whole puzzle and this certainly is a wildcard at this point. Richard Hightower: Okay. That's helpful. And then finally, just a quick one, and maybe this is for Bret. And Bret, it's good to hear you on the other end of the line. Yes, of course. And then just on the guidance really quick, guys. There's a $0.04 swing on $1.04 midpoint for 4Q. So just help explain what the swing factors might be between now and the end of the year, which is obviously not so many days. Bret McLeod: Yes. Look, I think we've got clearly other income growth, which we mentioned is going to help alongside with that swing. And then we've got also rental income contributing in the fourth quarter as well. That pretty much makes up the difference on it. Mark Parrell: Yes. And just to understand the variation because that you're sort of highlighting that, that's $16 million of total difference. We do have our overhead stuff. A lot of the bonuses and other things, frankly, are determined in the current period. So we don't know those numbers. The same with a lot of medical reserves and things, Rich, that kind of are inside baseball and not particularly interesting, but do have an effect on the numbers. So that was just giving us the ability to deal with those in the period. I mean we obviously feel good about the midpoint or we wouldn't have said it there, but there are puts and takes at the end of each year, and they are, frankly, relatively unpredictable and uncorrelated to each other. Operator: Your next question will be coming from the line of Jamie Feldman with Wells Fargo. James Feldman: So I guess just some of the line items in our model, we're hoping to get a little more clarity on as we think about '26. Can you talk us through your latest thoughts on loss to lease, if the pushout of other income will affect '26 at all, like there will be any kind of bump there that we should be thinking about? Any thoughts on your insurance renewal for March? And then any other key expense line items we should be thinking about? Mark Parrell: Wow, that's the gamut. It's Mark. I'm going to have Michael speak to loss to lease, which right now is to probably be by the end of the year a gain to lease thing and other income a little, and I'll talk to insurance, and we'll work on expenses for you a little bit. But we are, just to be fair, rolling numbers up. I mean we don't have visibility into a lot of these numbers at the level of precision I think you're asking, but we can talk directionally. Michael Manelis: Yes. And I think, Mark, this is Michael. Mark just hit on it, right? Today, the snapshot of the portfolio, we have a gain to lease of about 1%. This is where the portfolio was in November of 2024. And I think while we originally modeled to have a little more pricing power kind of through this peak leasing season, all of this stuff does appear to be very consistent in the fact that many of the other metrics and that everything is happening about a month sooner than normal. So my expectation is that we're going to start out 2026 in a continued gain-to-lease environment, and then we'll go through the leasing season. And as Mark just talked about, many of those variables is going to dictate how quickly we shift back into a loss to lease, which is kind of what happened to us in 2025 because we started out in a moderate gain to lease and very quickly moved into a loss-to-lease environment. I'll also hit on one of the other items. So I think as Bret alluded to, some of the shift in the other income that we saw in '25, it's really just a timing delay, and we're talking about -- it's a couple of million dollars that deferred from 2025 into 2026. So yes, it's going to help in '26, but we're still in this process of rolling all of this up to understand exactly what the full contribution from other income will be to revenue. Mark Parrell: Yes. And insurance, just to hit on that, for us, pretty small line item, 3% or 4% same-store expense, a good number this year after some really outsized numbers. Let's see how the rest of the hurricane season goes. We don't have hurricane exposure in our portfolio, but it does affect the marketplace as a whole. So right now, it feels like the loss history or losses these insurers have incurred hasn't been very high. But we'll be pretty careful and thoughtful, Jamie, like we always are on the fourth quarter call with the building blocks on revenue. I mean, clearly, there is going to be more emphasis on intra-period revenue growth next year to get to good numbers because the embedded will be good, but about the same as it was this year. I think we got something we can give you on occupancy because some of the markets are very, very highly occupied like New York. But we have opportunity in Los Angeles and some of these expansion markets, and that number has opportunity. I think we continue to have really good, interesting other income initiatives that provide value to our residents that continue to roll out successfully. And there's pluses and minuses in timing, but those will be in there, too. So there will be a pretty fulsome discussion with you when we get there. But I feel confident about next year. It feels like the setup is good. And the biggest thing we need is just some level of job growth. And then I think we're off to the races. James Feldman: Okay. Great. That's very helpful. And you guys have quoted a couple of times now the 6.2% income growth since 2019. If you were to mark that over the last 12 months or even thoughts going forward, like where are we today on that number? And how does it differ across your markets? And what does that tell you about your ability to push rents? Mark Parrell: So Jamie, just to clarify, 6.2% is year-over-year for all our new residents across the whole portfolio. 22% is the increase of all employment in San Francisco Metro area in wages. So it's grown by 22% since 2019, not just our residents, just in general, incomes have and rents in the market are a little above, but in the downtown area below what they were in 2019. So that's what we meant by that. Is that helpful clarification? James Feldman: Yes, I was thinking more across like other markets. Are you seeing deceleration, acceleration? I assume that will be -- that's a big governor on how much you can push rents. Just any other -- anything else that as you look at the data stands out to you guys? Michael Manelis: I mean I guess I would just look at what I would say as an affordability index of rent as a percent of income. And based on new move-ins coming in, in the quarter, we're running just below 20% rent-to-income ratios, which gives us a lot of confidence in the financial health of our consumers and the ability for them to be able to absorb kind of whatever the market rate growth is. Mark Parrell: And income growth has been pretty good across all our markets. It's that rent growth is widely varied. So some places, rent growth has been relatively significant until 2 years ago and then went down like in the Sunbelt markets. But places like Seattle and San Francisco, that's the dry powder that people, if we give them a great experience and if the supply picture improves, we have a bigger opportunity there because they have good incomes and they've had good income growth in nominal dollars, while rents in nominal dollars haven't moved very much. Operator: Your next question will be coming from the line of John Kim with BMO Capital Markets. John Kim: You're probably going to hate this question. But Mark, you mentioned that your Sunbelt markets are seeing a significant lack of pricing power, and that's due to the lingering impact of new supply. You've been talking about that for the last several years. Michael, you mentioned that net migration trends are favoring San Francisco and New York due to tech and AI demand. Yet this quarter, your Sunbelt concentration continues to grow with the acquisition in Arlington. But just given those dynamics that you're seeing today and the fact that your same-store NOI in expansion markets are down 7%, have you thought about pausing acquisitions in Sunbelt? Mark Parrell: I don't hate that question at all. I like that question, John. Thank you. I mean we're committed to the strategy of having a sort of all-weather diversified portfolio. Like we said at Investor Day, we're trying to balance supply-demand opportunities and risks as well as regulation and resilience and kind of have a portfolio that is very consistent and is just a cash flow growth machine. That said, we don't have a clock over here. Right now, it is not in our shareholders' best interest to continue to move quickly into these expansion markets, not just because of the forward next year's likely numbers in those markets, but because of the price. When we were buying earlier, we were buying better at better prices. And right now, 5%, 4.75% cap rates that Bob and his team have been bringing to us and premiums to replacement cost from our perspective, given where the stock is, is not a prescription for long-term investment success. So again, no clock over here. We like being more diversified in the long run, but we will do the best thing in the current period and in the long run. The great thing about the buyback this quarter and potentially going forward is by selling these lower growth assets in our existing markets, in the coastal markets, we're improving the growth rate of our NOI going forward. We are improving the percentage of exposure because we're lowering the denominator in these expansion markets. So -- and by the way, we're making a great arbitrage trade between private and public. So it kind of works all those ways, but you shouldn't think that we feel like we've got a clock going off that we need to finish this by a date. There's an opportunity to do it accretively, we're going to hit it. And if not, we're going to stand still or buy our own stock. John Kim: Okay. Michael, you mentioned in your response to Brad's question about what you're seeing in D.C. today that net effective pricing is down 4%. And I just wanted some clarification on what that meant. Is that what you're seeing currently on leases signed or what you're seeing kind of year-to-date? Michael Manelis: Yes. John, this is Michael. So what I was saying, so D.C., I want to make sure we're clear. I'm talking about the micro submarket of like D.C., the district, D.C. kind of Northwest, excluding Maryland, Virginia kind of portfolios. And when I referenced the rates, that's our pricing trend. So basically, you were out looking on our website and you basically snapshotted today with the net effective price against all those concessions compared it to the exact same day last year, same methodology, where would rents be on a year-over-year basis. How that manifests itself through the blends and through the new lease change, it's not fully correlated because new lease is very much subjective to who moved out and then who moved into that unit and the time duration in between all of that. But I think just that spot check in time of where rents are -- absolute rents are on a year-over-year basis is an indicator of what when I was saying that we felt pressure in isolated pockets. What did I mean by that? John Kim: But the pricing trend tends to be a leading indicator of where blended rates are? Michael Manelis: Yes. I mean there has to be some correlation, right? If rents are down 4% and I'm getting ready to generate renewals, that's going to put pressure on the quoted renewal offers that go out in the marketplace. Operator: Your next question will be coming from the line of Alex Kim with Zelman & Associates. Alex Kim: Could you talk about what you're seeing in the transaction market and just the quantity of for-sale supply in your markets? What does the kind of bid-ask spread look like? And could you put that in the context of the share buyback. Robert Garechana: Yes. It's -- Alex, it's Bob, and I'll start and maybe some of the team will augment a little bit. In terms of transaction volume, and we're seeing pretty healthy transaction volume in the private markets, right? So it's a very big -- as Mark has mentioned a few times on the call already, there's a fairly large disconnect between what you're seeing in the public markets versus the private market. So volume overall is about on parity with 2024, which in broader kind of historical context is about 50% of what we would have done pre-pandemic, but has, in fact, been accelerating. It's a tale of different markets and different assets. So when you have assets that are in that kind of down the middle of the fairway, call it, $80 million to $100 million relatively new, maybe a little bit of light value add, you see a lot of bidders in the tent. You see a decent amount of transactions and you see sellers getting good prices around that kind of 4.75% cap rate that Mark alluded to in his last response, and that's fairly active. If you look at larger scale transactions, larger assets, assets that might have a mixed-use component of it, there isn't much of a bidding tent. There isn't a lot of people interested there. And that also applies to some of the geographies, right? Some of the markets that are more geographically challenged because the operating momentum may be a little bit weaker, you're not seeing a lot of activity there. But there are -- there is plenty of private capital out there in general, and it's fairly liquid and pretty aggressive on pricing. So the opportunity set, as we've said on the call already, is our share is more at the moment. Alex Kim: Got it. Yes, I appreciate the detail there. And then I noticed that the completion date for your unconsolidated development in Washington State was pulled forward about a year. Could you talk about what allowed for the faster construction time line? Mark Parrell: Yes. So Bret and I were actually just out there in August. And it's a market where the rain and seasonal patterns matter a lot, and they got the footings in early and some of the more complex riskier excavation work done faster than they thought, and it was just kind of binary. And it's moving along really, really well. Kirkland is a great place to have a brand-new asset. We're really excited about that and thrilled that we'll be getting our hands on it a little sooner. But it really was we made a sort of average estimate on how long it would take. And some of this more complex and riskier, frankly, excavation and other work just got done really quick and really well without any problems at all and off to the races we are now with framing and a lot of stuff that is generally more routine. Operator: Next question will be coming from the line of Omotayo Okusanya with Deutsche Bank. Omotayo Okusanya: As we're about to go into election cycle, just curious if there are any states or counties that you're kind of watching for anything on any kind of ballot that could have an impact on your rent practices? And then specifically also kind of around New York, any thoughts on the mayoral race and any potential implications? Mark Parrell: Sure. It's Mark. Thanks for that question. So I'm going to start by taking a little bit of what I think is a fair and more optimistic take on regulation. I mean we've had good activity in California with Governor Newsom's leadership and passing a new law that really liberalizes zoning in areas that are near transit hubs and will create more supply and is really good public policy. And similar, frankly, to what was done in a very red state down in Florida. So there are a lot of places where there's a lot of good things going on in terms of increasing housing supply. Congress or at least excuse me, the Senate passed a bill that was bipartisan, again, supporting housing. The federal government doesn't have nearly the tools that the states and localities do, but that was very positive as well. In terms of areas of concern, areas of focus, New York, I mean, we've talked about it on prior calls. We are assuming, I think, like many that Mr. Mamdani will win. The industry associations we belong to have been in conversation with him. He has said in his various campaign announcements he'd like to increase supply a lot in New York. And the private sector builders are the ones who can do that for. So our message to him through our association is use us to help add to New York's housing supply and that rent control is bad. By the time he gets in office, if he wins and the rent control stabilization Board speaks on these rent issues, we're just going to have a very small percentage of our units subject to that risk. So for us, it's not as significant directly. But certainly, we want to keep having those conversations if he ends up being the mayor and push these supply-side solutions, programs like the new 421a program and things like that are really positive. We are keeping our eyes on Seattle. There's a big mayoral election there next year -- or next week, pardon me, that is important for the city to continue to make progress. So those are the areas. But again, we've seen a lot of positives as well as things we need to keep focused on as an industry. Omotayo Okusanya: That's helpful. Then one more for me. From an operating expense perspective, kind of any other opportunities to kind of keep making progress there? Again, I know like same-store payroll was down like 2% year-over-year. So just curious, any other levers that can be pulled in that area to kind of contain operating expense growth? Michael Manelis: Maybe I'll start and Bret can kind of add some color on top of it. I think just in terms of operational excellence, the reality is you're just -- we're never done with that pursuit. This is something that's wired into the DNA of our company. We just outlined in my prepared remarks, some of the initiatives that we've been working on to layer in kind of continuations of automation, centralization. And all of those do lead to kind of reduced payroll and operating efficiencies being garnered inside the portfolio. So we're really excited. I wouldn't even say that we're in the early inning. There's still a lot of opportunity in front of us to become a more efficient kind of operator by leveraging technology. Bret McLeod: I might add, just I think one of the things we called out was utility expenses were a bit higher. I think one of the areas that stood out was cash. And I think there's some opportunities for us, as Michael alluded to, to put some best practices in place where we can actually really drive that specific number down. And I think that will be helpful as we go into next year. Operator: And it appears there are no additional questions at this time. I'll turn the call back to Mark Parrell for closing remarks. Mark Parrell: Thank you, Shelley. I thank everyone on the call for their interest in Equity Residential, and we'll see you on the road over the next few months. Thank you very much. Operator: This concludes today's call. Thank you for your participation. You may now disconnect.
Operator: Thank you for standing by. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the ProPetro Holdings Third Quarter 2025 Conference Call. [Operator Instructions] It is now my pleasure to turn today's call over to Matt Augustine, Vice President of Finance and Investor Relations. Please go ahead. Matt Augustine: Thank you, and good morning. We appreciate your participation in today's call. With me are Chief Executive Officer, Sam Sledge; Chief Financial Officer, Caleb Weatherl; President and Chief Operating Officer, Adam Munoz; and President of PROPWR, Travis Simmering. This morning, we released our earnings results for the third quarter of 2025. Please note that any comments we make on today's call regarding projections or our expectations for future events are forward-looking statements covered by the Private Securities Litigation Reform Act. Forward-looking statements are subject to several risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and risk factors discussed in our filings with the SEC. Also, during today's call, we will reference certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release. Finally, after our prepared remarks, we will hold a question-and-answer session. With that, I would like to turn the call over to Sam. Sam Sledge: Thanks, Matt. Good morning, everyone. Thanks for joining us today. In the third quarter, ProPetro once again demonstrated resilience despite continued uncertainty in the broader energy markets, driven by tariffs and rising OPEC+ production. Our operational and financial results proved that the strategy we put in place is working. Our focus on capital-light assets and investments in our company's industrialized operating model helped us achieve another quarter of free cash flow generation in our completions business in an industry that has experienced stagnation. To put this into perspective, we still believe that approximately 70 full-time frac fleets are currently operating in the Permian as compared to approximately 90 to 100 fleets at the beginning of this year. This demonstrates the depressed activity levels in the completions market in the Permian Basin and is also indicative of a larger slowdown across energy markets. However, we are proud of the efforts we've made to implement a system focused on reactive cost reductions and flexible capital expenditures that allow our legacy completions business to generate sustainable free cash flow even during challenging periods like this. With sustainable cash flow, ProPetro is able to support and help fuel growth in our PROPWR segment. As we stated last quarter, we expect the challenging operating environment to continue into at least the first half of next year as impacts from tariffs and OPEC+ production increases drive further uncertainty across the energy markets. That being said, we believe that ProPetro is in a great position to continue to navigate the market as we execute on our plans and ensure we remain disciplined in our approach. We've built and continue to reinforce the foundation of our business by making strategic capital-light investments in the future of ProPetro with PROPWR and our FORCE electric fleets, both taking priority. We're controlling what we can control and have rigorously analyzed our costs across the business and taking decisive action to implement reductions where needed. We've also implemented measures to help us react quickly to any significant changes in activity levels as we continue to serve our first-class customers. All these measures have put ProPetro in a position of strength in the Permian, led and operated by our first-class team. We believe that even if the market further weakens, we'll continue our strong performance. As you are all aware, pricing discipline has softened at the lower end of the market, particularly among subscale frac providers. Fortunately, these operators now represent a much smaller portion of the market than in previous cycles. While we did have opportunities to keep virtually all of our fleets active, we proactively chose to idle certain fleets rather than run our fleets at subeconomic levels, preserving them for favorable market conditions in the future. The smaller and less disciplined companies are struggling to sustain returns at these undisciplined prices, which over time favors the well-capitalized providers like ProPetro that have next-generation assets and industry-leading efficiencies. We are well-positioned for this reality with a strong balance sheet, deep relationships with first-class customers and a culture anchored in safety and performance. I firmly believe that market cycles present valuable opportunities, and we are committed to emerging from this period even stronger in a completions market that will be healthier and more balanced from a supply and demand perspective due to accelerated attrition among lower-tier competitors. Before I dive into an overview of our results for the quarter, I want to discuss the strategic actions we're taking to support resilient financials. Recently, we secured an additional contract for 1 frac fleet, increasing our total to 7 contracted fleets, which includes 2 large simul-frac fleets. Approximately 75% of our fleet now consists of next-generation gas burning equipment. Of our active hydraulic horsepower, approximately 70% is committed under long-term contracts. Over time, we plan to continue to allocate capital to our FORCE electric equipment, given its high demand, successful contracts, commercial leverage, which we expect will further derisk future earnings. That said, before ordering additional FORCE equipment, we need additional visibility into customer demand and growth to justify those investments. On the PROPWR front, we're very excited about the significant progress we've made over the past several months, including the deployment of our first assets in the field where we have observed excellent operational efficiency and reliability. Furthermore, as announced earlier this week, we secured a long-term contract to commit approximately 60 megawatts to support a hyperscaler data center in the Midwest region of the United States, marking our entry into the data center power market. This builds on our previously announced inaugural contract last quarter, which committed 80 megawatts over a 10-year term to a distributed oilfield microgrid installation. Additionally, during the quarter, we signed another infield power contract to support production operations for a Permian E&P customer. We are also in advanced negotiations and deployment planning for a long-term 70-megawatt agreement with a large Permian E&P operator that is expected to include asset deployments before year-end and will support a turnkey distributed microgrid installation. In total, we now have over 150 megawatts contracted with expectations to reach at least 220 megawatts contracted by the end of the year. While we are pleased with both our current contracts and those nearing completion, we're even more optimistic about future growth. Given the accelerating demand for power, our active commercial pipeline and the expansion and extension opportunities available with our existing customers, we believe we are poised to deepen existing relationships, expand our reach to new partners and drive substantial long-term growth. To support our expanding commercial pipeline, we placed orders for an additional 140 megawatts of equipment, bringing our total delivered or on order capacity to 360 megawatts. We expect all of these units to be delivered by early 2027, with contracts expected to be in place ahead of delivery. Thanks to our strong relationships with supply chain partners, we are well-positioned to order additional capacity and anticipate 750 megawatts delivered by year-end 2028. Notably, we have also included additional 5-year growth guidance for PROPWR in our updated investor presentation deck. We currently estimate that the total cost of this equipment, including the balance of plant, will average approximately $1.1 million per megawatt. To help fund this growth, we've executed a letter of intent for a $350 million leasing facility with an investment-grade partner experienced in power generation financing. In today's challenging completions market, access to external capital is critical for scaling our power business. We will utilize this facility judiciously, drawing funds only as necessary to accelerate or expand projects. With long-term take-or-pay contracts, durable assets and robust expected returns, we believe PROPWR is well-positioned to leverage debt effectively in a disciplined as-needed manner to pursue its growth objectives. This is still just the beginning for PROPWR. Our momentum in securing customer commitments continues, and we are actively negotiating additional long-term contracts. The demand for reliable, low-emission power solutions is accelerating, and we believe we are well-positioned to capture this opportunity. Looking ahead, we intend to grow in our oilfield power projects while also seeking to further expand in the data center arena given the significant build-out underway in that sector. We see clear potential not just to grow but to multiply our installed capacity with expectations of 1 gigawatt or greater by 2030. Caleb will discuss our financial results in more detail in just a moment, but I wanted to highlight that despite the activity headwinds I've discussed, which led ProPetro to idling three fleets from the second quarter, our team responded quickly and continued to set the standard for operational excellence and efficiency. We've taken a disciplined and aggressive approach to cost controls, particularly regarding maintenance capital spending, which was a key factor sustaining free cash flow. While we had to take steps to rationalize operating expense given lower activity levels, pricing remained relatively stable as we continue to be disciplined on price. Running our fleets at subeconomic levels would damage our ability to ensure we are best prepared to capitalize on future opportunities as market conditions improve and rapid deployment is needed. Therefore, we will remain disciplined. Going forward, and as I mentioned briefly above, near-term demand visibility in the completions market remains limited, and we expect the challenging operating environment to persist into 2026. That said, we like what we are seeing for our current active fleets and expect to maintain 10 to 11 active fleets in the fourth quarter with normal holiday seasonality effects. However, the company anticipates a sequential improvement in the PROPWR segment, which should help offset holiday impacts and bolster margins. Looking ahead and under current market conditions, the company expects to sustain at least this level of frac activity into 2026. Fortunately, ProPetro is in a great position with a strong balance sheet, a refreshed next-generation asset base, and first-class customers. We're excited to continue investing in PROPWR, our key growth engine, which is set to make a significant impact starting in 2026. Our achievements are a direct result of our unwavering dedication and support of our outstanding team. With that, I'll turn it over to Caleb. Caleb Weatherl: Thanks, Sam, and good morning, everyone. As Sam mentioned, the third quarter again demonstrated the industrialized and resilient nature of ProPetro. We're proud of the work we did to generate free cash flow in our Completions segment and the significant progress made in our PROPWR business, including securing a letter of intent for a flexible financing agreement that will help enable future growth in our PROPWR business. Through the quarter, we took targeted actions to optimize costs from legacy completions operations. This has helped us navigate a challenging market dynamics and positions ProPetro for success in this part of the cycle. Looking at the income statement, financial performance across the third quarter was buoyant despite overall activity levels decreasing from the second quarter. This strength is an indicator of our differentiated service offering, our strong customer base, focus on the Permian, operational excellence, and ability to quickly remove costs from the business. ProPetro generated total revenue of $294 million, a decrease of 10% as compared to the prior quarter. Net loss totaled $2 million or $0.02 loss per diluted share compared to a net loss of $7 million or $0.07 loss per diluted share for the second quarter of 2025. Adjusted EBITDA totaled $35 million, was 12% of revenue and decreased 29% compared to the prior quarter. This includes the lease expense related to our electric fleets of $15 million. Net cash provided by operating activities and net cash used in investing activities, as shown on the statement of cash flows, were $42 million and $43 million, respectively. Free cash flow for our completions business was $25 million. As Sam mentioned, our legacy completions business continues to generate sustainable free cash flow. Although activity and related revenue declined from the second to third quarter, we effectively optimized our completions CapEx, primarily because our completions business is expected to remain in maintenance mode for the foreseeable future with very disciplined allocation to growth CapEx. This demonstrates what we have consistently communicated over the past several years. Even in today's challenging market environment, we operate with the consistency and reliability expected of a mature industrialized enterprise. During the third quarter, capital expenditures paid were $44 million, and capital expenditures incurred were $98 million, including approximately $20 million primarily supporting maintenance in the company's completions business and approximately $79 million supporting its PROPWR orders. During the quarter, some of the PROPWR spending was accelerated as our supply chain partners have consistently delivered equipment efficiently and on time or ahead of schedule, allowing us to meet customer demand sooner than expected. Notably, the difference between incurred and paid capital expenditures is primarily comprised of PROPWR-related CapEx that has been financed and paid directly by the financing partner and unpaid CapEx included in accounts payable and accrued liabilities. We will continue to evaluate the market and scale CapEx as activity demands. But as we sit here right now, the company anticipates full-year 2025 capital expenditures incurred to be between $270 million and $290 million, down from the $270 million to $310 million range highlighted in the company's second-quarter earnings report. Of this, the completions business is now expected to account for $80 million to $100 million, a reduction from last quarter's guidance given the realized decline in completions activity and the ongoing cost optimization efforts. Additionally, the company now expects to incur approximately $190 million in 2025 for its PROPWR business due to accelerated delivery schedules and down payments to support additional orders. In 2026, capital expenditures for PROPWR are projected to be between $200 million and $250 million, depending on further accelerated delivery schedules and additional orders. This outlook is based on the current 360 megawatts of PROPWR equipment on order with plans to reach a total of 750 megawatts delivered by year-end 2028. While these PROPWR capital expenditure estimates reflect the total cost of the equipment, they do not account for the impact of financing arrangements, which are expected to reduce the near-term actual cash outflows or cash CapEx required from the company. Cash and liquidity continue to remain healthy. As of September 30, 2025, total cash was $67 million, and borrowings under the ABL credit facility were $45 million. Total liquidity at the end of the third quarter of 2025 was $158 million, including cash and $91 million of available capacity under the ABL credit facility. Lastly, we'll continue to take a disciplined approach when it comes to deploying capital as we look to remain flexible and dynamic, providing us with the ability to pivot between our key priorities and allocate capital to the highest return opportunity. Regarding the $350 million lease financing facility we have agreed to terms on via a letter of intent, I want to again reiterate that this facility is designed to maximize our financial flexibility, enabling us to draw funds only as needed to accelerate or scale PROPWR projects. We intend to be highly disciplined in how we utilize this facility, ensuring we preserve a healthy balance sheet while also supporting our continued growth in PROPWR. We expect that effective use of this facility will accelerate returns for shareholders and help us achieve our long-term growth objectives more rapidly. Sam, back over to you. Sam Sledge: Thanks, Caleb. The work we've done and the investments we've made over the past few years have reshaped ProPetro. Today, we are a dynamic company, well-positioned not just to survive but to thrive. Resiliency is at the core of our business as demonstrated by our ability to successfully navigate market cycles throughout the company's 20-year history while continually evolving into the modern organization we are today. While we did report lower revenue this quarter, we also demonstrated our nimbleness in reacting to market conditions, successfully maintaining strong free cash flow in our completions business. We've proven that our business is sustainable through cycles as our legacy completions business helps fuel the growth of PROPWR. As demand for power generation continues to ramp, ProPetro will continue to benefit. We're already seeing strong commercial wins, capitalizing on existing demand by ordering more generation capacity and positioning the business for future success by obtaining flexible financing that will enable future growth. We will continue to execute on our strategy that has allowed us to proactively respond to changing market conditions in a decisive and effective way. The benefits of this approach are evident in our recent results. Despite the challenges currently facing our industry, we remain confident in our strategy and the future of ProPetro. We have positioned ourselves for success through several key strengths, including our best-in-class team, whose dedication and exceptional effort set us apart each and every day. I want to thank them for their performance we delivered this quarter, as they give me and the entirety of our leadership team the confidence to continue pursuing our strategy. Operator, we'd now like to open the call to questions. Operator: [Operator Instructions] Our first question comes from the line of Derek Podhaizer with Piper Sandler. Derek Podhaizer: The 60 megawatts, just hoping that you can expand on some of the details for us. Maybe first, what type of power solution you're deploying here? I know you have a mix of recipes turbines and batteries. And then just thinking about that 60 megawatts as your starting point, how do we think about this contract expanding over time, both in capacity and duration? Just thinking about the other comps that are out there that we've heard that are up in that 1-to-2-gigawatt range. Sam Sledge: Hi, Derek, it's Sam. I just want to make sure we get your question right. I think we missed the first part of your question, but we caught most of the tail end. But is it correct, you're focused in on the announcement we made Monday around the data center? Derek Podhaizer: Yes. Yes, the 60-megawatt data center announcement, the type of kit that you're bringing there. I know you have recipes, turbines and batteries in your portfolio. And then as far as kind of scaling that over time into some of the deal comps that we've seen out there in that 1-to-2-gigawatt range. Sam Sledge: Sure. Yes. I don't know if you caught it earlier in Matt's introduction. We have Travis Simmering on the line with us this morning, the President of our PROPWR business to help answer some of these questions. So, I'll let Travis talk a little bit about that. Travis Simmering: Derek, this is Travis. So as far as the technology goes, we did mention that it's reciprocating engines and battery energy storage systems for this project. That was actually driven by a customer request. We feel really confident in both turbines and recipes for these types of deployments. And we feel that the battery energy storage systems provide a differentiator for us, which I think is proven out by the customer selecting us for this contract. As far as how this fits into the data center market, we feel like this is just the start for us. This site will have more capacity at it. There will be more sites like this. This is just how the PROPWR technology and our experience fits into the overall site. So, we're excited to see how we can grow with these existing partners in both term and capacity. Sam Sledge: And Derek, I'll just add something to that, maybe more kind of high level and fundamental. We've learned and definitely I've learned being mostly or totally an oilfield service person in my entire career that, one, this data center space is very, very quickly evolving. And I think things are changing and moving and flavors are changing very quickly. Also, secondly, there's a lot of different ways to play this data center space. And we presume there will continue to be more layers of opportunity moving forward. We're super excited for this to be our first entrance into this arena with first-class counterparties on the other side. So, it's pretty exciting and more to come. Derek Podhaizer: That's very helpful. Second question, I just wanted maybe some more details around future funding structures. Obviously, you've just implemented that $350 million facility, that brings you with the 1.1 that kind of implies over 300 megawatts there, and that takes care of your initial, the next phase of that 140. But when you start targeting 750 megawatts and then going over 1 gigawatt, obviously, we're going to need some more capital here. Can you just help us understand between some of these long-duration contracts, whether those are ESAs or PPAs. We've seen some peer financing, whether it's converts or maybe some like high-yield debt offerings. Just help us understand that the liquidity runway and the funding gaps that you have and how you might be able to fill that with future sources of capital. Sam Sledge: Yes. Great question. I'll make a comment, and Caleb will probably want to opine further on it. But I think first thing we want to do is prioritize the use of our own organic free cash flow in our business. So, I think that's funding mechanism number one. Even in a weak completions market, we still had our completions business spit off $25 million of free cash flow in the third quarter, and we're able to use that money to fund growth initiatives. And then there becomes a point where this business becomes of such significance and kind of compounds on itself where it starts to fund a lot more of its own growth. And I think that happens pretty quickly, maybe even into the back part of next year. And we also have a lot of other options of which you mentioned some, Caleb, I don't know if you want to say anything about any of that. Caleb Weatherl: Yes. Derek, this is Caleb. Thing about the leasing facility, keep in mind is that it's flexible and that we only draw on it as needed, unlike a bond where you immediately have all the cash upfront. And so, like Sam mentioned, even in this challenging market with the significant free cash flow that our completions business generated, we're going to fund as much of the CapEx out of cash flow as we can. It's also important to recognize that PROPWR can support more leverage than a traditional oilfield services business. Like Sam mentioned, we're securing long-term take-or-pay contracts in this business, which is really more like contract compression than traditional frac and those contract compression businesses can support more leverage. Also, I think putting this lease facility in place just solidifies our ability to fund the CapEx if needed. It doesn't take any other funding options off the table. It only ensures a funding option that we know is attractive with an investment-grade partner that has a deep history and knowledge in the space. Sam Sledge: Yes. I guess last thing I'll say is I think about it a little bit more, we're going to be in constant pursuit of flexibility, like Caleb mentioned, and low cost -- low cost of capital. So, what we're doing right now, we think, is the best thing to fit those categories given the current state of our business. If we're able to achieve, which we're very confident in the kind of growth trajectory that we've talked about this morning, the business looks different. The cost of capital can change and the tools that we have access to at that point are much different. So, this is likely kind of a changing funding approach as the business grows and scales into the future. Operator: The next question comes from the line of Eddie Kim with Barclays. Edward Kim: Just wanted to circle back on the 60-megawatt data center contract. I don't believe there was a contract term or duration disclosed with that. Would you be able to talk about, is it similar, longer, shorter than the 10-year contract you signed for the 80 megawatts for the Permian microgrid? And just taking a step back, I mean, how are you thinking about term in this environment? Would you actually prefer shorter-term in anticipation of pricing potentially moving higher over the next several years? Or would you prefer as longer-term as the customer is willing to offer? Just any thoughts there would be great. Travis Simmering: Eddie, this is Travis again. So, we did say it's a long-term contract. That's all we're really going to say for competitive reasons on the 60-megawatt contract that we signed. As far as long term versus short term, we evaluate each one of the deals on a kind of case-by-case basis. I think it's a fair point to discuss higher pricing that could happen in the future. But if we see strong partners that are willing to sign up at return thresholds, we're comfortable with, then we're going to sign a long-term deal. And so, we're really excited about having the optionality to be able to look at maybe shorter-term deals with higher margin, but also these long-term partnerships that we can really put sustainable contracts on the books for a long time. Edward Kim: Understood. And then just my follow-up is on the cost of the equipment. You mentioned that the total cost of your equipment, including balance of plant is going to average about $1.1 million per megawatt. I'd imagine that for this data center contract, I mean, that comes with battery storage solutions, which I can't imagine are included for the Permian microgrid. So, could you just maybe talk about the cost differential of the equipment -- on equipment going to data centers versus Permian microgrids? Sam Sledge: Yes. I don't think there's a huge delta between the 2. I mean the battery systems are kind of baked into our economics around that 60-megawatts and the CapEx at $1.1 million as an average throughout kind of our portfolio of equipment. So, we've done really a great job, and I'm super proud of what we've done on the supply chain side so far, building out strong partnerships on the OEM side and the packaging side to be able to do what I think is near best-in-class on a cost of capital for this equipment. Operator: Next question comes from the line of Scott Gruber with Citigroup. Scott Gruber: Sam, great to see the penetration into the data center market. As you step back and kind of look at the opportunity set, how do you think about deployment of all your megawatts you're talking about here, whether it's the end of '28 or '30, how do you think about those being spread across oilfield contracts, data center contracts or other end markets by the time you kind of get out toward the end of the growth period? Just kind of talk us through how you envision the spread. Sam Sledge: Sure. Great question. I think that's something that we're talking about quite a bit as we dedicate or allocate resources and internal energy and attention. If you look at the kind of 220 megawatts or a little bit more than that, that we talked about being contracted by year-end, 60 of that being data center and the balance being oil and gas, I think maybe in the immediate near-term, that kind of distribution might stay pretty similar. But over time, as you've seen with other announcements and other things going on in the data center space, those are probably a bit more chunky in nature to the larger side. So that could change that ratio very quickly as we kind of continue to pursue more of these data center contracts. Is that 50-50? Is it 60-40, one way or the other? Or is it 80-20 one way or the other? I think right now, it's tough to say. I can tell you, which has already kind of been mentioned a couple of times here in our scripted remarks in our Q&A, we're in pursuit of what we believe the best return is, coupled with what we think continues to help us produce long-term opportunities and stability in our business. And as evidenced by what we've already accomplished in the oil and gas space with our inaugural contract being 80 megawatts in 10 years, it's hard to get even deals like that in certain data center applications. So, it's all about the economics and what projects and relationships help us build kind of compounding relationships into the future. So hard to give you straight numbers, but it will be a balance of both. We're building a team that can help us attack kind of both of those categories and we're excited to be a player in both spaces in a really big way. Scott Gruber: And are the economics that you're seeing across the different verticals pretty similar? I mean, obviously, the term you've gotten in the oilfield has been great and kind of matched what we're hearing on the data center side. But can you talk to us about paybacks and other Ts and Cs? Just kind of how do you view the economics of oilfield versus data center as we start to see more contracts flow here? Sam Sledge: Yes. Right now, we're seeing economics being pretty similar. The equipment footprint that we have in both areas is very similar. And so, the way we're deploying might be slightly different based on technology. But in most cases, it's relatively similar. And so therefore, the return that we're looking at on both sides based on the contract term is about the same. Operator: Our next question comes from the line of Stephen Gengaro with Stifel. Stephen Gengaro: I think two for me, following, I think, on Scott's question a bit. When you think about the sort of, I guess, the cost of power for you on the frac side, do you get concerned that you're going to get power bid away or you're going to -- like how do you work that arbitrage if data centers are willing to pay more for power? And how do you think that ultimately impacts the frac business? Sam Sledge: Yes, it's a good question, and we've thought a bit about that. I think right now, as we sit here today, we feel pretty good about where we sit, especially on our existing electric fleets, who and how those are being powered, the commercial agreements for those. I think the returns for our power providers and ourselves are pretty good in that arena back to kind of my comment earlier about being in pursuit of the best economic return. I think others are -- I wouldn't say that's unique to us. I think power providers in the frac space are the same. We'll see what happens in the long-term. But I think in the short-term, we feel really good about how we're positioned there. There's also, as Travis has kind of mentioned and talked a little bit about equipment, not all the frac equipment can go do some of the data center stuff and vice versa. So, there's a bit of an equipment makeup gap there that I think kind of helps keep some of that where it is. Stephen Gengaro: And my other question is, when we think about what's going on in the power gen business, one of the things that I struggle with a little bit is, obviously, now the demand growth is excellent and the supply chain is tight. How do you think about -- and you do both, so you have a good perspective on the differentiation you bring to customers on frac versus power gen? Sam Sledge: I don't know if I understand your question, like how are we different in those two service lines. Stephen Gengaro: I guess which product line do you think is ultimately more differentiated and where you can bring an advantage to your customers. Sam Sledge: I think my quick answer to that is both. And I think it comes down to a focus on the customer. And we've always tried to build and grow our business with that very intense focus on the customer and what their needs are. The inverse of that is us just building whatever we think is cool and trying to push it into the market. That's not the strategy here. And what we think is just running our business in that fashion and very -- like a normal in a logical way is a bit unique. I think, as we bump into competitors in both of those arenas. And I think what we learn is that it's not just unique from like, say, an operational perspective where you're trying to make sure the customer is getting a very high quality of service, safe. And when they want to make tweaks or adjustments to how we work, that we're there to meet them for that conversation and to help them with that. I think that's important, and that is at the core of being a successful service company. It's understanding your role and understanding the relationship with the customer and how that benefits. Call it unique in that, but I mean, either way, that's a focus of ours. The other part of this is how we approach customers commercially that I do not think can be overstated really and taking that kind of listening here, open mind and the basket of creative solutions to each customer individually has benefited both us and our customers significantly in both sides of that business. It's already benefiting us in the power business, where we constantly hear our approach to that business is a bit unique and different. So, we're pretty proud of that. I'd say you need to maybe go ask 5 or 10 E&P operators in the Permian, what makes companies like us different. But as we see it, I think those are kind of the two main things that make us different. I don't know if -- wants to add to that. Travis Simmering: The only thing I'd add on the power side is I think what's unique in this sector is the requirement of having the technology expertise and flexible assets to be able to compete in various sectors. And so, we've done a really good job building out a really strong engineering team to support technologies like battery energy storage systems, which might be unique in the oilfield, but actually, we've got some experience with that. We're going to use those on both production applications as well as data center applications to reach high efficiencies and help manage the technology side of it. So, I think that's something a little bit unique. But as far as the customer approach and the service excellence at its core, I think that differentiation on both sides is there for sure. Stephen Gengaro: Now that's helpful. We get the question a lot. So, I'm glad to get your perspective. I appreciate that. Operator: Our next question comes from the line of John Daniel with Daniel Energy Partners. John Daniel: I guess I'll show my age and comfort zone and stick to the oil service business. But first, a clarification on fleet count. I'm going back to the basics here. When you're reporting your average fleet count, are you counting the simul-frac fleet as 1 or is that 2 fleets? Sam Sledge: Yes. We're still just counting that as 1. John Daniel: And then your EBITDA margins in frac were about 17% in Q3. And I'm assuming there is a noticeable gap between, say, your contracted FORCE fleets versus the other fleets. And I guess, first, is that a fair assessment? And if it is, at what point would you look to maybe park those lowest 1 or 2 fleets that is not contracted? Sam Sledge: Yes. I think your assessment of the difference between contracted and noncontracted is accurate. We did, in fact, I mean, what you're kind of alluding to, when would you decide to park more fleets? I think we did a very good, disciplined job of that in Q3 as evidenced by the 3 fleets that we took out of the system. We could be fully utilized today easily. I think that's kind of an obvious statement. We chose not to be because the lower end of the market is just in a spot where we think is unsustainable. So, we'll let others kind of play in that area and preserve our equipment for better times and better pricing. We have the balance sheet and the stability, and I think the position here in the Permian to be able to do that. So, we're thankful for that. Another part of this is especially on the -- almost exclusively on the -- like the Tier 2 diesel portion of our fleet, which is a shrinking and smaller part of our fleet than it ever has been. We referenced that 75% of our fleet is gas burning next generation today. And so, we're able to kind of harvest that diesel equipment and look at economics and operations in a little bit of a different way to make sure that we're both staying in the market being competitive, servicing what we think are top category customers and at the same time, bolster the economics of those operations. John Daniel: I've got two more. They're both quick, I promise. This one is for Caleb. If activity levels stay where they are, 10 to call it maybe 12 fleets, what is your preliminary guess on CapEx for the OFS businesses in '26? Are you willing to give some sort of a range? Caleb Weatherl: Yes. So, we're not providing official 2026 guidance at this time, but I'll make the high-level comment that we're in maintenance mode in the completions business. And we've worked to industrialize our business. We mentioned several times over the past year that we're not expecting massive growth CapEx cycles in the frac business as we've just worked to create steadiness and consistency in that business. So high-level, I'd just say maintenance mode, but I don't want to get too much beyond that. John Daniel: Fair enough. Final question. And hopefully, one day becomes a trend. But according to my always write stock quote app on my phone, it shows in the first 13 minutes of trading, you guys are up about 28%, 29%, which I'm guessing. So, congratulations, if that's right. But I'm guessing that's a function of your comments on power. So, when you see this type of reaction, and the price. How will that impact your views on maybe tactical consolidation in OFS if the market go to sticker power? What does that make you think about for strategy on the OFS side? That's it for me. Sam Sledge: Yes. I'll just say high-level and to reiterate some things we've said over the last couple of years. M&A is a part of our overall strategy. We've done that mostly via what I'd call horizontal integration with things like wireline, wet sand, a little bit of growth with the cementing acquisition over the last few years here. We've been very pleased with all of those. We've used a mix of equity and cash to do those deals. So yes, I mean, I think a higher stock price is better than a lower stock price. That said, I think we're most interested in just doing the next right thing. Kind of to tie that back to the comment I made earlier about. What are the competitive pressures and the size of the business and the margins in our business. And at any given point in time, what's the opportunity set in the circumstances. We know what those things are today. What are those things a month or 6 months or 5 years from now is a little bit harder to say. But I think we kind of stay true to our main strategy of trying to be a high-quality, cost-effective service company in all the service lines that we're in and to add to that in a disciplined manner that allows us to remain as competitive as possible with the top-tier customers here in the Permian Basin and possibly in other places. So, if our equity strengthens and some of those opportunities present themselves, and that's helps us do things to increase the competitiveness of our business, then we're open-minded, but we don't have anything on the table right now that we're depending on an equity price to help us with. I think we've got a solid, sturdy business that we're just trying to make the next right decision with. John Daniel: Fair enough. And I was thinking more just from the standpoint that more -- I mean, what you're doing and what Caleb said, most of your CapEx for next year is going to be maintenance on the OFS side based on what you would know today, right? And it just seems like the market is paying is interested in power, as you can see from all the questions you and others have had this earnings season. So anyway, congratulations, and thank you very much. Sam Sledge: Yes, John, just one last thing before we go to the next question on the line. And you know this well, John, but attrition continues, especially in the completions business and the pressure pumping business, where it is, in fact, the most equipment-intensive service line in oilfield services. So, there's consolidation happening via attrition every day. So, I think staying power, high-quality services, high-quality customers and kind of the structure of the business as we have it today on the completion side is, in fact, playing in consolidation without even playing in M&A. So that, I think is tailwinds long-term. You've written about that. We've talked about that, but I just want to make sure everybody understands that consolidation via attrition on the bottom end of the market is significant and will play a part in the supply and demand balance moving forward. Operator: Our next question comes from the line of Jeff LeBlanc with TPH. Jeffrey LeBlanc: I just had two. On the first one, I was just curious if you talk about the equipment mix moving forward, given that you've been more technology-agnostic than your peers. As you continue to move in the data center market, do you anticipate moving to larger turbines? Or are you comfortable with the current fleet mix or equipment mix you have right now? Travis Simmering: Jeff, this is Travis. So, we're comfortable with where we're at right now. We're likely going to do more of the same but are always looking at new technologies. The door is always open to look at larger power blocks, more efficient power blocks. And as we enter into different sectors within the data center space, we are certainly excited to use the team that we have to evaluate these technologies and come up with what we think is the lowest cost, most efficient solution for those types of projects. Jeffrey LeBlanc: And then on the data center opportunity specifically, do you see a greater opportunity in prime power applications? Or do you also see applications for bridge and backup? Travis Simmering: Yes. We're only participating in prime power type applications. We've built our team and our operational structure to support prime power, and that's really difficult to make work economically as a backup provider. So those are really the only opportunities we're looking at. That's what we do in the oilfield. That's what we're going to do in the data center space. So, we're really a prime power player. Operator: [Operator Instructions] We have no further questions in queue. I will now turn the call back over to Sam Sledge, Chief Executive Officer, for closing remarks. Sam Sledge: Thanks, everyone, for joining us on today's call. Before we finish the call, I'd like to just reiterate a couple of simple things. As it pertains to our power business, I think we're super proud to show the progress we've made in really less than a year since launching the business. Last December, we hired a team, announced the launch of the business. We quickly then started to acquire assets and obtain contracts. And as noted in our materials, we're already in the field generating revenue. It's been just a top to bottom across the board win, all of which has been supported by an existing platform and completions business that's providing operational support and free cash flow to fund that business. So, a huge team effort, but real wins, not just blue sky. So, all of that, I think has been supported and founded by the entrepreneurial spirit that exists inside the company today. It's been a little bit tough to show that entrepreneurial spirit the last few years, but with the opportunities that we see today and moving forward, we think that that's going to shine through here at ProPetro. Thanks again for joining us on today's call, and we look forward to talking to you soon. Operator: Thank you again for joining us today. This does conclude today's conference call. You may now disconnect.
Operator: Ladies and gentlemen, good day, and welcome to the Q2 H1 FY '26 Earnings Conference Call hosted by Larsen & Toubro. [Operator Instructions] I now hand the conference over to Mr. P. Ramakrishnan from Larsen & Toubro. Thank you, and over to you, Mr. Ramakrishnan. Parameswaran Ramakrishnan: Thank you, Ruthuja. Good evening, ladies and gentlemen. A warm welcome to all of you into the Q2 H1 FY '26 Earnings Call of Larsen & Toubro. The earnings presentation was uploaded on the stock exchange and in our website around 6:20 p.m. Hope you had a chance to take a quick look at the numbers. I will first walk you through the important highlights for Q2 FY '26 in the next 20 to 25 minutes or so, post which we will take questions. Kindly note that when the Q&A session starts, I will also have with me our Deputy Managing Director and President, Mr. Subramanian Sarma. Before I begin the overview, the disclaimer from our end, the presentation, which we have uploaded on the stock exchange and our website today, including the discussions we may have on the call today may contain certain forward-looking statements concerning L&T's business prospects and profitability, which are subject to several risks and uncertainties, and the actual results could materially differ from those in such forward-looking statements. I would request you to go through the detailed disclaimer, which is available in Slide 2 of our earnings presentation that we have uploaded today. I will start with a brief overview on the economic conditions in India and the Middle East, which are key markets for the company, especially for the Projects and Manufacturing businesses. The country that is India's economic outlook continues to remain optimistic. The domestic conditions are favorable with GDP growth for FY '26 projected between 6.5% to 7%, largely driven by retail consumption resilient services sector and steady CapEx. The new private sector capital expenditure plans are also being driven by increased investments in manufacturing, renewables, real estate, digital infrastructure and power generation projects, even as the public infrastructure continues at a steady pace. The economic growth in the Middle East is expected to remain stable, supported by a rebound in oil output, controlled inflation and continued diversification into non-oil sectors. However, flat oil revenues as lower prices offset the higher production may lead to a renewed focus on efficient and prioritized spending. Countries in the region are increasingly prioritizing natural gas and renewables over oil for domestic power generations as part of their long-term economic diversification strategy. This shift supports their transition to cleaner energy while enabling higher oil exports and greater value capture through petrochemicals production. Having covered the macro landscape, let me share some few important highlights for the quarter. The L&T's onshore and offshore hydrocarbon businesses have secured each ultra mega orders in the Middle East. The onshore order involves the setting up of a natural gas liquids plant and allied facilities, while the offshore order involves multiple packages, including EPC, installation of offshore structures and upgradation of existing facilities. During the quarter, we have entered into strategic MOUs and partnerships across our renewables, green energy, defense and semiconductor businesses, strengthening the foundation for our future growth. The renewables business within the Infrastructure segment has entered an MOU with ACWA Power for the renewables and grid scope of the Yanbu green ammonia project in Saudi Arabia. The scope involves multiple facilities, including solar photovoltaic, wind and battery energy storage system plants, along with associated substations and transmission lines. The cooperation involves a commitment from L&T to enter an EPC contract once the final proposal is accepted. L&T Greentech Limited, a wholly owned subsidiary has entered into a joint development agreement with ITOCHU Corporation of Japan to develop and commercialize a 300 KTPA green ammonia project at Kandla in Gujarat. Under the agreement, L&T Energy Greentech and ITOCHU will collaborate on the development of the facility with ITOCHU planning to offtake the product for bunkering applications in Singapore. The company has formed a strategic partnership with Bharat Electronics to support the AMCA program of the Indian Air Force. The consortium has submitted an expression of interest in response to a notification issued by the Government of India's Aeronautical Development Agency. L&T Semiconductor Technologies, another wholly owned subsidiary, acquired the power module design assets of Fujitsu General Electronics of Japan. As part of the transaction, the semiconductor company has acquired Fujitsu's R&D equipment, design patents and various intellectual properties related to power module technologies. Additionally, the semiconductor subsidiary has signed an MOU with the Indian Institute of Science Bangalore to jointly develop a national 2D innovation hub. The envisioned hub will serve as a world-class facility focused on next-generation semiconductor innovation beyond silicon chip technologies, placing the country at the forefront of global semiconductor research and development. Besides this, the company has reached an in-principle understanding with the government of Telangana, wherein the government will take over the Hyderabad Metro SPV by refinancing the current debt and acquiring the entire equity stake in L&T Metro Rail Hyderabad Limited. The contours of the final agreement are being finalized, and we expect this transaction to get consummated by the end of the current fiscal FY '26. The company has secured a sustainability-linked trade finance facility from a commercial bank worth USD 700 million. The facility is aligned with international sustainability standards and ties its terms to the KPIs such as greenhouse gas emission intensity and freshwater withdrawal, which are critical to L&T's operations. I will now cover the various financial performance parameters for Q2 FY '26. We continue to witness strong ordering activity in Q2 FY '26 across India and the Middle East, with order inflows growing 45% Y-on-Y. Supported by this sustained momentum, the order book expanded to INR 6.67 trillion as of September 2025, reflecting a 31% Y-on-Y increase and providing a strong revenue visibility in the near future. Our group revenues grew 10% Y-o-Y in Q2 FY '26. The execution levels remain broadly in line with expectations, barring a few sector-specific challenges. The Projects & Manufacturing portfolio margin improved from 7.6% in Q2 of the previous year to 7.8% in Q2 FY '26. As of September 2025, the net working capital to revenue ratio remained healthy at 10.2%, an improvement of almost 200 basis points Y-on-Y. Our continued emphasis on capital efficiency also translated into a further improvement in the return on equity, which rose to 17.2%, up 110 basis points Y-o-Y. I now move on to the individual performance parameters. During the quarter, the group order inflow stood at INR 1,158 billion, registering a Y-on-Y growth of 45%, reflecting the continued traction across our key businesses. Within this, the Projects & Manufacturing, that is the P&M portfolio delivered a strong performance with order inflows of INR 968 billion, up 54% Y-on-Y, underscoring the broad-based demand environment across both domestic and international markets. The growth in the P&M portfolio was broad-based with domestic order inflows growing 40% Y-on-Y and international inflows up 62% Y-on-Y. The order inflows during the quarter were driven by strong activity across hydrocarbon, buildings and factories, heavy civil and the renewable subsegments. During the quarter, the share of international orders in the P&M portfolio stood at 65% as compared to 62% in the Q2 of the previous year. Moving on to the prospects pipeline for the near term. We have an overall prospects pipeline of INR 10.4 trillion vis-a-vis INR 8.1 trillion at the same time last year. This represents an increase of 29% on a Y-on-Y basis. The increase in the prospects pipeline is mainly led by infrastructure and hydrocarbon segments. The broad breakup of the overall prospects pipeline for the near term is as follows: Infrastructure, INR 6.50 trillion vis-a-vis INR 5.42 trillion last year, representing an increase of 20%. Hydrocarbons, INR 2.93 trillion vis-a-vis INR 2.25 trillion last year, representing an increase of 30%. Carbon Light Solutions, the prospects pipeline as of September '25 is INR 0.46 trillion as compared to INR 0.24 trillion last September 2024. The green and clean energy opportunities aggregate to INR 0.18 trillion as compared to INR 0.01 trillion last year. The increase is primarily because of gas to power-related opportunities outside of India. The Heavy Engineering and the Precision Engineering Systems, which aggregate to what we call the Hi-tech Manufacturing segment, the order prospects as of September '25 is at INR 0.31 trillion as compared to INR 0.16 trillion last year. Moving on to the order book. The order book as of September 2025 stands at INR 6.67 trillion, up by 31% as compared to September '24 last year. The Projects & Manufacturing order book has a balanced geographic mix with 51% of the order book coming from domestic markets and 49% from outside India. Out of the international order book of INR 3.27 trillion, around 84% is from Middle East and the balance 16% is from other parts of the world. The client-wise composition of the domestic order book of INR 3.4 trillion as of September '25 is as, central government constitutes 14%, state government and local authorities, the order book share is 24%, public sector corporations 32% and the private sector composition is at 30%. As you may note, the share of the private sector in our domestic order book has increased from 21% as of March '25 to 30% as of September '25. This growth reflects improved activity in the residential and commercial real estate, power generation and data storage solutions as well as the minerals and metals sector. Approximately 12% of our total order book of INR 6.67 trillion is funded by bilateral and multilateral funding institutions. Again, 91% of our total order book is from infrastructure and energy. You may refer to the presentation slides for further details. No major orders were deleted during the quarter. And as of September, the share of slow-moving orders is around 3%. Coming to revenues. The group revenues for Q2 FY '26 at INR 680 billion registered a Y-on-Y growth of 10%. The international revenues constituted 56% of the revenues during the quarter. The strong execution momentum in the Energy and Hi-Tech Manufacturing segments drove the overall group revenue growth for the quarter, while execution in the Infrastructure Projects segment was a little subdued during the quarter. Within the overall group revenue, the P&M businesses recorded revenue of INR 490 billion for Q2 FY '26, marking a 10% growth over the corresponding quarter of the previous year. Moving on to EBITDA margin. The group level EBITDA margin without other income for Q2 FY '26 is 10% as compared to 10.3% in Q2 of the previous year. The decline in EBITDA margin is primarily due to the margin compression in our IT&TS segment. The detailed breakup of EBITDA margin business-wise, including other income, is given in the annexures to the earnings presentation. Our EBITDA margins in the P&M business portfolio has improved from 7.6% in Q2 FY '25 to 7.8% in Q2 FY '26. The segment-wise EBITDA percentages will be shared in detail during the discussion on the segment performance. Our consolidated PAT for Q2 FY '26 at INR 39 billion is up by 16% as compared to Q2 of the previous year. The increase in PAT is reflective of improved activity levels and efficient treasury management. The group performance, the P&L construct, along with the reasons for the major variances under the respective function heads is provided in the earnings presentation. You may go through for further details. Coming on to working capital. Our group NWC to sales ratio has improved from 12.2% in September '24 to 10.2% in September '25, mainly due to an improvement in the GWC to sales ratio backed by strong customer collections during the last 12 months. Our group level collections, excluding Financial Services segment for Q2 FY '26 is INR 600 billion as compared to INR 620 billion in Q2 of the previous year. The year-on-year dip is primarily timing related as we had witnessed a very strong collection growth in the first quarter of the current financial year. With the continued focus on customer collections, our cash flow from operations, excluding Financial Services segment between April to September 2025 is at INR 106 billion as compared to INR 61 billion in H1 of the previous year. We have added a slide on group cash flows, excluding L&T Finance in the annexure alongside the reported cash flow slide to give more clarity on the cash flow performance. Finally, the trailing 12-month ROE for Q2 FY '26 is 17.2% as compared to 16.1% in Q2 of the previous year, an improvement of 110 basis points. Very briefly, I will now comment on the performance of each business segment before we give our final comments on our outlook for the remaining part of FY '26. The first would be infrastructure. The segment order inflow grew 6% in Q2 FY '26 on a Y-on-Y basis, driven by strong domestic private sector demand spanning residential, commercial buildings, airports, data centers, pump storage projects, ferrous and nonferrous facilities, solar PV manufacturing plants and semiconductor fab facilities that were witnessed during the quarter. These together account for nearly 60% of the domestic orders for the quarter. Like I mentioned earlier, our order prospects pipeline in infra for the near term is around INR 6.50 trillion as compared to INR 5.42 trillion during the same time last year, representing an increase of 20%. The infra prospects pipeline of INR 6.5 trillion comprises of domestic prospects of INR 4.25 trillion and international prospects of INR 2.25 trillion. The subsegment breakup of the total order prospects in infra segment is as, the share of transportation infrastructure is 21%; Heavy civil infrastructure is 16%; water and affluent treatment, 15%; Power Transmission and Distribution, 14%; Buildings and Factories, 13%; Renewables at 11% and Minerals & Metals at 10%. The order book of this segment is at INR 3.95 trillion as of September '25 with the execution period around 3 years. The revenues for the quarter in the Infrastructure segment registered a marginal decline of 1% Y-on-Y, largely attributed to an extended monsoon season and slower progress in the rural water supply projects, which continue to face sector-specific challenges. In addition, a few large renewable projects are in the initial execution phase. Our EBITDA margin in the segment was at 6.3% in Q2 FY '26 as compared to 6% in Q2 FY '25. The margin uptick has been driven by improved execution efficiency. Moving on to the next segment, which is Energy Projects, which comprises of hydrocarbon and carbon light solutions. The order inflows in this segment were robust at INR 382 billion in Q2 FY '26 as compared to INR 78 billion in Q2 FY '25. The segment order book was helped by receipt of ultra mega orders across onshore and offshore verticals of the hydrocarbon business in the Middle East. We have a strong order prospects pipeline of INR 3.57 trillion for the segment in the near term, comprising of hydrocarbon prospects of INR 2.93 trillion, carbon light solutions of INR 0.46 trillion and the clean energy prospects of INR 0.18 trillion. The hydrocarbon prospects remain predominantly international with approximately 93% of the opportunities is overseas, while carbon light solution prospects are primarily domestic and clean energy is largely driven by gas to power opportunities. The order book of the Energy segment is at INR 2.14 trillion as of September '25 with the hydrocarbon order book at INR 1.66 trillion and carbon solutions -- carbon light solutions at INR 0.48 trillion. The Q2 FY '26 revenues for the segment at INR 131 billion registers a robust growth of 48%, driven by the execution ramp-up in international hydrocarbon projects and commencement of execution in the carbon light solution orders secured in the recent past. The Energy segment margin in Q2 FY '26 is at 7.3% vis-a-vis 8.9% in Q2 of the previous year. The margin decline for the quarter in the hydrocarbons business was primarily due to cost overruns in some few domestic and international projects. These projects are in the final stages of execution and are expected to conclude over the next few quarters. We do anticipate soft margins in the segment to persist in the near term. As already communicated during our Q1 FY '26 earnings call, this is factored into our FY '26 P&L margin guidance. The Carbon Solutions margin improvement benefited from a favorable customer claim. The Clean Energy businesses within the Energy segment is in the incubation stage and is yet to meaningfully contribute to the segment numbers. We will now move on to the Hi-Tech Manufacturing segment, which primarily comprises of Precision Engineering Systems and the Heavy Engineering business. The lower order inflow in Q2 FY '26 is to order deferrals in both the businesses. The order book of the segment is INR 391 billion as of September '25 with the Precision Engineering order book at INR 328 billion and the Heavy Engineering order book at INR 62 billion. Our order prospect pipeline for the near term in this segment is around INR 315 billion, comprising of INR 251 billion of precision engineering prospects and the remaining INR 64 billion from the Heavy Engineering business. The segment revenue at approximately INR 28 billion registered a strong growth of 33% Y-on-Y with robust execution momentum across both the businesses. During the quarter, operational efficiencies aided margin improvement in Heavy Engineering, while lower margin in PES, that is the Precision Engineering Systems, is largely reflective of larger share of early-stage jobs and costs incurred on certain development projects. Moving on to the next segment, IT and Technology Services, which comprises 2 listed entities, LTI Mindtree and LTTS and as well as our newly incubated business of digital platforms, data centers and semiconductor design. The revenues of this segment at INR 133 billion in Q2 FY '26, registered a growth of 13%. The segment margin variation vis-a-vis previous year is largely due to the subdued margins in LTTS and costs incurred towards the newly incubated businesses. I will not dwell too much on the segment as both the companies in the segment are listed and the detailed fact sheets are already available in the public domain. We move on to L&T Finance Limited. Here again, the detailed results are available in the public domain. But to sum up, Q2 witnessed -- Q2 for L&T Finance witnessed the highest ever quarterly retail disbursement and improved collection efficiency. The Financial Services business achieved 98% retailization of its loan book in September '25, well ahead of its Lakshya 2026 targets. The ROAs remain healthy at 2.4% for Q2 FY '26 and adequate capital is available on the balance sheet to pursue growth in the medium term. Moving on to Development Projects segment, which primarily includes Nabha Power and Hyderabad Metro. The higher average fares post the fare hike that we did in the current year has led to the revenue growth and margin improvement of Hyderabad Metro. The average fare per passenger has increased from INR 38 in Q2 FY '25 to INR 46 in Q2 FY '26. The average ridership during the quarter was at 4.39 lakh passengers per day as compared to 4.68 lakh passengers per day in the same period of the previous year. At the PAT level, the Metro -- Hyderabad Metro posted a loss of INR 1.75 billion in the current quarter as compared to a loss of INR 2.07 billion in Q2 of last year. As I stated earlier, we have reached an in-principle understanding with the Government of Telangana, where the government of Telangana will take over the debt and the equity of L&T from the concerned SPV, which is L&T Metro Rail Hyderabad. The EBITDA margin of this segment was impacted by a litigation-related provision in respect of Nabha Power. Moving on to the others or the last segment. This segment comprises Realty, Industrial walls, construction equipment and mining machinery, rubber processing machinery and the residual world -- residual portion of the Smart World business. The segment witnessed healthy order inflow growth driven by higher presales in the Realty business and increased orders in the construction equipment business. The segment revenue at INR 14.2 billion declined by 14% Y-on-Y, primarily driven by the lower handover of residential units in the Realty business. The segment margin improvement was primarily due to sales of commercial space in the Realty segment. We have given the segment breakup between Realty and other businesses within the segment as part of our annexures in the presentation. Before I conclude, let me cover the guidance on the various parameters for FY '26. Order inflows. We witnessed a strong ordering momentum in H1 of the current financial year, and we see a robust prospects pipeline for the near term. We are confident of exceeding our full year FY '26 guidance of 10% growth in group order inflows for the current year. As we speak, we are also well placed to secure a few ultra mega opportunities. On revenue, the group revenue grew by 13% in H1 FY '26, in line with our expectations. As highlighted during the Q4 FY '25 earnings call, we expect a stronger revenue visibility in the second half of the fiscal year, driven by a ramp-up in the execution. Accordingly, we maintain our full year revenue growth guidance at 15%. Coming to the EBITDA margin for the P&M business. As you may have seen, the EBITDA margin for the P&M business has improved by 10 basis points in H1 FY '26. With the execution momentum expected to pick up in H2, we are reasonably confident to achieve our full year EBITDA margin target of 8.5%. On working capital, our guidance for working capital for FY '26 remains unchanged at around 12% by March 2026. With this, I conclude. Thank you, ladies and gentlemen, for the patient hearing. We can now begin the Q&A part of the call. In the interest of time, I would encourage all the participants to stick to the broader questions on strategy and outlook to take full advantage of the presence of our Deputy Managing Director and President, Mr. Subramanian Sarma. The bookkeeping questions can be taken up by the IR team at a suitable time. Thank you. Operator: [Operator Instructions] The first question is from the line of Mohit Kumar from ICICI Securities. Mohit Kumar: My first question is, sir, as per media, it seems we are quiet ahead in Kuwait in large projects. Is it possible to help us with the prospect pipeline and the sustainability of these prospects in the country from the medium-term perspective? Subramanian Sarma: Yes, Sarma here. Good evening, all of you. You're right. I think this was a public opening. So we are -- have an L1 position on 3 of the bids we have submitted out of 5, I think, adding up to about $4.5 billion. We'll have to see how the whole process now moves on in terms of budget allocation, but we are kind of optimistic that they should be able to get the extra funds because all these prices are -- though we are L1, the prices are above the budget. So they are completing their process for getting additional funding. And that should get done by this quarter or maybe latest by next quarter. And hopefully, this should come through. We are hoping for that. What was the other question? Yes. I mean I think the overall -- in terms of opportunities, the pipeline looks strong in terms of what is available in Saudi, in Qatar and Kuwait and also the joint operation of [indiscernible]. And also, there are a lot of opportunities coming in UAE. So we are quite bullish on Middle East now for the time being. Mohit Kumar: Yes. My second question is, sir, of course, the rising order book in Middle East. What are the execution challenges while sustaining the profitability? Are you with any big order book which you think of the level at which we have -- we don't have to worry about the resource mobilization? Subramanian Sarma: No, you don't need to worry because we worry about the order book in terms of our risk exposure. We have a very good robust system here internally. Mr. Shankar Raman and the team and Govindan and team, we have a very strong risk management system. They interrogate all the businesses in terms of country exposure and geopolitics, et cetera. So we have strong system there. And we are very cognizant of that in terms of what is our exposure. Our experience has been good. The customers are paying well. All these companies are national oil companies. They have a reasonably good cash flow, and we have not seen any payment risk. The commercial terms and conditions, what is available in the contracts are quite reasonable, acceptable, pretty balanced. And the execution risks are more or less same as what we have been having experiencing in the past and historically, I mean, in the sense that we have to be sort of aware of the supply chain constraints and logistic constraints and local work availability. I think we have overcome many of those through having strategic partnership at the time of bidding and negotiating some of the critical high-value orders during the bidding and back-to-back contracts and things like that. So we know the market, we know the risk and we have a plan to mitigate those risks. So by and large, I would not be too concerned about [indiscernible]. Mohit Kumar: Understood. My last question, sir, as the media we are looking to invest in electronic manufacturing services. Can you please explain the kind of investment within the EMS is interesting to us and the expected investment and the market potential? Parameswaran Ramakrishnan: So Mohit, I will take that. We are in a way, we have a Precision Electronics part as a small sub item under our Precision Engineering business, and we have a unit in Coimbatore. As part of our Lakshya L31 strategy, we are seriously looking into expanding the electronic part of our L&T's portfolio. Various options are being explored, including the need to set up units in some parts of the country. At this juncture, it's a little premature for us to comment on the extent of investments and which areas we will be covering. Kindly wait maybe in sometime, in May '26, once we complete our financial results and we are ready with our stat plan for L31, we will be in a position to possibly give you a more greater detail of the future business prospects and the investment potential, along with the opportunities insofar as this business is concerned. Operator: [Operator Instructions] The next question is from the line of Mohit Pandey from Citi Group. Mohit Pandey: Sir, my question is on the Infrastructure segment. So when you mentioned execution pickup into it, is it safe to assume infrastructure execution also has been seen as picking up? And associated question is on margin. So this quarter despite revenue decline, there has been 30 bps of margin expansion in infra. So safe to assume that is sustainable because that looks driven by execution efficiencies? And also you mentioned a sizable jump of incremental orders have been via private sector. So what could that mean for margins? And are these generally lower generation compared to a non-private sector orders in the infrastructure? That would be my question. Parameswaran Ramakrishnan: So thank you, Mohit. I think you were asked to ask 1 question. You asked 4 questions now. Okay. I'll take one by one. So the infra revenue, there has been a sort of -- infra revenue has been stagnant for Q2 of the current year. Having said this, one of the main reasons, as I explained, was because of extended monsoon across many parts of the country that affected the pace of execution. And secondly, and this I have mentioned in the Q1 earnings call also that because of the payment-related issues with respect to certain projects in the water and affluent treatment segment, we have slowed down execution, okay? Having said this, the overall revenue guidance that the company has provided for 15% of full year is on track, okay? And this we can confirm. And we do believe -- and as you know that the H2 for infrastructure is a far more busier 2 quarters as compared to a relatively subdued H1. So this is baked in terms of how the revenue map -- revenue growth has happened. This is baked into our 15% overall P&M guidance on revenues. And as far as number 2 point is concerned, I think over the years, the infra margins have come down, have been southward bound for various reasons. But given the fact of rigor of execution and better control on project execution time lines and with also looking to ensure that the growth is related to the collections we get, this has finally resulted into a slow improvement in the infra margins. We do believe that infra margins will be a little northward. But since we don't give margin guidance for the individual P&M segment, this is also baked into overall FY '26 target of 8.5%, okay? So number three, of course, the share of private sector orders have gone up, largely driven by real estate and the carbon light type of orders. So one important thing is, as far as private sector orders is concerned, obviously, the execution momentum in line with the payments, I think, will be faster. This is something I think we have always maintained a share of -- higher share of private orders could potentially result into an improved working capital situation. But having said this, as far as margins is concerned, we should be seeing it as the execution of the projects progress. But let me also tell you that the company, as Mr. Sarma was referring to the answer to the previous question, we are ensuring a proper risk mitigation or risk evaluation mechanism while we bid for projects concerning the customer, the sector and the geography. Operator: The next question is from the line of Aditya Bhartia from Investec. Aditya Bhartia: My first question water segment. How big is the segment in the overall scheme of things? What proportion of domestic order book could be from the water segment? And is it that we are really going slow on execution given the payment challenges? Or are you seeing some improvement around that? Parameswaran Ramakrishnan: Sorry. As far as the water segment is concerned, the order book that we have is around INR 400 billion. Subramanian Sarma: 7% of the total order. Parameswaran Ramakrishnan: 7% of the total order book. And these are projects which have been related to the Jal Jeevan Mission projects. And once the allocation of the government start coming in, we do expect the execution momentum to smoothen out in the subsequent quarters. Aditya Bhartia: Understood. So as of now, we are going very slow on execution of these projects. They are not really contributing. They're not -- there is no money that's getting stuck over there because we are just going slow on execution itself. Parameswaran Ramakrishnan: Yes. Money is getting slow on execution, but we are not just building up execution without getting paid. Aditya Bhartia: Understood, sir. And sir, my second question is on Realty, wherein for the last couple of quarters, we've been seeing very high margins. I mean, if we look at this quarter, revenues might have been lower, but margins have been exceptional. So how should we think about this business from the perspective of next 2 or 3 years? What's the road map? What kind of growth should we be seeing in? And what kind of margin should we be building in? Parameswaran Ramakrishnan: So the issue is in so far as the Realty business is concerned, it is more of an accounting development because in a particular quarter, when you have a higher handing over of the residential units, the entire sales and margin gets clocked in, unlike the other P&M business where the margins get crystallized over the period of execution. So this is at a point of time, recognition of sales and margin. To that extent, you can have some quarters margins dipping at the overall P&M level because of lower residential -- lower handing over of residential units. And in case of any quarter where the number of units go up, then consequently, the Realty business will show a better profit. And this apart from -- in a particular quarter, if there is a particular sale -- a sale of a commercial property, that adds up also to the overall margin. So for example, in the current quarter, we have had in terms of a sale of a commercial property along with sale of TDR rights has enabled the profitability to go up almost by INR 0.9 billion. Aditya Bhartia: Understood, sir. And could you give us some road map on how we should think about the Realty business for next few years? What kind of growth should we anticipate in terms of residential project sales and any large commercial project that we should be aware of? Parameswaran Ramakrishnan: So as of now, the way we are focusing is that we will try to expand the presence in the cities of the Mumbai Metropolitan region, National Capital Region, Bengaluru, Chennai. And this development will be happening through a mix of monetizing of our existing land parcels, acquisition of new land real estate parcels, and also increasing growth through the joint development route. As we speak now, the order book for the real estate segment, that is where we have secured the flat purchases have happened, but we're yet to handover is in the range of INR 120 billion. And we have an unsold inventory of almost INR 40 billion for the near term. So this will be -- I think over the next 2 to 2, 3 years, this will get converted to revenues. But long and short, we -- you could see an increased visibility of L&T Realty in terms of the overall perspective on the real estate sector in the regions or the locations that I spoke about. We also will continue to focus on select commercial property developments in some of these areas, driven by the market demand. So it will be largely led by residential property development and interspersed with some commercial properties at some certain locations. Operator: The next question is from the line of Bharanidhar V from Avendus Spark. Bharanidhar Vijayakumar: Can you tell what is the total funding L&T places into Hyderabad Metro by way of both equity and not funding? And how much of that are we getting through this deal? And how from accounting point of view, this will have an impact on, say, any one-off income or any [indiscernible] in the coming quarters? Parameswaran Ramakrishnan: Okay. So the total investment of L&T in Hyderabad Metro till date is in the range of INR 70 billion, okay? And since as it is there in the public domain in terms of the incentives and the Hyderabad Metro has a debt of almost INR 130 billion, okay? Now until now, the losses of the Hyderabad Metro, they are all factored in our consolidated financial results, okay? So if you see this time, if you have seen our advertisement in the stand-alone, which is the investment that we are carrying at INR 70 billion, we have now brought the investment to what we believe as a realizable value by tendering our stake to the government of Telangana at INR 20 billion. And thereby, we have taken an impairment charge in Q2 of the current financial year in L&T stand-alone results. The fact is insofar as the consolidated results go, the YTD cumulative losses of Hyderabad Metro is already adjusted against the INR 70 billion of our investment. And consequently, the Hyderabad net worth -- share of net worth in our consolidated books is actually even lower than the current standalone post impaired value of INR 20 billion. So technically speaking, tomorrow, if we were to do the -- if tomorrow, we were to do the divestment, there could be a chance that the consolidated financial statements will actually possibly show a marginal credit in the P&L because the consolidated financial statements has the share of net worth is almost INR 10 billion as compared to the restated value of INR 20 billion. Is that clear, Bharani? Bharanidhar Vijayakumar: Sir, so one question follow-up is that the INR 7,000 crores or INR 70 billion of book value or net worth that is reflected in Metro balance sheet, we are essentially selling we are realizing INR 2,000 crores from the buyer. Parameswaran Ramakrishnan: So consequently, you see that impairment charge in the stand-alone. Bharanidhar Vijayakumar: Okay. Okay. Fine. So I will take up some follow-up on this later. My second question is on, say, our Indian domestic order inflow, while we are doing very well on the private side, the order inflow from state sensor definitely is lower than what it was in the past. What is our outlook on that going forward? Is it set of customers likely to improve? Or where do you see that going? Parameswaran Ramakrishnan: Okay. So one of the major reasons for the share of private sector order inflow going up in the recent maybe last 4 or 5 quarters is because of a higher amount of real estate transactions or real estate development, both commercial, real estate -- sorry, residential, data center development. All of this, we have seen a strong traction from the various developers, number one. Number two is, if you note that in the Q1 that we had reported order inflows in domestic also included carbon-light private sector orders that we secured, okay? And we do expect as far as coal-based power plant ordering is concerned, you see as is evident that there's a lot of projects up in the pipeline, which is a mix of both state-owned or central public sector-owned project opportunities and also some of the major private sector power plant producers also setting to expand their current power plants or new greenfield. So we do believe because of this increase in the -- or revival of the coal-based power plant equipment business, the share of private sector has actually gone up. Bharanidhar Vijayakumar: So I got that. My only question was areas like metros, bridges, all these things which used to be a major part, it seems to be slowing down. So that was my question, meaning... Parameswaran Ramakrishnan: That is mostly on the government funded no. So we do have a sizable amount of opportunities as far as central government or state government or public sector corporation is concerned in the areas of energy, which comprises hydel, thermal that I spoke about, nuclear. So the entire energy landscape is there. And we do see sizably large opportunities in the transportation infra in terms of roads and elevated corridors. In fact, the order prospects that I communicated for heavy civil and transportation infra, to the extent they are all domestic, they are largely all government projects only. Operator: [Operator Instructions] The next question is from the line of Shirom Kapur from Jefferies. Shirom Kapur: I just wanted to ask about your 34% growth in domestic orders this quarter. Could you highlight what drove this? And what are some of the major orders that contributed here? Parameswaran Ramakrishnan: So the major orders that we secured on the domestic side is the pump storage project that we secured from a private sector client, which is almost INR 35-odd billion, plus a whole lot of residential and commercial real estate orders that we have secured from private sector developers. Shirom Kapur: Noted. And just if you could help break up the order prospects into domestic and international and within domestic, what the breakup should be across your segments? Parameswaran Ramakrishnan: So I guess -- yes, I think we have been giving quite an articulated granular detail. But let me put it like this, that the total order prospects that we have given for domestic and international, we'll stay and put with it. We will see at an appropriate point of time. In case something is very major for a particular subsegment, we will give the details at that point of time. Operator: The next question is from the line of Sumit Kishore from Axis Capital. Sumit Kishore: My question is in relation to the hydrocarbon margins, which were subdued and the explanation given around cost overruns in certain international and domestic jobs that are approaching completion. So what were the reasons for the cost overrun on a generic basis? And how can we be sort of assured that going forward for a substantial international order book, some of these issues will not get repeated. So that's my question. Subramanian Sarma: Yes. Again, this is Sarma here. This is a bit of a phasing issue. I mean we have in our portfolio mixture of projects. Some of them are old legacy projects, some of them are new projects and some of them are, like I said, we have new projects waiting to be awarded. So in this quarter and maybe for some time, I think we'll have -- some of these legacy projects are closing. I mean some of these projects are large projects which have been running even during the pre-COVID time, it was awarded. So I think as they close, there have been some cost overrun because of COVID. But definitely, there is a contractual entitlement for us, we'll pursue those. But as per our internal policy, we don't recognize any entitlement unless it is approved. So I think that will manifest maybe in the future at some point in time. But otherwise, going forward, the portfolio is quite reasonable. And in fact, the market is quite buoyant, and we are very selective and our intention is to pick up jobs, which will help us to realize better margin in the future. Parameswaran Ramakrishnan: The current southward movement in energy margins is big. I reiterate is big when we have given the guidance of 8.5%. Sumit Kishore: Very clear. Sir, just a follow-up here on margins. Given the fixed price order backlog now would also be close to 50% of the order backlog, how are you thinking about the commodity price risk to margins here for the order backlog? Subramanian Sarma: Yes. I mean I think this question keeps coming up. But in general, we are in the business where we have fixed price models. And like I said, I think when we are bidding, we take a lot of care in terms of trying to have back-to-back contracts with -- for construction, back-to-back contracts for major high-cost items in supply chain. And so that we have a reasonable sort of cover, I mean, risk mitigation on those items. And of course, we also have a strong treasury group, which gives us a reasonable forecast about how the commodity prices will move. Based on that movement -- based on that forecast, we also provide certain adequate provisions in terms of contingencies, commodity contingencies, specifically in our pricing. So I think broadly, we are covered unless we have a very, very unexpected situation like what happened in Ukraine-Russia war, which is something nobody could forecast. We kind of, yes, built in that in our pricing. Operator: The next question is from the line of Amit Anwani from PL Capital. Amit Anwani: Sir, my question pertains to the strategic partnership with Bharat Electronics for AMCA. So here, it would be better to understand what role L&T will have in this joint venture? And what is the long-term strategy? We understand that we have supplied wings and I think some other components for LCA in the past, and we have been doing that. Wanted to understand, are we getting into full-fledged aircraft manufacturing in the future? Is there any capability which is required? Any investments required? Any thoughts and details on this joint venture consortium, yes? Parameswaran Ramakrishnan: So I will take that. So the Aeronautical Development Agency, which is the customer, is likely to shortlist the eligible bidders for the AMCA program based on the expression of interest where we also provided. This shortlist is expected in the current quarter, October to December '25. Basis the shortlist, we expect the customer to issue the request for proposal, that is RFP sometime in Q4 of the current financial year. And the announcement of the winner to build the prototype most likely is going to happen Q4 of the next financial year after the bidding process. Now in terms of the L&T Bharat Electronics JV for this particular program is essentially the scope of the JV is to build the prototype airframe, fixtures, system integration, and the flight certification of the prototype. As of now, both L&T and BEL are equal partners in the JV, which is it will be a separately incorporated company that will house this transaction in case the particular consortium gets the -- becomes the winner. And in terms of how the work will be shared between L&T and the other partner will be finally assessed after we receive -- go through the entire details of the request for proposal. Our understanding is that the order for the prototype will be one single PO for the entire value. And most likely, if it is awarded in the Q4 of the next financial year, then in terms of the prototype getting delivered, I think it's sometime in '28, '29, the test flight to happen in FY '29, '30, then followed by the usual trials. So in terms of serial production, I guess we are still around 8 or 9 years away, okay? I've given you quite a detailed perspective of this. Now beyond this, I think I don't have anything to talk about. Amit Anwani: Right. So for prototype, any investment which would be required once we get this order by Q4 next year, if at all, this is coming to us. Parameswaran Ramakrishnan: So there are so many ifs and buts, so we should get the order in Q4, hopefully. So we will have to evaluate the scope. This is the RFP scope. That time, we will be able to understand. But since it is a prototype, a prototype, usually, the customer works with the contractor or in this case, the consortium and ensure that there is no -- the consortium will not suffer in principle any cash outflow. It is like a sort of a funded project. Operator: The next question is from the line of Atul Tiwari from JPMorgan. Atul Tiwari: Another question on this BEL, L&T consortium. So what kind of risk you run? Suppose this is obviously a technically complex project. And if you get it and in case there are unusual delays because of some technology challenge is out of your control. So do you have to fund that over next several years? Or is there some kind of carve-out clause? Could you throw some light on that? Parameswaran Ramakrishnan: So Atul, it is like this. L&T in the past with respect to the PES business, okay, we have engaged with the customer across the major other two forces that we usually deal with. In terms of -- when it comes to a prototype, it is usually cash neutral for the contractor like us. So that is the principle we believe will be followed when it comes to the AMCA program as well. But it is still early days because once the RFP is rolled out, then only we'll be able to clearly understand the outcome of the proposal. But given our past experience, usually prototypes have a 0 cash implication because the customer, along with the contractor, in this case, the consortium will jointly work to have a successful prototype done. So the customer also has a sort of, I would say, a skin in this whole transaction. Atul Tiwari: Okay, sir. And just to confirm, sir, you said that the winner, eventual winner will be announced by fourth quarter of FY '27. Parameswaran Ramakrishnan: That's our understanding as we speak now. Operator: The next question is from the line of Girish Achhipalia from Morgan Stanley. Girish Achhipalia: I wanted to just check with Mr. Sarma that we are almost doing $4.5 billion, $5 billion worth of international projects last couple of quarters. The order prospect pipeline is also very strong. I wanted to understand like you've been with the company since 2016, I believe, and you've seen a lot of cycles up and down, a lot of contracts, competition. How do you think about the next couple of years in terms of different types of jobs that are coming through? And I wanted to understand the win rate typically that we've enjoyed in the last 12 months across, let's say, infra and then within hydrocarbon offshore versus onshore, if you can just split that up? And also on the domestic opportunity, are you seeing any prospects on nuclear? And how much of coal-based order pipeline is still left in the domestic side that could come through in the probably more medium term? Subramanian Sarma: For your information, I've been with the company since 2015. So I completed 10 years, not 2016. Anyway, I see this has been, like you said, we had a good run over the last decade. The industry is cyclic, but I think what has happened is that our share of the market was not that good in the previous years, and we have established ourselves now as a major player. So we are able to access larger market share -- larger market. So I think our ability to access larger projects, multibillion-dollar projects has now enhanced substantially over this decade. So therefore, our ability to continue to build a strong order pipeline has substantially increased over the last few years. Today, as you see, I mean, we are winning quite a few $3 billion, $4 billion projects, which was not the case earlier. So I'm quite bullish. I think we will continue to have that market available to us, and we'll bid in a disciplined way. And I think this run will continue for some more time, at least for next 2, 3, 4 years. I mean, beyond that, I cannot predict. So all in all, I'm quite optimistic. When it comes to domestic on the thermal power, the market is, like I said, has suddenly become very buoyant and very active because of the two reasons. One is that the renewable power round-the-clock availability has become a bit of an issue. So we need additional power -- stable power generation to stabilize the grid. And two is that there is a general increase or forecast increase in the power demand because of the sudden acceleration of the AI and the data centers, which are going to consume a huge amount of power. So a combination of that, I think there are a lot of plans coming up. It can be met through either thermal power or nuclear or other means. But I think nuclear -- thermal power becomes the most simplest and fastest solution. So we've seen a significant uptick in that. We have picked up about 13.5 gigawatts. We are going ahead with expansion of our capacity, and we are gearing up for ideal, taking up additional maybe 10, 15 gigawatts in the next 2, 3 years. That's how we see the market now. Parameswaran Ramakrishnan: So I think I told Girish, that the order prospects pipeline for CarbonLite is almost INR 460 billion as of September. Girish Achhipalia: Okay. And sir, just one small follow-up. In international, I understand that the oil sensitivity to GDP for larger countries like Saudi Arabia and UAE is coming down. Is there a different approach that the customer is taking irrespective of whether he's in infra or offshore or onshore versus the previous cycles? Like if you can qualitatively remark on how confident or are you seeing closures happen at a faster clip? Or is there a little lesser competition? I mean, what is driving the market share higher? Subramanian Sarma: No, I think there were projects which were of different size, right? I mean I think there were -- earlier, we were able to compete in a segment which was less than $1 billion. So we had a different level of competition. Now when we move up the ladder and then we are able to access multibillion dollars, I think the level of competition and intensity of competition changes. I mean I think now I believe that for larger jobs, we are better placed to win, and we have a reasonable win rate on those projects. I mean many of these projects are very critical. I mean some of them are like gas development projects. Many of these countries are committed to those projects. I don't expect too much of sensitivity to the current spot market prices. These are long-term views. And next 2, 3 years, I mean, at least I can talk about only 2, 3 years beyond that, I cannot predict. I expect to see multiple projects. And our order book is so strong that we have almost 3 years of workflow in our hand. And we pick up some more projects in the next 1 year or so, we will have about almost more than 3 years of workflow. So I think that brings a lot of stability to our business. Operator: The next question is from the line of Parikshit Kandpal from HDFC Securities. Parikshit Kandpal: So my first question is on the margins. So now with the share of international order book growing, for the thesis of improvement in margins from this year, P&M margins from FY '26 and building over the next 2, 3 years, so does it get challenged somehow? Parameswaran Ramakrishnan: So Parikshit, this is P.R. As you know that we have a way of taking the margin guidance restricted to the year under question or under review, okay? We'll get back to you in terms of how the margin uptick looks like in the subsequent periods. Having said this, I also referred to the improvement in infra margins is now slowly changing in terms of going into the positive trajectory. And we do expect that this particular momentum to continue in the future quarters, okay? Insofar as the softness in the margins for the Energy segment in the current 6 months is concerned, I did refer to this during the Q1 call that the softness in margins is going to be reflected in Hydrocarbon performance in the current year. Hopefully, by the time March '25 gets over, many of the cost or the cost overruns in certain select jobs that we secured in the earlier years will get into -- they're all in the final stage of execution, which is also baked in our revenue and margin guidance. So we do also expect that margins in the subsequent periods to improve. Now to what extent the improvement will happen, we will communicate that once we close March '26 and give the guidance for the next year. Parikshit Kandpal: Okay. So the second question is on Hyderabad Metro. So now you said that INR 2,100 crores is somewhere where it settles. So is this a cash inflow, and is it adjusted for the INR 900 crores of the support which we have received from the Hyderabad Metro? So basically, I want to understand how -- will this be a cash item or a non-cash item from the government side? And what will be the quantum likely? Parameswaran Ramakrishnan: So as we understand basis the discussions that have happened, L&T will get a cash consideration against tendering its 100% equity stake in the Metro SPV to the particular vehicle which the government of Telangana will propose as the buyer and L&T should be getting cash. That's the understanding. And this has got nothing to do with the INR 900 crores that the SPV received as part of the soft loan assistance. So that loan has already got -- is residing in the SPV as an interest-free long-term debt. What we are talking about this L&T exiting its entire -- or divesting its entire exposure in the Metro SPV to the government of Telangana. So the SPV debt of INR 13,000-odd crores will be taken by the buyer as the new equity shareholder when they take the stake -- when they purchase the stake from L&T. And that consideration as we speak now, is in cash. Parikshit Kandpal: The INR 2,100 crores you receive in cash, so net-net. Parameswaran Ramakrishnan: Around -- I did not tell a number. I said around INR 2000 -- 21 -- INR 20 billion or INR 2,000-odd crores. Parikshit Kandpal: Okay. And just the last thing on the NWC. Last quarter, you highlighted that because of the water receivables, there was a negative impact on NWC of about 75 basis points because there was delay in receivables collections on the water side. So if you can quantify in this quarter, 10.2% NWC, so how much better it would have been if the water receivables have come on time? Parameswaran Ramakrishnan: So I will not -- okay, let me put it like this. The fact is that we have slowed down execution also means that the position of the segment remains as the same as it was in June. okay? Wherever the projects are getting executed in that segment, when we are getting paid, that execution happens. But let me tell you, when we talk about 10.2% as the working capital at the group level, the share of projects and manufacturing working capital is 7.8%. Operator: The next question is from the line of Renu Baid from IIFL Capital Services. Renu Baid: Just a couple of bookkeeping quick questions. On the power equipment terminal portfolio, you mentioned that you are targeting 10 to 15 gigawatts of incremental orders in the next couple of years. So given the order book that we have at what utilization levels are we working through? And do you see that the market today with the existing only two domestic vendors is stretched in terms of supply and Chinese BTG equipment manufacturers are probably getting the feedback in the market? Subramanian Sarma: No, I think the government has taken a stock and both us and BHEL are working on expanding the capacity. Chinese equipments are not something which is preferred. And we have given -- even 6 months back before these awards came, we had given a commitment to the ministry that we will add our -- enhance our capacity to almost 5.5, 6 gigawatts. We are looking at even further expanding this in the next 6 to 9 months' time. So between us and other supplier, which is BHEL, we believe that we should be able to handle this. The time lines are a little longer, which is acceptable to most of the PPP developers. So I don't expect Chinese products to come in. It will be between us and other Indian manufacturers. Renu Baid: Got it. And second, just to clarify, broad-based, whatever we understand of the Hyderabad Metro at the console level, net of all the losses, et cetera, that you have booked is close to about INR 10 billion at the end of first half. So incrementally, even if on a stand-alone level, the book value has been brought down to investment value has been brought down to INR 20 billion. On a console basis, we still would be having net positive impact on the transfer of -- or receive of the cash consideration. Parameswaran Ramakrishnan: So Renu, I think I responded this in the -- as an answer to the previous question. So it is like this, let me put it like this. In the stand-alone, the Hyderabad Metro is valued at INR 20 billion. In the consolidated, it is valued because the original investment of INR 70 billion has taken all the losses YTD. So in the console, it is around INR 10 billion. Now if we were to do the divestment today, the stand-alone further, there will be no profit, no loss because you are getting cash against the INR 20 billion that you have restated. And in the consolidated, you will have the gain because obviously, you are getting value at INR 20 billion as compared to the value that you hold at INR 10 billion. Renu Baid: True. And the debt or whatever... Parameswaran Ramakrishnan: Debt goes to the -- it is residing in the SPV. So one of the fundamental attributes to this transaction or understanding is the vehicle, which the government of Telangana will propose, the buying vehicle will take over the complete debt as it is, which is today around INR 130 billion. Renu Baid: And of this, the L&T support to -- in debt format to the SPV would be how much at the end of the first half? Parameswaran Ramakrishnan: So the entire debt, the debt comprises of roughly order of magnitude, INR 80 billion in terms of medium-term nonconvertible debentures and a commercial paper portfolio of the balance, I would say, INR 40 billion to INR 50 billion adjusted for the movement that will happen. So the debt is having a guarantee of the parent. So the fact is when the debt moves in, the guarantees all fall off. So there will be no further recourse after the transaction is consummated, there will be no recourse on L&T as far as Hyderabad Metro operations is concerned. Renu Baid: So technically, we will be completely out of the asset by the end of fiscal '26 once the transaction is closed. Parameswaran Ramakrishnan: That's the target. Renu Baid: And will we continue to have any O&M responsibility with the asset or be completely out? Parameswaran Ramakrishnan: The Metro itself has an O&M contractor, which is doing the operations and maintenance. The understanding is we will have no further obligation right or any sort of indemnity post the transaction. Operator: The next question is from the line of Priyankar Biswas from JM Financial. Priyankar Biswas: One very quick question from my side. Earlier, we used -- earlier like almost like 5, 6 years back, we used to talk about landing platform docks as an opportunity in Defence. So recently, there has been some approvals and movement regarding that. So are we considering LPDs in our prospects? I mean, this year or maybe the next? So that's the first. Parameswaran Ramakrishnan: It does not feature in the current prospects. But once that opportunity comes where it is in a position to get bid, it will get added. Priyankar Biswas: Okay. So it's like a potential that may be there potentially, let's say, next year or the year after that somewhere whenever it comes up. So that would be... Parameswaran Ramakrishnan: Whenever it comes. At this juncture, don't ask me timelines because it's not yet come into -- it is not featured in our current order prospects. Priyankar Biswas: Sir, one more question that I have because there was a mention of green ammonia project in Kandla. So is there more such projects that are planned by L&T? And if so, how should we look at the CapEx that may be required? And what is the business economics for it? Parameswaran Ramakrishnan: So the -- you're referring to the joint development opportunity for the green ammonia project with ITOCHU, right? Are you referring to that? That's the one we are looking -- we had actually put it in the public domain. Sir, would you like to comment on that? Subramanian Sarma: Yes, there's no problem. So that project is under evaluation, and we will go through the process. And once we work out the economics, and then we'll have discussion with ITOCHU. And I think for all these development projects, we have a very standard where we have metrics -- financial metrics in terms of return on investment, IRR, project IRR, et cetera, et cetera. So we will not pursue any of those projects unless it meets those criteria. So I think that applies to the ITOCHU and any other future potential opportunities. I mean, there are a few which we are discussing both in domestic and international customers, a bit too early to sort of specify those prospects. But as a principle, I think the process will be the same. We'll engage with the customers. We'll have an MOU and we'll go through the process and we'll evaluate. And if they meet the IRR criteria and the risk criteria, then we'll go ahead. Otherwise, we will not. Priyankar Biswas: Okay, sir. And just one more thing. You had already provided a detailed answer regarding Middle East oil in earlier questions. My question right now is more on the Middle East renewables and, let's say, T&D for that matter. So can you shed some light like what sort of, let's say, market shares we have in, let's say, the GCC renewable space and T&D? And how do you see the order prospects similarly like for this, let's say, 2, 3 years down the line? Subramanian Sarma: We are one of the largest EPC contractors in the renewables sector. I think the projects we have in the portfolio are sometimes -- I mean, most of them are very iconic and are being done for very large customers like ACWA and Masdar and UAE, our performance in these projects have been pretty good. Some of the projects we have executed ahead of time and the customer is extremely happy and they want to engage us more and more. And I see -- I'm quite optimistic again on this sector as well. Parameswaran Ramakrishnan: In fact, the softness of our renewables opportunity starting with KSA, we are extending this relationship across as we move... Subramanian Sarma: [indiscernible . Yes, we have gone to [indiscernible] also. So I think it's -- currently, it is a good story, yes. Priyankar Biswas: Sir, can you give some light on like gigawatt size opportunities? Like what is the size of the KSA market? What do you... Subramanian Sarma: They have about 18 gigawatts and maybe there is another 15 gigawatt of opportunities in the next 2 years. Operator: Ladies and gentlemen, due to time constraints, that was the last question for today. I now hand the conference over to Mr. P. Ramakrishnan for closing comments. Parameswaran Ramakrishnan: Okay. So thank you, everyone, for taking this call. It was a pleasure to interact with all of you. Good luck and wishing you all the very best. Thank you. Operator: Thank you. On behalf of Larsen & Toubro, that concludes this conference. Thank you for joining us, and you may now disconnect your line.
Operator: Hello. Good day, and welcome to the Watsco, Inc. Third Quarter Conference Call.[Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Albert Nahmad, Chairman and CEO. Please go ahead. Albert Nahmad: Good morning, everyone. Welcome to our third quarter earnings call. And this is Al Nahmad, Chairman and CEO; and with me is A.J. President of Watsco; Paul Johnston; Barry Logan; and Rick Gomez. Before we start our normal cautionary statement. This conference call has forward-looking statements as defined by SEC laws and regulations and are made pursuant to the safe harbor provisions of these various laws. Ultimate results may differ materially in the forward-looking statements. I'm pleased to report that Watsco generated healthy earnings and record cash flow despite a very challenging market environment. As you all know, 2025, a year of significant transition to next-generation equipment continue A2L refrigerants. The transition affected roughly 55% of products sold and influenced most every aspect of our business. Regulatory changes have historically been good for our business, and good for our customers. In the long term, we expect this transition to be no different. The transition is substantially complete, and we look forward to operating a far simpler business in 2026. Throughout all of the volatility, we are satisfied that our earnings are largely intact. Our balance sheet remains strong, and our technology advantages remain immense. We certainly expect the volatility is temporary and will ease as the transition concludes. We operate in a great industry with strong long-term fundamentals and how the industry's most accomplished leadership team, all with long-term focus to keep building on our success. Turning now to our third quarter results. Sales declined 4% in total and 3% in the U.S. While unit volumes remain subdued, we achieved double-digit pricing gains on the new products with growth in sales for both nonequipment and commercial refrigeration products. We again improved gross margins, which expanded 130 basis-points to 27.5%. As we have expressed before, we have several ongoing initiatives to enhance gross margins long-term goals of exceeding 30%. Operating expenses increased 5%, reflecting a measure of ongoing inefficiency tied to the product transition, as well as new and acquired locations. With the product transition largely behind us, we expect SG&A performance to improve from here. We continue to fortify our balance sheet, reducing inventories and overall working capital. We generated record third quarter cash flow of $355 million, incremental opportunity in the fourth quarter as we close out the year. We remain fundamentally positive and optimistic about our position in the industry and our ability to generate growth. Our balance sheet has a healthy cash position and no debt, providing us with opportunity to invest in most any size growth opportunity. This includes the capacity to co-invest with our OEM partners as well as heading to 2020 -- as we head into 2026. We also continue to invest in innovation and technology that separates us from our competitors. We have made long-term progress in driving adoption, I should say, we have made terrific progress in driving adoption. For example, e-commerce penetration continues to grow and accounts for 34% of our sales and up to 60% to 70% in certain U.S. markets. Let me say it again, e-commerce penetration continues to grow and accounts for 30%, 34% I should say of our sales, and up to 60% to 70% in certain U.S. market. The number of contractors and technologies -- the number of contractors and technicians engaged with our mobile app now stand at 72,000 users and grew an impressive 18%. That means it's 72% -- I should say, 72,000 of our customers are using our technology. The annual run rate of sales to OnCallAir, our digital selling platform for contractors saw a 19% increase in the gross merchandise value. Products sold to the platform and reaching $1.7 billion over the last 12 months. We are also making next-generation investments to enhance our competitive position. For example, we are developing new technology aimed at capturing more sales from the institutional customer. We are accelerating the use of pricing optimization tools to make progress toward 30% plus gross margin target. We have launched a new initiative to peak and grow sales in the highly fragmented equipment -- non-equipment, I should say, non-equipment market, which today is roughly 30% of our sales. And we have begun to harness the artificial intelligence, both internally and externally offering potential to further transition our customer experience, improve operating efficiency and create new data-driven growth strategy. Our technology investments are making a big difference, and we believe the impact is only -- is only -- excuse me -- clear my throat -- will only grow with time. We look forward to sharing more during our upcoming investor meeting in Miami in December. I can't wait to see and meet you all this December. These investments, along with our scale, entrepreneurship culture and capacity to invest are unmatched in our industry. With that, let's turn to Q&A. Operator: [Operator Instructions] The first question comes from Tommy Moll of Stephens. Thomas Moll: I want to start with a question on the repair versus replace dynamic. It's been a couple of quarters in a row now where your non-equipment business trends have been well ahead of the equipment trends. You've obviously been very disciplined on pricing for the new equipment. And so I'm curious is the simplest explanation here just that we're seeing some price elasticity among homeowners? Or is there something else you might call out? Albert Nahmad: I'm going to let Paul Johnston respond to that. Paul Johnston: Yes. It's not a repair versus replace. It's a repair and replace. I think we said that on the last call. What we've seen is the larger dealers that have salespeople generally don't sell compressors and motors, they generally sell the equipment side. And what we see with the people that don't have an in-home salesperson is, they will repair the unit. So we see a dichotomy there amongst our customers. Also, there's a geographic spread where if you're in Illinois or excuse me Pennsylvania and you've got an 11-year-old unit in your house, you're generally going to repair it and not replace it. It's got a 20-year life. In Florida, Texas, where you've got a shorter life, I think, generally, you're going to replace it with a piece of equipment. So it's -- it's really difficult to put your finger exactly on where and who is creating a repair versus replace market. Barry S. Logan: And just some data behind that. When we say non-equipment, there are really 2 things that are not equipment parts and supplies. That's maybe be a more direct way of calling that category something parts and supplies. So parts basically is 8% of Watsco's revenues, parts. And supply is everything else is over 20% of Watsco's revenues. So just in the scope of the bandwidth of that discussion, parts will never substitute what's happening in the replacement market in that discussion. The data just doesn't -- isn't there to support that. So at the end of the day, it's the consumer that's spending $8,000, $10,000, $12,000 on a pair of new machines for their home. As Paul suggesting where we see in the Sunbelt, that's a more frequent purchase and a more ordinary purchase and a more necessity purchase, and we do see some differences as we go north of the Sunbelt. So we do like it that Watsco's 75% of the Sunbelt in that respect. But it's really, I think, more of the crux of the answer is built on what are consumers spending on their homes right now. And that's probably the bigger orientation to this than whether we're selling more compressors or not versus the replacement market. Thomas Moll: As a follow-up, maybe we'll address the elephant in the room here, maybe just take it on directly. Yesterday, Carrier mentioned that their October distributor movement was down 30% and that they expect something like down mid-20s for November and December? Does all that sound reasonable enough in terms of what you have seen or expect to see for your equipment business this quarter? And should we think of that in terms of volumes or sales? Albert Nahmad: Well, that's a very good question. And I don't think we're out of the woods yet. So there's some merit to that. Who wants to add more to that? Is it you, Paul, A.J.? Paul Johnston: I think it's pretty much in line. You got to remember that the shipment data that you're seeing was up last year as a lot of the OEMs were shipping all that 410 in. So the shipment data coming out of AHRI really isn't going to be indicative of what's going on in the market. But when you look at the actual unit sales without the price increase, I think they're pretty much in line with what the market is showing. Now that's going to vary from region to region. Once again, we're -- we're seeing some real strength in certain parts of the country, and we're seeing definite weaknesses in others. And so it's not across the board. Albert Nahmad: But in aggregate, we are not seeing increase in demand in the fourth quarter. In aggregate, it's still below this time last year. Now this time last year, it was an extraordinary quarter. But nevertheless, we're seeing that, and we're dealing with, we're getting more productive in our operations and more efficient given the lower volumes temporary or lower. And we are adjusting to the circumstances. Rick Gomez: And Tommy just to clarify one -- Tommy, just to clarify one aspect of that is that the 20% to 30% is unit volumes, not sales dollars. I want to be clear about that. Albert Nahmad: Read my mind. Barry S. Logan: I mean, let me just now little bit of therapy about it, just to be, again, very direct about it. So we're clear a year ago, fourth quarter unit volumes -- unit volumes for Watsco were up almost 20%, right, between 15% and 20%. And a year later, the variance is going to be exposed to that comparable, right? And then after the fourth quarter is when things started to become, I would say, less extreme in that -- in that -- in that regard. So I think the fourth quarter a year ago is still in the context of the transition started. The 410A availability was at its peak, be it contractors, builders, national accounts. Remember, it was drawing on distribution for 410A because they could get it. And it's really the last of the cyclical things in this discussion, I think, about the transition is the fourth quarter. Now it's the smallest quarter of the year. It's off season and it will be -- there obviously is noise in the fourth quarter this year, but it really doesn't bear resemblance as we go forward into next year as a consequential trend, I would say. It's more about the comp a year ago than whether the market has changed any at all in the last 20 days. Aaron Nahmad: Sure. I think that last one summarizes the barrier, our pacing and the industry pacing is roughly the same, the comp changes in Q4. Albert Nahmad: Rick, is there something you want to add with the work you've done? Rick Gomez: Yes. I think -- I mean it's -- obviously, it's been a fluid market and one of the noisiest year -- years in our industry in some memory. And by the way, with all that noise, our earnings are largely intact and I think that says a lot about the resiliency of our business model and of distribution in general. But if we step back, let's -- and examine kind of the big macro factors. We don't have influence over interest rates. We can't influence consumer sentiment or new housing completions or existing home sales. These are all things that impact the unit movement numbers that everyone is focused on. But we have control and we have influence over many other things. We have control over how many customers we serve, and that's been growing steadily over time. We have influence over our margins, and that too has steadily improved with more upside to go, we think. We have control over our expenses, and we're taking steps to improve efficiencies with the product transition now largely behind us. We control our inventory. And as you can see, we made great progress to improve working capital and cash flow in the quarter. We have influence on how we partner with OEMs, and we're right now developing aggressive growth strategies with our key partners for next year. We control our balance sheet. It's -- and of course, it's never been stronger. And we control our technology, which is, I think, the most important competitive advantage we have and with more innovation being introduced right now in real time to help future growth. So even as we navigate this admittedly fluid industry dynamic, I think we've done a great job of acting on the things within our control, and we will continue to do so. Operator: The next question comes from Ryan Merkel of William Blair. Ryan Merkel: I want to follow-up on the fourth quarter. Could you just comment on what you've seen quarter-to-date in terms of total sales? Albert Nahmad: It's soft. Ryan Merkel: Okay. Got you. So yes, it sounds like your biggest supplier is talking about units down 30%, it sounds like we don't totally disagree with that? Albert Nahmad: No, no, we're not in that arena of softness, not even close. It's a single digit, it's probably mid-single digit so far in revenue. Ryan Merkel: Okay. That's helpful. Okay. So mid-single-digit decline. And then... Albert Nahmad: In the single digit now and maybe a little bit higher in the start of the quarter. I would say, more accurately is it Barry, what is it 5%, 10% in that area? Barry S. Logan: Yes. I would give that a range it's October. It's not the rest of the year. But in that 5% to 10% range decline in dollars is how I'd characterize it. Ryan Merkel: Okay. All right. That's not too different than I think most of us were expecting. And then I'm curious, if you talk about the third quarter, the shape of the quarter, it sounded like July started off kind of flat, right, year-over-year. And then from what I heard, August was really rough, September was also tough. So 2-part question. Is that what you saw? And then what do you think the reason is that the unit volume just fell off so much in August and September? Albert Nahmad: Barry, Paul, do you want to deal with that? Paul Johnston: I don't know, Barry, do you want to grab that one? Albert Nahmad: Because contractors installed fewer systems. Barry S. Logan: Yes. Yes. I mean, again, if we consider the number of units that did decline, put it in a unit number and then ask the question, what makes up -- what makes up the -- what are the components of the unit decline. New construction is the largest component of that discussion. We can see it in -- we can see our customers, we can see the special pricing we give. We can count the number of units we sell into new construction, and it was down -- as a percentage down the most in that overall discussion. And I don't know offhand if that got worse in August and September, that's a little granular for my brain this morning. Paul Johnston: Right. Barry S. Logan: But that's the largest component of the discussion. So if interest rates or homebuilding activity or existing home sales get generated in the forward period over the next 12 months, that's an opportunity because that is the largest component of both the quarter and the year-to-date decline in units. And the -- in terms of the replacement market and everything else, there's always a measure of consumer discretion always when a contractor walks in and says, this thing will cost you $10,000, $12,000. And to the extent the consumer is either tighter or worried or credit crunched or more paralyzed in some way about spending $10,000, $12,000 or more on something, it's going to affect -- did that get worse in August and September? It looks like it. Is it permanent or temporary? Is it long term or short term, we'll see. At least in our industry's history, it's never long term. It's always a short-term dynamic. And -- but anyway, that's just some big picture thoughts on that. Ryan Merkel: Okay. I appreciate it. I know that's kind of a hard question to answer, so I appreciate you entertaining it. I'll pass it on. Operator: The next question comes from David Manthey of Baird. David Manthey: I feel like I'm in a parallel universe here in 25 years covering Watsco. This is the closest kind of come to hearing guidance. It's pretty amazing. But -- as long as we're talking about it, the minus 5% to 10% revenue declines in the fourth quarter. We're talking about equipment only there, correct? Barry S. Logan: No, we did not give guidance. We did not give guidance. We gave a percentage of what we see thus far in the quarter in October. David Manthey: But in equipment, Barry, right? Barry S. Logan: No, that's overall. Yes. David Manthey: Overall. Okay. Fair. Fair. Okay. All right. And then if you believe in this -- the normalization theme here, you have a lot of cash, no debt, a healthy dividend. You've always invested organically as needed. The stock seems to be on sale here. Is there a thought about allocating some of your cash forward to more aggressive share repurchase at these levels? Albert Nahmad: That's an excellent question, and I thought about it. We thought about it. But on the other hand, the softness in the industry creates perhaps opportunities for us to do more acquisitions, because, I would say, when we compare our financial strength to others, we're at the top of the heap. And there may be some distributors that finally want to venture with us, either a joint venture or sell to us altogether. We don't know, but we have to remain open to the possibility that we may be able to step up our acquisition activity. I don't know that it's going to happen, but we have to be ready to do that. And we will use our capital to acquire more distributors that we have that opportunity. David Manthey: Yes. I appreciate that, Al. Operator: The next question comes from Jeffrey Sprague of Vertical Research Partners. Jeffrey Sprague: I just want to come back to inventories. It was nice to see that sequential step down in Q3. Just want to think about where we end the year. Obviously, a lot of that depends on things so you said you can't control like end demand in the consumer and all those sorts of things. But what is your view at this point in time of sort of how you end the year, how close to normal inventories you might be as you obviously then start to pivot the focus into 2026? Albert Nahmad: Well, I would say that maybe a general reply as I think from a specific fourth quarter, we want to increase our inventory turns. And that effort will continue into the fourth quarter and in the future. So we're going to get better at inventory turns. And that's our goal. So I think I've answered your question. That is a focus, and we certainly have the capability with our technology and do something about it. And we're doing it, as you can tell, the inventory is coming down, and it's coming down again in the fourth quarter. And the turns are slightly increasing. Turns create more cash for us. So we like that. Jeffrey Sprague: And like more cash too. Barry S. Logan: There's really 2 curiosities and the one you're asking about is will our distribution channel at Watsco be in a more conventional position, right? That's your -- and that's really almost an OEM orientation that then asked the question, has the inventory been reset in line with some kind of -- so you understand what I'm saying. So -- and so yes, there's a lot of progress in the third quarter, more progress in the fourth. You could look analytically where are we today versus history and answer the question, and I can help you with that. But what Al was saying is how does inventory affect us looking forward. What if we had 5 inventory turns instead of 4? What would that do to our return on invested capital? What would that do to our real estate? What would that do to our cash flow? What would it do to the overall handling and load that we carry in our stores if we had less inventory and better turns? What if we had better technology with our OEMs to replenish our stock every day? Those are the bigger -- those are the things we are focused on, while trying to reduce inventory by the end of the year. And you can understand that it's a longer-term perspective from our point of view. And while we're just trying to get the year-end inventory in line to have a, frankly, a strong hand, a strong capital base to flow into next year. And so I think we said last quarter, we were targeting $500 million of reductions by year-end. And second quarter -- or third quarter was $350 million of that. I think we can improve on the $500 million target. It's a slower time of year to say that, but by the end of the year, I think inventories will be near historical levels versus the size of our company. Albert Nahmad: Let me say, again, yes, when we say inventory turns, we are presently at about 3.6, 3.7. We want to be a lot better than that, Barry used some numbers, but he was just throwing numbers out there. I'm giving you more specific numbers. So we have an opportunity to significantly improve inventory turns, which also significantly increases our cash flow, and becomes a more productive part of our business with higher inventory turns. And we have the ability to get our contract -- manufacturers to participate in that because generally, we're the largest customer, and we have the largest impact on the unmet market. And that's what we're doing with them and with our own technology to do better with what we have to achieve the higher returns. But I like it. I like higher returns, and I like higher cash flow. I mean we're at $600 million in cash flow right now in the bank. I'd like to see that number get larger because I'd like to have the ability to do almost any transaction that comes our way. And I don't like going into debt for it. I'd like to have the capacity to do what we need to do with the cash we have. Operator: Our next question comes from Chris Snyder of Morgan Stanley. Christopher Snyder: I wanted to follow-up on some of that inventory conversation. It seems like you guys believe you'll be at like a roughly more normalized level to exit the year. But I guess my question is, should we expect the normal kind of typical ramp in inventories from year-end into Q2 that we've seen you guys do historically? Or could that be more muted just kind of given the inventory backdrop? Albert Nahmad: Well, that's an interesting question, and I can only say that we're trying to get better in the management of our inventory. So history is not dependent what we're going to do as we go forward this year. I think whatever we've done in the past, we'll do better. Go ahead, Paul. Paul Johnston: Yes. Think about the last 5, 6 years in our industry. We've had -- we had the change in industry standards on efficiency then we had the change in refrigerant come at us. Then we had the pandemic. It hasn't been normal on a lead time basis with our OEMs for the last 4, 5, 6 years. So for us to get back to normal again, as Barry was talking about, means that we order something and we get it within 4 to 6 weeks. And we don't have lead times that extend out beyond that and that the manufacturers can go ahead and supply us in a timely manner, and that's how you adapt your inventory to get to a 5 turn. Albert Nahmad: And we're trying to get cooperation from the manufacturer to do better in deliveries. Whatever they have to do to deliver much quicker with less lead time. And that's part of the effort. And because of who we are in our size, they listen to us. I hope -- I'm hoping, but I think they will. Christopher Snyder: I appreciate that. Maybe to follow-up on price. The OEMs that have reported so far talked about an expectation of incremental price in '26. Maybe a bit of a surprise, given what seems like affordability challenges and just overall headwinds facing the consumer, I guess what is your thoughts on that? And do you feel like just given the balance sheet and maybe the absorption headwinds that they're facing, do you feel like that gives you guys better ability to push back or negotiate than years past? Albert Nahmad: Well, I couldn't know how to answer that question... Paul Johnston: That's a tough question. Albert Nahmad: We're a good customer of our manufacturers and I like to think that we can -- we're listening and we will listen to them, and we'd like to get along with our manufacturers and I don't know, I don't answer that any better than that. Paul Johnston: Yes. Bottom line, though, when you look at the average transaction out there, our value content to the contractor is generally about 30% to 40%. So if it's a $12,000 installation, the amount of product that we're selling is going to be in the, let's say, $3,000 to $4,000 range. So a price increase at that point is going to increase, let's say, they go up pick a number. If they go up $100, it's not going to be a major transaction halt to the consumer. So I really don't know what we're facing from the OEMs yet. And until we do, we can't react to it. Operator: The next question from Mitch Moore of KeyBanc Capital Markets. Mitchell Moore: I know most of the industry is already in those entry-level baseline SEER products. But just wondering if you could talk about mix in the quarter. Just maybe if you could flesh out if you're seeing consumers trade down to lower tier products? Paul Johnston: Yes, that's been occurring all year long. Any time you have a change in product. Everything always has migrated to the base model. The base model today is 15.3 SEER in the South. That's a very efficient thesis of equipment that I wouldn't call base anymore. I'd call it almost high efficiency. So it's been pretty steady. The data we have only covers 2 quarters on the industry. So first and second quarter, we're fairly flat as far as the SEER ratings. It's always higher on heat pumps than it is on straight cool. Aaron Nahmad: The exception and an exciting thing going on in our business is that we can help our customers sell up, particularly through OnCallAir. I think we're approaching -- not I think. We are approaching close to $2 billion of our customer sales going through that tool and the most amazing statistic is that over 70% of the sales that occur are more -- or higher than the minimum efficiency standard. So where the rest of the industry is selling 80%, 85% minimum standard on OnCallAir, it's over 70% above the minimum standard. And more of that we can do, the better for everybody in the channel. Albert Nahmad: Well said A.J., can you explain OnCallAir? There may be some new people on this call. Aaron Nahmad: Sure. OnCallAir is a technology initiative. It's actually a business we created in our Watsco venture subsidiary and has created [indiscernible] software that's really a sales engine for our contractors or our customers. So a customer like AJ's heating and cooling would be OnCallAir customer and use our software to sell in the kitchen house. And it's loaded up with all of our data about all the products we sell, our customers' pricing, our inventory everything you could ever want in terms of creating a world-class professional sophisticated proposal or proposals for homeowners as a contractor or building owners of contractors attempt to sell their wares. Our customers that use it are winning more jobs, they're higher-ticket jobs, they're higher-margin jobs. And like I just said, they're more often than not selling higher efficiency systems than the base tier as well. So it's growing, it's growing fast, and it's just a win-win-win for everybody in the channel. Mitchell Moore: Great. That's super helpful. And then obviously, record gross margins here in the third quarter. Just wondering if you could unpack the moving pieces within that. Maybe just how much was mix benefits from the other HVAC products versus some carryover OEM pricing? Rick Gomez: This is Rick. I can -- yes, this is Rick. I can help you with that answer a little bit. There's 2 or 3 contributors there that help and that feel good and sustainable. The first is we had growth in non-equipment, and as a category as a basket, that nonequipment business has higher gross margins. So that is a mix benefit in our gross margin. There was some carryover benefit from springtime OEM pricing actions. And then the third most structural most interesting aspect of it is that, we've talked about the pricing optimization tools that are maturing and getting better every day in the field. AI is making that even better today and transactional margins were very resilient in a down market and actually slightly up. So we take some comfort in that and feeling and being somewhat -- or to us feel somewhat permanent and structural whatever word you want to use. And those are the large contributors to the margin expansion. Aaron Nahmad: And then just by the way... Albert Nahmad: Let me just say this. We don't want to provide information to our competitors that can use for. So be careful with how much detail we answer these things. Go ahead, A.J. Aaron Nahmad: I was just going to say, the way you said that, Rick, and what you said earlier about controlling what we can control, it's important to reiterate that we're a long-term company. I mean I know this is the third quarter call. But our job is to invest and to steer the business for the long-term health and continuous improvement of this business. You heard us talk about that in our inventory, right? We talked a little bit about what it means in this quarter and next quarter, but really, we're talking about how do we get to 5 turns. What does that mean for our business in the medium and long term. There's pricing, there's noise, there's OEM changes and so forth, but what are we doing to improve our paradigm as a selling organization to structurally increase our margins over the long term. It's true of our technology initiatives, helping our customers digitize their businesses so they can be more efficient as well as we can be more efficient and we can all move the efficient frontier out into the right. So I understand these questions are very much focused on this quarter and next quarter, but our business is focused on the long term as well as the short term. Operator: Our next question comes from Steve Tusa of JPMorgan. Albert Nahmad: As I say, Miami [ commerce ]staff. C. Stephen Tusa: [indiscernible] I don't know. I was in Italy this summer. So just... Albert Nahmad: I can tell. I can tell. C. Stephen Tusa: Yes. Never real language guy, unfortunately. . Albert Nahmad: You did good. C. Stephen Tusa: But I do talk HVAC. I talk the HVAC language. So I'm just curious, when you survey your contractors, what are they saying about like what their volumes are down? Or are they -- I mean I would assume they're down if this is what kind of like what you guys are seeing, but like what is the actual like I don't know what you call it, like of activity for the contractors like at the ground level? Albert Nahmad: I'm not sure I understand your question. C. Stephen Tusa: Well, are your contractor customer sales down? Or are they -- like, is it -- because Lennox mentioned something about contractors having inventory. I think Carrier kind of reinforced that yesterday. So there's this kind of narrative that there was -- there was some inventory sitting at contractors? Or should we assume that your sales are kind of in line with what they're seeing on the ground level? Paul Johnston: I think some contractors may have inventory, but that's going to be a very large contractor. It's got a warehouse. We sell to almost 100,000 different contractors across the country. So it's -- if you're talking to large contractors, yes, they could have inventory, but I don't think it's ever going to be a meaningful amount of inventory. Aaron Nahmad: I mean, Steve I've talked to contractors in the Northeast that are of size and they're doing great. I've talked to small ones in Texas that are closing up shop. I mean it is all over the map, which as you imagine, since like Paul said, we're at such scale with 100,000 customers across the company. It's not -- there's not one story. There's thousands. C. Stephen Tusa: And as far as... Aaron Nahmad: The industry overall is down, right. C. Stephen Tusa: As far as this institutional channel, which is, I think, the large contractors, how big is that now as a percentage of the market, if like housing and homebuilders are like 20%-ish, like is that institutional channel? How big is that now the consolidators on the contractor side? Paul Johnston: It would be guess on our part. Yes. Albert Nahmad: Barry, what do you have there? I think you estimated that for me once. Barry S. Logan: Yes, I mean it's 2 separate conversations, Steve. There's the contractors that do work for the builder community and that is not necessarily a consolidator or some kind of what we're targeting as institutional. And if housing is 10%, 15% of the market, I believe those contractors are 10%, 15% of the market. But the focus of what we're talking about is mega contractors that are primarily replacement driven that have a multitude of locations throughout the U.S. and their fragmentation of who they buy from is extreme. So we're trying to develop the thought of how to bring productivity and scale to that relationship. And I certainly think that segment is under 10% of the market, but it is growing, and this isn't just cooked up in a lab. This is customers coming to us and asking if we can help them with this. Aaron Nahmad: I think you said that right, Barry. It's under 10%, but it's an important growing segment. They are buying -- their buying is fragmented, including amongst the Watsco companies fragmented. So what we're developing is a single solution for them to buy all their needs from all of our businesses that's under development now and we'll come to market early next year. But the conversations we have with those institutional-type contractors, and the consolidators of what the prospect of this thing is it's very exciting to them and therefore, very exciting to us. C. Stephen Tusa: Got it. And then just one last one for you on pricing. Anything on the in the environment that you're seeing, where maybe there's an OEM that's trying to get rid of some inventory or something, any kind of like late season rebate activity that -- or discounting activity you're seeing on a like-for-like basis price-wise? Paul Johnston: Whatever we're seeing is not material. Operator: The next question comes from Nigel Coe of Wolfe Research. Nigel Coe: By the way, I think this is the first time you guys have done a formal investor event. So this is one we can't miss. So look forward to that guys. Albert Nahmad: Where are you coming from, Nigel? Nigel Coe: New York. Yes. So don't [ depot ] by the accents. It's a... Albert Nahmad: You had [ depot ] you did have [ depot ] I was going -- I'm going to guess -- I was going to guess Ireland. Nigel Coe: Ireland. Well, yes, I'm actually Wash, but close enough. Albert Nahmad: Okay. Nigel Coe: So I want to go back -- I really love to get your perspective on the customer behavior and why it changed so dramatically. And it seems to be a coincidence, so maybe not coincidence that it's happening at the time that we've seen this A2L transition. And I'm just wondering if the kind of the cost of a full replacement system versus a partial is a factor that contractors are highlighting to you. And within that question, I'm just wondering if you're seeing the same sort of trends for the R-32 products, Ductless or Goodman. Are those kind of sell-through dynamics better than what we're seeing for R-454B? Paul Johnston: Yes, this is Paul. Yes, you are seeing a difference as far as performance. The A2L product, you've got to replace the coil inside as well as the outdoor unit. You can't just replace the outdoor unit because you have to have the sniffing device to be able to tell if there's a leak and then you have to have the switch to turn on the blower fan. So that brought the price up, but it also increases the cost of the consumer to replace an entire system. When you look at Ductless products, Ductless products continue to grow. There's some new products out there that are side discharge. And they have a tendency to get into the higher efficiency levels with the coil inside and they're ducted. So yes, we've seen some changes in the duct free market, which have enhanced our sales there. Aaron Nahmad: But Nigel, I guess, the price of the A2L machines or equipment or solutions are higher, but I don't believe that's the full reason that there's a slowdown in the industry, I think that's much more about the all record or, I believe, close to record lows and consumer confidence, record lows in the trading of homes and building of new homes, the tariffs creating I would say, uncertainty for many homeowners of what their cost of living is going to be. So I just think there's less activity in terms of people investing in their homes, HVAC included, especially coming off a period where they invested a lot in their homes, when they were living at home all day long during the COVID times. So while yes, it's true that there is more price than machines. I just don't believe it's that clear of elasticity conversation, I think, much more macro influences or having an impact. Nigel Coe: Okay. Okay. That's great color. Barry S. Logan: I just want to add something for everyone's sake in this because I think part of this discussion is where is the contractor in this and how are their businesses doing? Someone asked, is there a correlation between what a contractor would feel and what we're feeling and so on. And I said this many quarters through my career, no one ever asks about credit. We give contractors $800 million in accounts receivable, and we know the credit quality every second of the day. In the recession, for example, we had 10% of that portfolio over 90 days past due. Today, it's 1.2%. Last year, at this time, it was 1.2%. Credit quality has not changed at all. It's not -- that 1.2% is as low as any year in the last 10 years. So if I look at the pure credit quality of our customer as maybe a leading indicator of some kind, the quality is very high. Nigel Coe: Okay. That's great color. And then my follow-up, and I know we're running out of time here. But my follow-up is everyone tracks the HARDI data intra-quarter. And it just seems very disconnected from -- well, it doesn't seem it is very disconnected from what we're seeing from you and obviously, your OEM partners. Any perspective on that would be helpful. Paul Johnston: Yes. I think there's a great deal of difference there. Yes, one, if you take a look at the OEMs themselves who don't report to HARDI, you've got, what, 50% of train sales goes through their company-owned stores, 70% of Lennox, 70% of Goodman. Carrier pushes, what, over 40%, 45% of their sales through Watsco, we don't report to that. So it's a different reporting group. I think it's going to be a little bit more commercial refrigeration. I think it's going to be a little bit more on the repair side, perhaps. And it tends to be generally more of a northern-based report than the south. So geographically, I don't know how it's -- and I don't know if they have a consistency every month or quarter as far as who is reporting to it. So on the index that weekly can use is the HRI data. Albert Nahmad: Paul, why don't you comment also, which we generally do not comment but the weather this season. Paul Johnston: Yes, the weather was -- yes, it was hot in Florida like it always is. It was hot in Texas, like it generally is. But we had the recooling days that were not really on target for the entire year, especially the peak part of the year, which is May and June when people are thinking about putting in a new air conditioner. But if the weather doesn't get hot, they don't. So it's been just an odd year. I just wish I could put both arms around it and explain it better, but it's a very difficult situation to explain. Aaron Nahmad: Barry said on last quarter's call. We look forward to getting back to some harmony hopefully, in 2026. Barry S. Logan: And the word was serenity, by the way. Albert Nahmad: Serenity, yes. Thank you, better, better word. Serenity, now. Barry S. Logan: But in the meantime, we're getting stronger. Our balance sheet is getting stronger, technology capabilities are getting better. We're not feeling sorry for ourselves that the industry has slowed down. We're doing something about it. We're getting stronger. Operator: Our next question comes from Steve Tusa of JPMorgan. Albert Nahmad: We're very proud. C. Stephen Tusa: I believe the term is serenity now and sanity later. I believe that's what they say. Sorry, on that point about this year being an unusual year. So as you kind of stand today, I know the crystal ball is pretty clouded, but like do you view this as kind of like abnormally low? And then next year, you bounce from a sell-through perspective? Or there's not enough visibility to kind of call that as you move into next year? . Albert Nahmad: Do we think this year has been unusual, Yes. Demand is unusual. Do we think we'll get normal next year? I would like to think so, but who might have predicted what the weather is going to do and the other circumstances that create demand. So that's an unknown. But are we stronger now? And will we be stronger next year? Yes. All I can do is control what we do. We're going to get stronger and better no matter what's going on with demand, because that's who we are. We're going to get -- we're going to build up our capabilities to do much more things that our competitors can do, innovating in technology and building our cash position to perhaps do more M&A. I'd like to do more M&A. So whenever it comes, comes, we'll be ready for you. C. Stephen Tusa: Yes, control the control. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Albert Nahmad for any closing remarks. Albert Nahmad: Well, let's just fine today. I enjoyed it. We have a great team here in Watsco in Miami, and I certainly hope as many of you can come to Miami in December, please do. We'll welcome you with open arms. And any of it, thanks to your interest in Watsco. Bye-bye now. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to Bladex Third Quarter 2025 Earnings Conference Call. A slide presentation is accompanying today's webcast and is also available in the Investor Relations section of the company's website, www.bladex.com. [Operator Instructions] Please note that today's conference call is being recorded. [Operator Instructions] I would now like to turn the call over to Mr. Jorge Salas, Chief Executive Officer. Sir, please go ahead. Jorge Salas: Good morning, everyone, and thank you for joining us to discuss our third quarter results. I'll start with the quarter's highlights, and then Annette will walk you through the financials in detail. After that, I will briefly comment on the region's economic outlook and also provide an update on the implementation status of the 2 main IT platforms that underpin our path towards scalability and enhanced fee generation. After that, we will open the call for questions. Despite the more challenging environment marked by rate cuts, high regional liquidity and wide open capital markets for Latin American issuers at historically tight spreads, we delivered very solid results in the third quarter, fully aligned with our expectations and guidance. And I'm particularly proud of the fact that in mid-September, we successfully issued our first additional Tier 1 capital instrument. The deal was led by JPMorgan and Bank of America as joint book runners and was more than 3x oversubscribed. It attracted investors across Latin America, the United States, Canada, Europe and the Middle East. I want to recognize Annette, our CFO, for her leadership in this landmark transaction for Bladex. Annette will cover the details shortly. The objective of this additional Tier 1 capital is straightforward, to strengthen our capital base to support the very robust pipeline of high-value transactions we are building and executing. This will ensure we sustain growth through the remainder of this year and into the future. Now turning to our commercial portfolio. Balances were stable quarter-over-quarter and up 12% year-over-year, driven by loan origination in Mexico, Guatemala and Argentina. Notably, the commercial team has continued to onboard new clients. As a matter of fact, new client onboarding is up 7% year-to-date. Regarding funding, deposits rose 6% quarter-on-quarter and 21% year-on-year with a quarter end record of $6.8 billion. The quarter also benefit from another significantly oversubscribed issuance in the Mexican debt capital markets, allowing us to secure medium-term funding at highly competitive terms. On the P&L front, interest income was stable quarter-over-quarter despite the impact on rate cuts and ample market liquidity. Noninterest income performed well, down sequentially given the one-off transaction we highlighted last quarter, but up 40% year-over-year, supported by strong activity in both letters of credit and our syndication and structuring team. During the third quarter, Bladex acted as sole lead arranger in the acquisition financing of CEMEX Panama by a leading Dominican business group, another clear example of how Bladex supports intra-regional expansion across Latin America. Our net interest margin showed a slight decline of 4 basis points down to 2.32%, but still remains above our full year guidance. This stability on margins is a reflection of proactive portfolio management, including a shift towards corporate clients that now represents 73% of our portfolio versus 68% last quarter and a healthy momentum in medium-term transactions, all without extending the average duration of our commercial exposures, which remains slightly below 14 months. Operating expenses were stable, and our efficiency ratio closed at 25.8%, even better than our full year guidance of 27%. We closed a solid quarter with $55 million in net income and a 15% return on equity. The quarter-over-quarter decline in ROE reflects the one-off transactions referenced in Q2 as well as the dilution from the increase in the capital base resulting from our AT1 issuance. If you exclude these 2 effects, it is very clear that the performance is consistent with the guidance for the year. Let me now hand it over to Annette for a more detailed look at the financials. Annette, please go ahead. Annette van de Solis: Thank you, Jorge, and good morning, everyone. Let me walk you through the main financial highlights for the third quarter, which once again reflects disciplined execution and solid results, supported by resilient margins and strong fee generation, while further strengthening our capital and funding base, all of this while navigating a more competitive environment with abundant liquidity and continued rate cuts. Let me start with capital, given the relevance of the AT1 issuance this quarter. In September, we executed a $200 million perpetual non-call 7 Additional Tier 1 or AT1. Market conditions were exceptionally constructive for this asset class, and we timed the issuance to capture a favorable window with comparable AT1s trading near historical tight spreads and well below our estimated cost of equity. This instrument is Basel III compliant and meets local regulatory requirements and under IFRS, it is recorded as equity, further strengthening our capital base. Its perpetual non-call 7 structure provides the optionality to recap the instrument over the next 2 years if additional capital is required, while still in full compliance with local regulation, giving us the flexibility to support portfolio growth and capture opportunities across the region while maintaining a solid capital position. Following this transaction, our regulatory capital adequacy ratio rose to 15.8% and our Basel III Tier 1 ratio increased to 18.1%, both comfortably above internal targets and well ahead of regulatory minimums. This additional layer of capital reinforces our strong positions and keep us well prepared to execute on our growth plans. In line with these solid fundamentals, the Board approved a quarterly dividend of $0.625 per share, consistent with recent quarters, representing a [4.2] payout ratio, reaffirming our confidence in the bank's sustainable earnings capacity. Let's now take a look at earnings and returns. Third quarter's net income totaled $55 million compared to $64 million in the previous quarter, which included the extraordinary syndication fee from the Staatsolie transaction booked in the second quarter. This quarter's performance translate into a return on assets of 1.8% and a return on equity of 14.9%, fully in line with our full year guidance of 15% to 16%. The decline in ROE versus the prior quarter mainly reflects the impact of the AT1 issuance in late September, which increased our equity base ahead of deployment as well as the one-off fee recognized last quarter, which boosted those results. Looking at the first 9 months of the year, ROA stood at 1.9% and ROE at 16.2%, highlighting the bank's solid and consistent profitability. As mentioned earlier, the AT1 is recorded as equity under IFRS, expanding the denominator and mechanically diluting the ROE. On this basis, our reported ROE was 14.9% for the quarter and 16.2% year-to-date. To provide additional clarity, we also calculated an adjusted return on equity, which excludes the AT1 from the denominator, reflecting the return to our shareholder base. These metrics provide a clear view of underlying profitability from a shareholders' perspective. Under this measure, the adjusted ROE was 15.1% for the quarter and 16.3% year-to-date, with the slight difference versus reported ROE, mainly reflecting timing as the transaction closed late in September and its full effect will be seen next quarter. As we deploy the new capital into medium-term pipeline, we expect returns to normalize to our historical levels, reaffirming the strength and consistency of Bladex earnings model. Overall, this result confirm that Bladex profitability is driven by a diversified and recurring earning base, not dependent on one-off transactions and that our strategy continues to deliver sustainable, predictable returns. Let's move on to the credit portfolio. Total credit portfolio reached $12.3 billion, a new all-time high, up 1% from the previous quarter and 13% year-over-year, supported by growth across loans, contingencies and investments while maintaining a conservative liquidity position. Our commercial portfolio, which includes loans and contingencies stood at $10.9 billion, reflecting a slight growth quarter-over-quarter and up 12% year-over-year. Within this total, the loan portfolio closed at $8.7 billion, an increase of 2% from June and 8% compared to last year, reflecting steady client demand, despite high market liquidities and tighter capital market spreads. In this environment, we continue to prioritize disciplined short-term origination during the quarter, complemented by the execution of our medium-term pipeline. This moderation in growth also reflected prudent balance sheet management, leading up to the AT1 issuance as we maintain a capital cushion while the transaction timing was being finalized. Now that the transaction has been completed, we are well positioned to resume disciplined expansion in the coming quarters. On the contingent business side, which includes letter of credits, guarantees and credit commitments, balances closed the quarter at $2.1 billion, down 4% from the previous quarter after a very strong first half, but still 33% year-over-year. What is important is that our letter of credit business continued to grow, both in average volumes and fee income, showing healthy underlying activity. Letter of credits remain central to this business line, directly supporting our mission of facilitating regional trade flows, while commitments have evolved into a resilient income source as we continue to structure medium-term transactions that foster lasting client relationships. With our new trade finance platform implemented, we are prepared to support higher transaction volumes of letter of credit and expand our client base. In terms of performance by country, Guatemala, Mexico and Argentina were the main drivers of growth this quarter, reflecting healthy commercial activity and strong client engagement in these markets. Looking at the commercial portfolio diversification, financial institutions remain our largest exposure, representing about 1/4 of total credits, while our exposure to corporate clients continue to grow across sectors and countries. This mix help us to stabilize margins and reinforce the resilience of our earning base. Overall, our commercial portfolio continues to expand with discipline, supported by the successful completion of the AT1 issuance, growth across key markets and a well-diversified client base that positions us to capture new opportunities ahead. Now turning to the investment portfolio and liquidity. The investment portfolio totaled [ $1.4 billion ], up 4% from the prior quarter and 18% year-over-year, consistent with our liquidity strategy. It remains predominantly investment grade, about 88% of the portfolio and is largely composed of non-Latin American issuers, providing both credit diversification and a reliable source of contingent liquidity. The portfolio is short in duration by design with an average maturity of about 2 years and is primarily held through our New York agency, where these securities are eligible as collateral at the Federal reserve discount window. Liquidity ended the quarter at [ $1.9 billion ], representing 15.5% of total assets, in line with our target range. As of September 30th, 95% of liquidity was placed with the Federal reserve, highlighting our prudent and proactive liquidity management. Together, our high-quality, well-diversified investment portfolio and a strong cash position with the Federal reserve provides a robust liquidity foundation and the flexibility to fund new opportunities while maintaining a prudent balance sheet strategy. Let's now look at asset quality. Credit quality remains remarkably strong. By the end of the quarter, 97% of total exposures were classified as Stage 1, reflecting low credit risk across the portfolio, while nonperforming loans stayed near 0 at just 0.2% of total credit. Our coverage ratio remained above 5x, confirming the strength and resilience of our asset base. Provisions charges totaled $6.5 million, slightly higher than in the previous quarter, mainly reflecting the reclassification of a single client exposure from Stage 1 to Stage 2. With this, total allowances reached $101.5 million or 0.8% of total exposures, fully consistent with our prudent and proactive credit management approach. All-in-all, credit portfolio remains solid and well diversified with Stage 3 exposures stable at 0.2% and overall asset quality remaining very strong. Let's move on to funding, where we continue to see strong momentum in deposit growth. Deposits continued their strong upward trend, growing 6% quarter-over-quarter and 21% year-over-year, reaching $6.8 billion and now accounting for 2/3 of total funding, the highest share in Bladex's history. Deposit growth was driven by corporate clients' deposits, which rose over 26% from June, supported by cross-selling efforts, while higher balances from financial institutions also contributed to the overall growth. At the same time, Class A shareholders' deposits remained stable, providing an anchor of funding stability. This performance highlights the depth of our client relationships and the success of our Yankee CD program as a diversification strategy, which continues to lower our overall cost of funds. In July, we issued MXN 4,000 in the local market. The deal was very well received and oversubscribed, giving us a competitive cost and further diversifying our funding base. The proceeds were swapped to U.S. dollars, which provided a cost-efficient source to fund new business opportunities. The favorable evolution of our deposit base, combined with the proceeds from the AT1 issuance provided the resources to repay our $400 million benchmark bond that mature in mid-September. And looking ahead, we continue to monitor medium-term funding opportunities to further diversify our investor base and maintain an efficient cost of fund structure. This combination of strong deposit growth and continued access to market funding has strengthened our liability profile, making it more diversified, stable and well aligned with the growth of our commercial portfolio. Moving now to net interest income and margins. Net interest income remained stable at $67.4 million, showing resilience despite margin pressure from higher market liquidity and the gradual impact of lower reference rates. Our net interest margin stood at 2.32%, down 4 basis points from the second quarter, while the net interest spread narrowed from 1.70% to 1.64%. This slight margin compression is the result of a short-term liability sensitive position in the context of an inverted yield curve. It also captures the initial impact of the recent Fed rate cuts on our liquidity balances, which will be followed by the repricing of the remaining assets and liabilities in the upcoming months, consistent with our largely neutral positions to base rate movements. These effects were partially offset by a lower cost of funds, supported by continued deposit growth, greater funding diversification and disciplined loan origination across the portfolio. Overall, margins remained stable and well managed, reflecting disciplined pricing, a strong funding base and the resilience of our core earnings models. Now let's turn to noninterest income. Noninterest income totaled $15.4 million for the quarter, following the record level we reached in the second quarter. If we exclude the extraordinary fee from the Staatsolie transaction last quarter, this would have been a new record with results stronger than our historical quarterly fee results with contribution across all line of business. Fee income this quarter was led by letter of credits and credit commitments, reflecting healthy trade activity and client engagement. As announced last quarter, we launched our new trade finance platform. And while we are still in the fine-tuning phase, this marks a major step towards future scalability. The platform is expected to be fully optimized by the end of the year, enabling us to process higher transaction volumes and enhanced client experience, reinforcing our competitive position in trade finance. In syndications, we closed 4 transactions totaling $431 million, including new originations and upsized deals across Panama, Costa Rica, Paraguay and El Salvador. Among them was the acquisition financing for CEMEX Panama, where Bladex acted as the sole lead arranger. Together, these operations generated around $2 million in fees, reflecting the depth and strength of our structuring and distribution capabilities across the region. As we expand our presence in structured medium-term transactions, credit commitment continue to grow as a relevant and stable source of fees since many of these deals include committed facilities as part of their structure. We also saw additional contributions from the other noninterest income sources. Our secondary market distribution desk generated almost $1 million in loan sales this quarter and about $2.5 million year-to-date. We expect this figure to continue rising over time as our deal flow expand and market activity remains strong. In addition, our treasury team closed a large interest rate swap tied to a project finance deal we led in Peru, a transaction that validates our growing project finance and infrastructure strategy. This type of business not only brings healthy margins and structuring fees but also creates cross-selling opportunities in areas like derivative. These early derivative transactions mark an important first step in building our treasury-related noninterest income business, positioning the bank to capture future hedging and risk management opportunities once the NASDAQ platform goes live in the second half of 2026. Overall, fees and noninterest income and gaining strong momentum, supported by recurring fees, broader diversification and solid activity in trade and syndications, they now account for around 19% of total revenues, up from 14% last year and will continue to grow as new platforms and client solutions drive the next phase of our diversification strategy. Finally, let's look at expenses and efficiency. Operating expenses totaled $21.3 million, about $0.5 million above last quarter, reflecting a 2% sequential increase. This was mainly driven by higher personnel expenses related to compensation adjustments and new hires supporting strategic projects, partially offset by lower operational costs. As several technology and strategic initiatives move into production, we expect depreciation costs to begin rising next quarter. Our efficiency ratio closed at 25.8%, slightly better than our guidance of 27%, and we continue to expect to end the year within that range. This demonstrates our ability to grow revenues faster than expenses while continuing to invest in modernization and future growth. Overall, Bladex continues to operate with one of the best efficiency levels among the regional peers, a reflection of disciplined cost management and our focus on sustainable growth. That concludes my reviews of the financials. I will now turn the call back to Jorge for his closing comments. Jorge Salas: Thanks very much, Annette. Very clear, great job. The global economy is adapting to a more protectionist trade setting. Recent agreements have tempered some tariff pressures and push growth expectations higher as recession risks have largely faded. Having said that, volatility persists. This is visible in international financial market swings and a stronger safe haven demand, including gold. In the United States, our base case continues to be a soft landing. However, inflation remains above target and could face upside risk from tariff tensions. In our view, this limits the scope for rate cuts and points to a structurally higher terminal rate than in the prior cycle. Latin America, however, has largely remained insulated from global trade frictions, supporting stable growth in 2025, although with significant variations across countries. The IMF now projects 2.4% growth for the region in 2025 and 2.3% in 2026, with the 2025 upgrade led by stronger performance in several economies, especially Mexico, where recession risks have diminished. As usual in Latin America, inflation is advancing unevenly. Most of Central America has converged faster to inflation targets, allowing lower policy rates, while the larger economies in South America and Mexico are normalizing at a slower pace, leaving less room for further interest rate cuts. For trade, the outlook is mixed. Tariff noise and policy uncertainty weighed on Mexico and parts of Central America, while nearshoring and supply chain diversification continue to create structural opportunities, particularly in manufacturing and agribusiness. In this context, Bladex is well positioned to help clients navigate uncertainty and capture these opportunities through medium-term structured solutions in our trade finance expertise, reinforcing our role as a trusted partner in cross-border flows. Next slide, please. Let me now close with a quick update on strategy execution. Since launching our strategic plan in 2022, we have strengthened our operating capabilities to support a meaningful growth in volumes and profitability. At the same time, we have developed new business lines to raise noninterest income and diversify revenue sources. As we announced last quarter, reaching full operational capacity on our new trade finance platform powered by CGI will take until next year. That said, the first quarter operation with the new platform is already delivering tangible results, higher transaction volumes and faster cycle times, including shorter processing times for letters of credit. These early outcomes enhance the client experience and improve our operational leverage. Also, as you probably saw, we recently announced our partnership with Nasdaq's Treasury and Capital Markets platform. We selected its front-to-back cloud-enabled API-driven solution to scale treasury and capital markets. The state-of-the-art platform supports client hedging in FX and rates, broadens local currency and structured funding and automates core workflows, enhancing speed, controls and risk management. Teams from both Bladex and Nasdaq are already making good progress on the implementation, and we expect to have the first phase fully operational by Q3 2026. Moving on to the next and final slide. Just to note here that based on year-to-date performance, we reaffirm our full year guidance. With that, let's open the line for your questions. Operator: [Operator Instructions] Our first question comes from Inigo Vega with Jefferies. Iñigo Vega Zabala: A couple of very short questions. One is on capital. Obviously, you got the AT1. You moved from a capital ratio of 15% to 18%, so I'm wondering if you can give some color on what is your new target in terms of capital ratios once you've done this AT1? And if you answer me like we're going back to 15%, what is the timing to deploy that capital, like how many quarters, how many years you could go back to, if you say 15%? The other question is on credit quality. I mean, I can see that Stage 3 remains very low. I think you commented that there's been a pickup on Stage 2. I mean, running the numbers, I get to something like 20 basis points more of Stage 2, which is like $50 million. So if you can sort of explain what is the visibility on that ticket, how concerned? And what is the sort of probability of default? I guess classifications of Stage 1 to Stage 2 is basically the day-to-day, but if you can give some color on that would be helpful. And probably the last one is, I reckon that you are working on a new stake plan. Do you have any timing in terms of announcing the new stake plan? Jorge Salas: Inigo, good questions, as always. Regarding the capital, you're right. I mean, our target remains unchanged in the mid-teens and 15%. The AT1 transaction was more about having dry powder to deploy, as we said, on the pipeline. In terms of that deployment, we expect to put that additional capital to work over the, I would say, the 12, 18 months. That's the time -- that's a normal life cycle that takes between origination, structuring and syndicating the medium-term deal. So obviously, we'll prioritize risk-adjusted fee accretive opportunities, but the bottom line is the targets remain unchanged, and we will deploy it in the next year to 1.5 years. So there's no impact on the guidance that we've communicated, the long-term guidance. In terms of increase in Stage 2, you're right, it was driven by mainly one client. In terms of how worrisome, Inigo, I'll put it this way. It's short term, it's trade finance exposure, which is what we do. It's primarily letters of credit to support imports for essential goods for the country. All facilities are uncommitted. They are maturing quarter-by-quarter. The client is current. We have increased reserves as we do with every loan that falls into Stage 2, we're monitoring closely. But importantly, even when running the stress scenarios with the info we have today and given the size and the terms, this will have no effect on our ROE we've indicated for the year. And that's why we just ratified the guidance. So in short, we're being prudent. We're on top of it, but business as usual and the bank remains strong. As far as the Investor Day, we're in the final stages of approval of our 2030 strategy and vision by the Board. And we're super excited to host the new Investor Day with the 2030 vision in Q1, I mean, right after we have the full year 2025 results. So right after we published the first quarter -- I mean, the end of the year 2025 by the end -- I guess by the end of the first quarter, we'll share the 2030 plan. Operator: Our next question comes from Ricardo Buchpiguel from BTG Pactual. Ricardo Buchpiguel: I have a couple of questions here on funding. The bank deposit franchise has been growing very strong recently, especially in the last quarter and its funding cost is a bit below the bank's overall borrowing cost, right? So I just wanted to understand whether this deposit could mainly help to lower the short-term funding cost over time or if that could eventually help to reduce long-term funding instances, bringing more meaningful reduction on NIMs? And also will be great if you could comment on the opportunity to improve the funding cost with operational deposits, right? You already make several payments into our customers' account when you're granting loans. And I understand you already have been investing in this banking account offering. So I'd like to understand whether we can see further funding cost gains as kind of a low-hanging fruit over the next couple of years? Jorge Salas: So let me start with the second question first on operational deposits. You're right. We see it as a low-hanging fruit. That's something that Bladex, despite being a trade bank, we don't have too much of operational deposits. Of course, that involves some basic cash management capabilities that we're building. How are we going to do it? How much of that are we going to do? That's a big part of what the Investor Day is going to be telling about on Q1. So you have to wait until our Investor Day for that, but it could be a very significant upside there in terms of cost of funds. Regarding the shorter term question on funding, it's true. I mean, this quarter, first of all, we had the AT1, and that helps, of course, there was an influx of $200 million. Then we increased deposits as obviously the more efficient cost of funding avenue that we have. And also, we have an issuance in Mexico also at very good rates even when swapped to dollars. So that was part of the increase in the -- I mean, the benefit in cost of funds that we had this quarter. I don't know, Annette, if you want to complement that. Annette van de Solis: As Jorge mentioned, funding keeps being complemented by the participation of deposits. We feel confident that going forward, as we increase our cross-selling capabilities, we're able to keep growing our depositor base organically as we do the cross-selling and also as we increase our client base as part of the strategic plan. So we are projecting growth in the organic deposit balances. And for the upcoming years, as part of the strategic plan, as Jorge mentioned, this will be further complemented with more powerful deposits from a cost point of view, even though these are new to the balance sheet. Ricardo Buchpiguel: Very clear. I'm just wondering that when I see the average balance of your interest-bearing liabilities that you have like around like $2.6 billion in terms of long-term borrowings, right? I wanted to understand eventually if this component of the funding would be more diluted over time and this would improve your overall funding cost even without the benefits of the operational deposits or it should grow like kind of in a similar [ weight ] over time, like since it has a more long-term duration. What can we expect here? Like can the time deposits help to lower the funding cost on this kind of longer part of the funding? Annette van de Solis: Yes, Ricardo. I mean, as we have mentioned before, we always maintain a very well structured funding profile, maintaining a percentage of funding in medium-term transaction and that we are planning to do so. Here, I will pass the word to Eduardo from our treasury that can comment on the different possibilities that we're seeing that will strengthen our medium-term funding structure. Eduardo Vivone: Yes. Just to make it very, very short. I mean, on the one hand, deposits have been growing and the share of the total funding, as you have seen, -- the incorporation of operational deposits by definition, are much more stable will very likely allow us to reduce the participation of medium-term funding. But until that happens, medium-term funding will continue to have a similar participation in funding mix because, as Annette said, we want to maintain a healthy maturity of our profile of our liabilities. Having said that, they have been gaining significant share as compared to other short-term sources of funding. So the expectation is that we will see efficiency -- the cost of funding gaining efficiency in the next -- in the forthcoming months. And I would say that the key to reduce reliance on medium-term funding will be the growth of operational deposits. But doesn't mean that deposit will not benefit the overall cost of funding in other ways because they have been replacing other short-term sources of funding that were more costly for the bank. Operator: Our next question comes from Daniel Mora with Credicorp Capital. Daniel Mora: I have just 2 questions. The first one is regarding loan growth. I would like to understand where do you see the most interesting growth opportunities to deploy the AT1 capital? Is there any market that is gaining your attention? Is Argentina a new option after the election results in the last weekend? That will be my first question. The second one is regarding NIM, considering that you reduced the sensitivity to interest rates, what should be the NIM performance from current figures considering, one, the movement in interest rates; and two, the funding changes that you have been mentioning during the presentation? Jorge Salas: Daniel, so the first question in terms of opportunities to deploy our capital in the pipeline, we're going to let Samuel, our Chief Commercial Officer, respond that. But yes, we're being very cautious in Argentina. Argentina is one of those countries, and I'm going to let Sam give a little bit more color on that pipeline. And then Annette will tackle the net interest margin question. Sam? Samuel Canineu: Sure. Well, we continue to see good momentum in the Central America region across the board. We're seeing a strong fit in that region with our enhanced capabilities of our structured trade and working capital solutions business with our project finance infrastructure business and also our acquisition financing and syndication capabilities. There are less competitive pressure in that market, in that region compared to South America. And of course, we see this positively and we drive resources accordingly. In South America, while we are ready to -- we have more dry powder now with the AT1 to tap potential opportunities that may arise from increased volatility in countries that will go through presidential elections next year, and there are a few, I would say that we see a more balanced growth in South America. We think it's important to say we keep building our pipeline for more structured transactions and syndicated ones in line with our target to continue to grow fees. I think also important that we are starting to see as we build up our derivative capabilities, the pipeline is starting to grow there, and we hope to continue to show a gradual increase in that line of the business as well. Going to Argentina, yes, we actually grew the last quarter. Argentina, I think we're still -- as Jorge referred to, we're still very selective, and we are quite pleased with the quality and return for risk of our current exposure. We really only work with the top tier names, ones whom we have worked for years. We're mostly focused on exporters, dollar-generating sectors, oil and gas and soft commodities. And while the quality of our exposure is not necessarily affected by an eventual change of government, we're very positive with the recent win of the ruling party in the latest elections, and that should bring good opportunities for us to grow hopefully next year. Jorge Salas: Net interest margin, right? Annette van de Solis: Yes, sure. Regarding your questions regarding NIM, obviously, the bank has been very successful at managing its assets and liability very proactively, and this is something that we'll keep doing. We have improved our mix, both in the asset and liability side, increasing our exposure to corporates, increasing some of the medium-term transactions that we have been talking about that not only are very accretive from a margin point of view, but also from a fee point of view, trying to mitigate our impact of interest rates in our bottom line. So we'll keep doing that. Obviously, on the assets -- on the liability side, we are doing the same thing, increasing the percentage of the deposits as part of the total funding of the bank. And as Eduardo just previously described, deposits will keep being an important part of the growth of the liabilities in the upcoming months. Regarding the operational deposits, we'll see those increasing gradually as we execute the new strategic plan, and we'll share more information about that in the Investor Day. Nonetheless, we are expecting interest rate cuts going forward. So those will have an impact on the NIM. And what we have shared before that the sensitivity of the -- about 100 basis points in rate cuts will impact our NIM in around 12 to 13 basis points. So that's what we can share right now regarding the NIM, but for the 2025, we are maintaining our NIM guidance of 230 for the year. Operator: Our next question comes from Mario [indiscernible] from Itau. Unknown Analyst: Just one question on -- I mean, I had a question about the NIM, but I guess it's already answered. So I'm focusing on the evolution of the deposit composition. I saw that the corporations actually increased their share from 30% to 35% in just 1 quarter, right? So that's -- I mean, that seems like a huge impact very rapidly, right? So I just want to understand, I mean, how positive -- if it's positive for the cost of funding? And how should we -- how should that evolve going forward? I mean what's behind that? I mean, I know that you talk about your relationship with many clients, but -- that seems like a huge advance in just 1 quarter, right? So I just wanted to understand what's to come going forward and how that should impact the cost of funding? Annette van de Solis: Mario, I think Eduardo was very clear about the growth of the deposits coming from different type of exposures. They are all growing proportionately. But as we grow our client base on the commercial side, and we are working on the cross-selling efforts, we are seeing those translate as well into our depositor balances. And that's kind of the reason why you see the growth in the corporate section of the deposits. This is not a one-off. This is the result of working with our clients, working the cross-selling capabilities as we develop and foster more strong relationship with our clients, we're seeing that translated into our deposit balances as well. Jorge Salas: I would just add, I mean, if you zoom out, Mario, a little bit and you look at this sort of the broader picture with the 5-year back, I mean, believe it or not, our client deposits were minimal. I mean they've been growing because we basically changed the incentive structure and now simply the commercial team, the front line has some KPIs in their balance scorecards that simply foster this. And that will continue to be the case going forward. Unknown Analyst: That's very clear. And just to be clear, I mean, those deposits are remunerated close to the Fed rates, right, or the software rate? Jorge Salas: Mostly market rates, yes. Operator: Our next question comes from Andres Soto from Santander. Andres Soto: My first question is regarding the growth in clients that Jorge mentioned at the beginning of the call. I heard an increase in 7% in new client onboarding year-to-date. I would like to understand what is the profile of those clients? Number one. Number two, if you expect this strategy to continue, are you expecting to add clients or growth ahead is mostly based on doing more business with your existing client base and benefiting from increased trade across the region? Jorge Salas: Yes, 7% growth in onboarding so far year-to-date. The profile is the same, Andres. So we're not changing our client profile. Going forward, we do expect growth, and I'm going to let Sam talk a little bit about where are we seeing more potential of client growth. And it's basically -- I mean, the 2 biggest economies in Latin America. Sam, do you want to put some color there? Samuel Canineu: Sure. When it comes to -- first of all, I think we're always looking to grow our client base, and that's how we help to be concentrate, which is one of our objectives. I think our clients -- the 7%, I think, is very balanced. I think balanced in terms of all the countries we operate. But I think what is important to mention there is the new clients are very tied to our enhanced product capability. Most of the clients that we are onboarding are clients that have been there that we know for a while, we want to get in, but we didn't have the right product suite to be able to add value to them to be very transparent. And as we develop new products, we start to have a product offering that is more attractive to them and profitable enough for us, right, to be able to onboard such clients. For example, this year, I think I would say probably in terms of percentage, the biggest growth has been on the letters of credit business. So both in terms of new clients, which were not active before, but also in terms of cross-sell. And I think to the second point you made, we -- of course, I think it's cheaper to cross-sell, it's more efficient to cross-sell to existing clients, and we are very strongly focused on that, but we also see opportunity to continue to grow our client base. So in terms of speed of growth or quantity, it is really -- it's hard to say. Again, we know -- I would say that we almost know all the players that we want to bank, right? LatAm is not such a great region in terms of number of corporations that fit our credit profile. But we have a very, I would say, target plan to where we want to get in, and there's many names that are in our pipeline that we're about to onboard. So I think we hope to continue to onboard new clients as we did in the past. Jorge Salas: And it's both FIs and corporate, but perhaps more corporates. Andres Soto: Perfect. That's very clear. And then can you give us a sense of what is your current market share? Jorge Salas: That's a hard question and a very good question. If you take the profit pools of dollar financing in LatAm, then you get about between $5 billion and $6 billion in dollar financing and letters of credit. Our revenues are around $300 million. So you do the math there. We have obviously more share if you consider the smaller countries, Central America and the Caribbean than the bigger countries. If we take share as dollar financing in terms of loans and trade finance in general, that will be my answer. I don't know, Sam, do you want to complement that? Samuel Canineu: I think the message maybe is that I think we still have a low market share. We don't measure our business by market share. I think in wholesale banking, that is our business. I think we don't -- it's very dangerous to try to grow by gaining market share. We try to grow by really onboarding the clients profitably. We don't even measure so much what our market share is. I think there is an opportunity to grow as we lower our cost of funds. I think then we could enter clients that today we cannot tap because we're not competitive enough. But as the cost of funds start coming down, we could enter that -- those clients more competitively, so I think that could grow our market share. But the message is, yes, it's not -- I would say, it's not that -- we don't target growing market share. We target to grow and grow profitably. Andres Soto: That's helpful. And my second other question is regarding the asset quality and the Stage 2 that we saw this quarter. I would like to understand a little bit more about what was the reason why you had to move to Stage 2? And I understand the client is still current. A little bit more about the profile and what to expect going ahead. Jorge Salas: Yes. I mean the definition of Stage 2 is clients, again, that are current, but the conditions have deteriorated. And that's exactly what's going on with this client in the petrochemical sector. Andres Soto: Is it specifically to this client or it is more sector-based, country-based? What is the driver? Jorge Salas: No, I mean we review the whole portfolio. This is a single case. There's nothing systemic about the country or the sector, if that's the question. And we feel very comfortable with -- again, with the information that we have today and the scenarios that we run, that's why we're confirming guidance and profitability guidance in particular for the year. Andres Soto: For as long as the client remain current, no additional provisions will be required, correct? Jorge Salas: No, I mean the client -- we have proactively provisioned as we do with every client that falls in Stage 2. Even including that provision, we're ratifying the guidance is what I'm saying. Samuel Canineu: I think maybe to complement with the information that we have available, I think we're well provisioned for that specific name, and it's very straightforward. As there are rating downgrades, like in our models, a certain rating downgrade takes to Stage 2. And this is -- and that's what happened but the client, as Jorge said, is current and our exposure is short-term trade, and we expect to collect. Jorge Salas: As a matter of fact, in this same quarter, we -- there was some -- actually, our biggest exposure in Stage 2 was fully repaid and that went out of Stage 2. So I mean there's a lot of moving parts in Stage 2 provisions. Operator: Our next question is from Arthur Byrnes, Deltec Asset. What types of loans constitute your 15% exposure to oil and gas? And what type of business are you doing in Argentina? Eduardo Vivone: Okay. I'll take that one. That's a good question. I would say oil and gas is a key sector for us and we are seeing excellent opportunities to continue to grow and is a great fit with our product suite. Not as important, along with financial institution is probably the sector that we have built the most knowledge throughout the years. In terms of what type of loans we're doing, say it's a combination, very short-term trade-related exposure to national oil companies in several of the countries that we operate. I dare to say that we have the widest coverage in such names in Latin America compared to any other bank, which makes us a key counterparty to the global trading companies that wants to discount their sales to such companies, which is something we do much more profitable than if we sometimes lend directly to those companies. So this is a very important source of business. It's short term. Some of those clients, we've been doing for over 20 years. So we have built a lot of experience in doing the business, and I would say it's the bulk of our exposure. Of course, then on the more longer term, on the CapEx financing for such companies, I think we've also been active in financing CapEx. We're, of course, much more selective for medium-term exposure. Those are typically secured where like, for example, when we're financing E&P players, we're looking the ones with the projects that have the lift costs, the more competitive that could sustain prices of low cycle in terms of oil prices, also fields that are not very difficult to extract and with the right operators, the right partners. So we've been doing some of that. I think we're also growing our project and infrastructure business into midstream, which is, I would say, a low-risk sector, which very moderate, if no construction risk, no demand risk and typically no price risk. We, as a bank, we don't like to take commodity price risk. And as we work and expand our oil and gas portfolio, that's something we look at very carefully. Operator: Thank you very much. That's all the questions we have for today. I'll pass the line back to the Bladex team for their concluding remarks. Jorge Salas: Well, thank you, everybody, for joining. I mean this was clearly a very strong quarter for Bladex. We're very happy with the execution and progress we're making on the 2 platforms. The pipeline, as I said, remains robust, and we are confident in delivering the full year guidance. Thank you, everybody, for joining, and we look forward to speaking with you in the next quarter and then also on the Investor Day, hopefully, before the end of March. Thank you.
Operator: Thank you, and welcome, everyone, to FormFactor's Third Quarter 2025 Earnings Conference Call. On today's call are Chief Executive Officer, Mike Slessor; and Chief Financial Officer, Aric McKinnis. Before we begin, Stan Finkelstein, the company's VP of Investor Relations, will remind you of some important information. Stan Finkelstein: Thank you. Today, the company will be discussing GAAP P&L results and some important non-GAAP results intended to supplement your understanding of the company's financials. Reconciliations of GAAP to non-GAAP measures and other financial information are available in the press release issued today by the company and on the Investor Relations section of our website. Today's discussion contains forward-looking statements within the meaning of the federal securities laws. Examples of such forward-looking statements include also with respect to the projections of financial and business performance, future macroeconomic and geopolitical conditions; the benefits of acquisitions and investments, including acquisition of manufacturing facility, anticipated industry trends, potential disruptions in our supply chain; the impacts of regulatory changes, including tariffs and changes in export controls; the anticipated volatility in demand for products; our ability to develop, produce and sell products and the assumptions upon which such statements are based. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed during this call. Information on risk factors and uncertainties is contained in our most recent filing on Form 10-K with the SEC for the fiscal year ended December 28, 2024, and in our other SEC filings, which are available on the SEC's website at www.sec.gov and in our press release issued today. Forward-looking statements are made as of today, October 29, 2025, and we assume no obligation to update them. With that, we will now turn the call over to FormFactor's CEO, Mike Slessor. Sorry about that. Thanks for joining us today. Mike Slessor: Thanks for joining us today. FormFactor's third quarter revenue, gross margin and earnings per share exceeded both second quarter results and the midpoint of our outlook range. Our outlook for the current fourth quarter builds on the third quarter and we expect to again deliver sequentially higher revenue, earnings and most importantly, gross margin. As you heard from us on last quarter's call and in meetings with many of you since then, we're focused on and committed to improving our profitability to get back on a path to the 47% non-GAAP gross margins of our target model. As you can see in our fourth quarter outlook, we expect to reach the model quarterly revenue run rate earlier than we achieved model gross margins. This disconnect is driving urgency across FormFactor in executing a program of rapid and immediate gross margin improvement actions that have already produced a 250 basis point increase from the second quarter, and we anticipate will produce an additional 100 basis point increase in the fourth quarter. We expect these short-term improvements will continue throughout next year, steadily closing the gap to the target model gross margin of 47%. At the same time, we're also executing longer-term structural initiatives that will further improve our gross margins, including developing and commercializing differentiated new products to drive increased market share and pricing as well as qualifying and ramping our new Farmers Branch, Texas facility to rapidly and cost effectively expand our capacity in a region with lower operating costs and a variety of financial and regulatory incentives. Aric McKinnis, who became our CFO on August 12, will provide more details on both the short- and long-term initiatives. While we're intently focused on improving gross margins to generate the profitability warranted by our leadership positions in both probe cards and engineering systems, we're also working to expand those positions, principally at the intersection of advanced packaging and high-performance compute. Innovations in this space like the stacking of DRAM chiplets to produce HBMs, which are then integrated with GPUs in multi reticle CoWos packages, co-packaged optics and even chiplet-based processors deployed at the edge are all driving increased test intensity and test complexity, creating increased demand in our served markets. In some of these areas, like HBM and DRAM and network switches and foundry and logic, we today have leading market share positions. In others, like GPUs, we're making steady progress on qualifications to produce market share gains and revenue growth. Turning now to segments and market level details. In DRAM probe cards, we delivered the expected double-digit sequential growth in the third quarter to a new record, primarily from growth in HBM. In the current fourth quarter, we expect to post another record primarily from an increase in non-HBM applications like DDR5 and LPDDR4, likely driven by the well-publicized recent increases in commodity DRAM end market demand pricing and customer profitability. In HBM, we've now reached the anticipated HBM3 to HBM4 crossover as HBM 3E ramps down and HBM4 ramps up. With the overall net result being total fourth quarter HBM revenue similar to the third quarter. We continue to have significant contributions from all 3 major HBM manufacturers as we execute our long-term strategy to be a key supplier to all the leading customers in the industry, thereby growing and diversifying our HBM demand profile. Consistent with the current market share split between our customers, however, our HBM revenue continues to be skewed towards our largest customer. The ramp-up of HBM4 offers some exciting opportunities for FormFactor as we look ahead to 2026. First, the test intensity for each HBM stack further increases with the transition to HBM4 16-high stacks of core die chiplets from the 8 and 12-high stacks of HBM3 and 3. As we've detailed in our past discussions of advanced packaging, each of these core die chiplets must be comprehensively tested to ensure that a single effective core die does not cause a failure of the entire stack. In addition, the I/O speeds of HBM4 increased substantially over HBM3, and our customers are now striving to exceed the JEDEC specification of 8 gigabits per second. This performance increase in greater test complexity drives competitive advantage for FormFactor as our SmartMatrix architecture is the industry's only production-proven high parallelism probe card architecture that can operate at these 10 gigabit plus frequencies, providing our customers with the unique capability to validate their product performance at these higher and more valuable I/O speeds. Shifting to the foundry and logic probe card market. As expected third quarter demand in this market was sequentially weaker than the second quarter, and we expect similar foundry and logic demand levels in the fourth quarter. Despite broader indications of the beginning of a PC recovery, we're not experiencing significant growth in probe cards for CPU applications. We believe this is because the increased demand is being served by our customers' existing legacy node designs, where they're able to employ their existing probe card fleet. As a reminder, probe cards are a device-specific consumable. And as this customer ramps volume on their new designs on new leading-edge silicon nodes, we expect to see increased demand for probe cards and CPU applications. This current situation also highlights the need to execute our strategy to be a key supplier to all the leading customers in the industry and we continue to build the foundation for market share gains at a large fabless CPU manufacturer. Having achieved qualification in a specific application with this customer earlier this year, we're now building on that penetration and qualifying our market-leading Apollo MEMS probe card technology on a mainstream CPU device that's forecasted to ramp in volume next year. And continuing on the theme of diversification and market share growth in foundry and logic, we've now met all technical requirements for a major GPU application with a new variant of the same Apollo MEMS probe card architecture and are now in the pilot production stage of qualification. Once we complete this final stage of qualification, we'll be in a position to compete for volume orders for GPU probe cards in the first half of 2026. Turning to our Systems segment. We delivered the expected sequential revenue increase in the third quarter and are forecasting additional growth in the current fourth quarter. Some of this strength stems from the typical seasonal cadence of the systems business, but we're also experiencing increased momentum in the progression towards initial production of co-packaged optics or CPO as well as the significant investments being made to advance quantum computing towards full-scale industrialization. In co-packaged optics, in addition to the multiple CM300xi systems running pilot production for our primary CPO customer at their foundry, we've now installed multiple units of our next-generation Triton silicon photonics test system. Developed in collaboration with Advantest and Tokyo Electron, Triton brings together fab level automation and integration of both optical and electrical probe and test capability for our customers. Triton represents the next step in our silicon photonics product road map as we transition our differentiated electrooptical probing technology from the lab to the fab, helping enable the adoption of energy-efficient optical data transmission in tomorrow's data centers. Before I turn the call over to Aric, I want to reiterate our continued commitment to achieving the 47% gross margin of our target model. As you can see from our fourth quarter guidance, we expect to reach target model revenue levels before we reach target model gross margin levels, but we've shown meaningful progress towards closing this gap. We plan to continue gross margin improvement in a direct factoring footprint by making continued progress this quarter and in 2026, layering on further improvement as we then bring our farmers branch expansion online at a structurally lower cost. These multipronged initiatives will improve our competitiveness and add capacity at lower cost enabling us to grow FormFactor as we meet the challenges of increased test intensity and higher test complexity associated with the adoption of advanced packaging in applications like high-bandwidth memory, co-packaged optics, and quantum computing Aric, you are up. Aric McKinnis: Thank you, Mike, and good afternoon. Before we dive into the details of our third quarter financial results, I want to express my excitement as I move into the role of CFO and begin to leverage my experience across operations and finance to drive operational efficiency and financial discipline. I truly enjoy working across varied constituents to find innovative ways of driving value and continuous improvement. I also want to spend a couple of moments to summarize how we plan to drive sustainable improvement in profitability, emphasizing the key focus areas that will guide our actions and our priorities in both the short and the longer term. As you heard from Mike, we are focused on improving our profitability to a path to the 47% non-GAAP gross margins of our target model. We are committed to achieving these improvements in a sustainable way and we believe the most critical elements of success for us in the short and midterm are to drive improved operational effectiveness, which means optimizing output from our existing infrastructure, and better financial discipline. We believe focus in these areas will drive meaningful change in our unit costs and our gross margins. This focus starts with some immediate action. First, on the labor front, we just completed a reduction in headcount, reducing costs even as we execute on existing demand and prepare for future demand. Furthermore, we implemented changes in how we manage over time in all of our manufacturing sites, immediately reducing our unit labor costs. Second, with respect to our manufacturing processes, we executed on targeted decreases in manufacturing spending. For example, we have expanded our existing precious metal recovery process to reduce waste in our manufacturing line among implementing other improvements. Beyond these immediate actions, over the coming quarters, we will continue to drive a relentless focus on reducing our manufacturing expenses by attacking the fundamental drivers of cost within our existing footprint. For example, focusing on improving yields and reducing manufacturing cycle times by smartly deploying automation, implementing more effective defect detection capabilities and implementing new factory management tools and analytics. Improvement in areas like cycle times and yields are structural and we believe improvements in these areas drive durable cost benefits that will help us to weather and partially offset the impact of inevitable shifts in product mix and headwinds presented by new challenges, such as what we have seen recently with tariffs. Even as we drive the unit cost of our products down, we are aiming to simultaneously enable higher output from our current infrastructure, reducing cycle times and improving yields enable this objective while also supporting our continued ability to be a top-performing supplier by increasing the quality and speed with which we address our customers' needs as they address rapidly growing demand in areas like high-performance compute and HBM. In addition to our laser-like focus on improving operational effectiveness, we will also exercise good financial discipline and continue to examine our overall portfolio of products, markets and businesses, evaluating all of our operations through the lens of how each best supports our target model and our key strategic priorities. We are changing how we communicate our financial results. Instead of residing breakdowns by product and market, we will continue to provide this important data in the supplemental materials on our investor website. And our discussion will focus on the key actions we are taking and the key drivers for our short and midterm road map to achieve our target model. As you saw in our press release, we are favorable to our Q3 outlook on revenues, gross margins and EPS for both GAAP and non-GAAP. Q3 '25 revenues are $202.7 million, non-GAAP gross margins are 41%, up 250 basis points from 38.5% in Q2 '25, and non-GAAP EPS is $0.33, and $0.04 above the high end of the outlook range of $0.21 to $0.29. GAAP gross margins for the third quarter were 39.8% compared to 37.3% in Q2. Cost of revenues included $2.5 million of GAAP to non-GAAP reconciling items, which we outlined in our press release issued today and in the reconciliation table available on the Investor Relations section of our website. As I mentioned, on a non-GAAP basis, gross margins for the third quarter were 41%, 250 basis points higher than the 38.5% non-GAAP gross margins in Q2 and at the higher end of our outlook range. This increase in non-GAAP gross margins is driven by improvement in both segments. The Probe Card segment was up 254 basis points and the Systems segment was up 260 basis points to 40.8% and 42%, respectively. The reductions we have made in labor costs and manufacturing spending are starting to have an effect on our financial results. This progress represents the start of a more disciplined path that will yield incremental improvement in gross margins, leading us back to our target model gross margins over the course of 2026, as you heard from Mike. Our GAAP operating expenses were $62.6 million for the third quarter, effectively flat as a percent of revenue from the prior quarter and down 130 basis points from the same period in the prior year, demonstrating continued discipline in spending across the P&L, even as we continue to invest in R&D in projects like Farmers Branch to drive innovation and future growth beyond the immediate term and even beyond our current target model. GAAP net income for the third quarter was $15.7 million or $0.20 per fully diluted share compared with a GAAP net income of $9.1 million or $0.12 per fully diluted share in the previous quarter. Third quarter non-GAAP net income was $25.7 million or $0.33 per fully diluted share up from $21.2 million or $0.27 per fully diluted share in Q2. The GAAP effective tax rate for the third quarter was 29.1% and the non-GAAP effective tax rate for the third quarter was 21.2%. We are continuing to refine our approach to key provisions of the recent tax legislation. Moving to the balance sheet and cash flows. We had free cash flow in the third quarter of $19.7 million compared to a negative $47.1 million in Q2. Remember that the reason for the negative cash flow in Q2 was the $55 million investment in the Farmers Branch, Texas manufacturing facility. Operating cash flows were $27 million in Q3, $8.1 million higher than the $18.9 million in Q2 '25, primarily driven by the improved net income on higher revenues and improved gross margins. At quarter end, total cash and investments were up $16.7 million to $266 million. Since purchasing the Farmers Branch facility, we have made excellent progress in executing our planning and pre-startup activities. This project is a good example of how we are taking advantage of our strong balance sheet to enable the next stage of growth and continued improvement in our gross margins over the long term. We expect the cash expenditures related to Farmers Branch will be between $140 million and $170 million over the course of 2026 and believe that this investment will enable further improvement in gross margins beyond our current target model. During the third quarter, we used $1.7 million to repurchase shares. At quarter end, $70.9 million remained available for future purchases under the $75 million 2-year buyback program that was approved and announced in April 2025. As a reminder, our share repurchase program objective is to offset dilution from stock-based compensation. Turning to the fourth quarter non-GAAP outlook. We expect Q4 revenues of $210 million, plus or minus $5 million. This increase in revenues more favorable product mix and the cost reduction initiatives described earlier are expected to result in a higher non-GAAP gross margin of 42%, plus or minus 150 basis points. As a reminder, we continue to see a 150 to 200 basis point impact on gross margins from tariffs. We are taking actions to mitigate the impact of these tariffs, but those efforts are ongoing. At the midpoint of these outlook ranges, we expect Q4 non-GAAP operating expenses to be $58 million, plus or minus $2 million. Approximately $3.5 million higher than Q2, mainly due -- sorry, Q3, mainly due to higher incentive-based compensation, planned spending on R&D and expenses related to the start-up of costs for our new manufacturing facility in Farmers Branch. Our Q4 effective tax rate is expected to be within the range of 17% to 21%. Non-GAAP earnings per fully diluted share for Q4 is expected to be $0.35, plus or minus $0.04. A reconciliation of our GAAP to non-GAAP Q4 outlook is available on the Investor Relations section of our website and in the press release issued today. As demonstrated by our Q3 results and our Q4 outlook, we are making encouraging progress to our target model. As recent initiatives to improve our structural costs take effect, and we are able to better leverage our fixed cost as demand increases. With that, let's open the call for questions. Operator? Operator: [Operator Instructions]. Our first question comes from the line of Craig Ellis from B. Riley Securities. Craig Ellis: Nice execution, guys, and Aric, welcome to the call. Mike, I want to just start with you. Thanks for all the insight on the top line and how the business segments are performing. I was hoping you could go back to some of your DRAM commentary and specifically commentary around HBM4 and the cutoff with the business having reached the cutoff in the recent quarter and flat sequentially. How would you frame up the growth gives and takes as you look out to 2026 for HBM. And if we look at the next transition without getting the cart too far before the horse as HBM4E becomes much more customizable. What will that mean for probe card intensity. Mike Slessor: Yes. Thanks, Craig. So we did experience the crossover or are experiencing the crossover in the fourth quarter as HBM4 takes over as the majority of our HBM revenue. All three customers, as I said, are contributing to this. But we're fairly early in this HBM4 ramp. I think most people understand the timing and how it's linked up to a major high compute -- high-performance compute product launch next year. And so we expect continued growth from here in our HBM4 business and our HBM business overall. If you look at -- as we go through 2026, a couple of elements of test intensity and test complexity are increasing with HBM4, as I mentioned in the prepared remarks. Test speeds are going up, the layer counts are going up. These are all powerful tailwinds for probe card intensity. And as we move to HBM4E and then 5, those tailwinds continue, right? We expect higher speeds and higher bit counts. The other interesting wrinkle is, as you mentioned, this idea of a custom HBM base die. And I think that's -- although it's further out on the horizon, it's something we're partnered with customers very closely right now, as it combines high-end logic and memory controllers on the base die for HBM, obviously, FormFactor in a place where that can offer some significant differentiation as we're the only supplier of scale in both memory and logic probe cards. Craig Ellis: Very helpful, Mike. Aric, the follow-up is for you. So thanks for the granularity on the levers that you're pulling to close to 500 gap -- 500 basis point gap to target GM. The question is this, as we look at things that, in my words, not yours, maybe more tactical versus those structural things that you talked about, how do those two things contribute in relative size to closing that 500 basis point gap -- and can you talk about the linearity that we should expect from where we are to 500, acknowledging that there's going to be mixed dynamics that move up and down along the way. Aric McKinnis: Yes. Thank you for your question. The 41% that we have as results in Q3 represents a meaningful improvement from last quarter. And we're already seeing the benefit of some of the actions that we have taken. We are not done, as you know. And so the restructuring actions that I referred to, we believe we'll continue to provide benefit heading into Q4 of about $1 million. And then on an ongoing basis of about $1.5 million thereafter. In addition to that, we have plans in place to continue to drive improvements in, as you noted, kind of fundamental cost structure areas, focusing on things like manufacturing cycle time and yields, and we believe that those will address both the gross margin road map over the course of 2026 as well as bring more output out of our existing facilities. Operator: [Operator Instructions]. Next question comes from the line of Brian Chin from Stifel. Brian, you might be on mute. Brian Chin, we're not hearing you. Our next question comes from the line of Christian Schwab from Craig Hallum. Christian Schwab: Just my first question regarding the gross margin target of 45%. It sounded like you think you will attain that level in 2026. Is that a statement regarding mix of business improving in foundry logic versus DRAM? Or is that a statement regarding the initiatives that you're doing or a combination of both. Aric McKinnis: As I mentioned in our prepared remarks, we are focused on changing the underlying cost structure across all of our products. And those underlying elements such as manufacturing cycle time and yield, those are independent of mix. Of course, there are always going to be elements of mix that impact us as well as volume. And we do expect to continue to see those impacts as we move forward. But the road map that we have in place we believe will bring us up to target model gross margins over the course of 2026, as you know, with mix independent. Christian Schwab: Fantastic. And my second question has to lead to -- can you quantify the positive impact on 26 foundry logic from potential ramps of CPU and GPU customers, a broad range, Mike. Mike Slessor: Yes. Christian, we haven't really quantified that. As I noted in the prepared remarks, we're making excellent progress on the qualifications and competing for business. This is a critically important initiative for us to continue to diversify our customer base and grow share in foundry and logic. We would expect a significant impact as we move through 2026. But as the selections and commercial negotiations are ongoing, it's hard to quantify. I will say the addressable markets associated with those two opportunities are significant. And if you look at one of our competitors who's been the primary vendor for it, you can see the impact of those. It's tens of millions of dollars a quarter from a served market perspective. Now we got to go compete and win on the back of these qualifications and bring that revenue and market share in. Operator: And our next question comes from the line of Brian Chin from Stifel. Brian Chin: Maybe first, and I apologize if I cover any ground that's been covered already between calls. But the -- for Q4, it sounds like the revenue growth, is that -- that's mainly being driven by so to speak, legacy DRAM, if I heard that right, even across the business encompassing logic/foundry. And I would even think of that being kind of a margin at best case, neutral, but probably a little bit negative, but you are guiding gross margins higher. Can you maybe kind of speak to how you're able to offset or improve that on the gross margin line? That's the first question. Aric McKinnis: Thank you for your question, Brian. I think there are some general relationships that we can draw from the market level DRAM versus foundry and logic. And in general, we do see some differentiation in standard margins across those markets. But we also need to remember that even within those markets, there's product level changes in profitability that can drive increases or decreases quarter-over-quarter as that mix changes. So there is an element of mix in there. But again, one of the main reasons why our gross margins and standard margins are improving quarter-over-quarter is really in great part, driven by the cost improvements that we're making, which is, again, mix independent, and we believe will sustain regardless of the mix of foundry and logic versus DRAM. Brian Chin: And I know you've announced an amount of CapEx increase for next year tied to the Farmers Branch facility and capacity expansion. Have you provided -- sorry, earlier in the queue or earlier in the call, details or some sense in terms of the timing of that deployment and sort of when some of that increased capacity will be available to the company. Aric McKinnis: Yes. So we have a detailed project plan that extends over the course of 2026 and 2027. We expect some of the initial capacity to come online late in 2026 with the majority of that capacity coming online into 2027? Brian Chin: Majority in 2027. Okay. Is it -- is it going to be focused mainly on like HBM market? Or have you not stated? Or is there kind of broader fungibility in terms of what you can produce in that facility initially? Aric McKinnis: That's a great question. While we are focused on continuing to drive incremental gross margin improvement, that's one of the things we have our eye on, we are also focused on making sure that as we invest additional capital into our manufacturing footprint that we're creating a manufacturing environment that's flexible and efficient in supporting our future growth and making sure that it can serve the breadth of our product lines and that we are able to move resources back and forth as the market dictates. Operator: And our next question comes from the line of Charles Shi from Needham & Company. Yu Shi: Mike, Aric, by the way, Aric, welcome aboard. Looking forward to working with you. So the question on HBM, I don't recall you actually start an HBM revenue number for the third quarter in mind if you provide some color there, is that in target $11 million incremental DRAM revenue like all HBM? And what that means for traditional DRAM was still at the $20 million per quarter, that kind of a 12-ish level. But yes, I get it's going to increase into Q4. Mike Slessor: Yes, Charles, for Q3, just to put a few more details around it. Most of the sequential growth in DRAM in the third quarter going -- second quarter to third quarter, was driven by HBM. So it was -- HBM in round numbers was $40 million in the quarter, in the third quarter, pretty close to the previous high. As you know, we now see in the fourth quarter some of the non HBM DRAM taking over, but in conversations with our customers, understanding that our lead times are still really well within a quarter, in most cases, we see some pretty strong growth associated with HBM4 as we move through the first part of 2026. And I think most suppliers who are participating in high-performance compute and the HBM4 and associated GPU and other networking chip ramp see the same strength. Yu Shi: Got it. Allow me -- I mean, forgive me for being a glass half empty this time, I have to do it. But looks like some commentary around your CPU customer, which disappeared from the 10% customer list this time feels like you are basically saying the revenue was kind of, I mean, getting to a pretty depressed level in third quarter. Mind if you put a little bit more quantitative color where your top CPU customer, where the revenue number was in Q3? And what's your projection into Q4 and given all the cost-cutting effort they're going through? Mike Slessor: Yes. So you're correct in noting that our large CPU customer was not a 10% customer in the third quarter. But I'll take the glass half full position say that we still delivered revenue above $200 million, close to all-time highs. And if we talk about expectations for Q4, as I said in the prepared remarks, we're not seeing a lot of strength in the PC sector in the CPU sector, but still working very closely with that customer. They're a key partner for us. And as they go through some of their changes in restructuring and cost cutting, we're very closely partnered with them in making sure that we're a supplier that's continuing to help them through that. It's a long-term partnership. I'll also shift gears on you and talk about why it's so important that we qualify at both major CPE manufacturers. And as I said in the call, we're making good progress there generate revenue from those projects in 2026. Operator: And our next question comes from the line of Elizabeth Sun from Citi. Yiling Sun: I guess my first question is, Mike, you were talking about ASICs, contributed about a couple of million dollars last quarter. So I'm just curious, in Q2, so just curious in September quarter, did you see any contribution in ASICs project? And also just -- could you share us any updates on your engagement in the ASIC projects? Mike Slessor: Yes. I think the custom ASICs space is an interesting growth opportunity for us. We're engaged with all the major hyperscalers, and we highlighted for you last quarter that we'd won a significant project that contributed to second quarter revenues. There's a little bit of contribution again in the third quarter, but I think these are long-term engagements with the hyperscalers. There is significant business there and to be perfectly transparent with you, we've got a smaller competitor who's doing a pretty good job serving that business with the two major ASIC -- custom ASIC projects in the industry. We believe that as things -- as the ASIC projects start to get closer to the specs required for GPUs, things like power, speed, density that those -- that market is going to consolidate towards the 2 top foundry and logic suppliers who have advanced MEMS probe technology. But for now, that's a hole in both our and our primary competitors revenue that we're both working to fix. I think the other point to make is when we look at the sort of the fundamental spend associated with high-performance compute in the logic space, GPU versus custom ASIC, it continues to be dominated by GPU. And that's why it's so important that we qualify for the merchant GPU business and start to participate in that. Yiling Sun: That makes sense. And then on the Farmers Branch, I'm curious if you could share as it ramps majority in 2027, what would be the tailwind for the gross margin side? Aric McKinnis: Yes. So you're correct in that we will be ramping and investing over 2026 and 2027. We have detailed models and the detailed project plan associated with this project. And as we look at that and we look forward, we believe that our investment there will yield incremental gross margin improvement over the long term, as we move forward, and that's kind of beyond our current target model. Operator: And our next question comes from the line of Tom Diffely from D.A. Davidson. Thomas Diffely: A couple of questions. Aric, I hate to do it, but I'm asking another gross margin question. When you look at the move from 38.5% last quarter to 42% this quarter. Could you segregate the impact of mix, overhead absorption and perhaps the cost reduction programs? Are they roughly the same? Or is one greater than the others? Aric McKinnis: Yes. Good question. And you're correct in the elements there. So mix, volume and cost improvement actions all contributed to the improved gross margins quarter-over-quarter. But as you could see from my prepared remarks, we are very focused on making sure that we are managing the underlying cost drivers that are going to persist period in and period out. If I were to characterize the relative contribution, I would say that the volume, for example, is the minority of the change from last quarter. Thomas Diffely: Okay. That's very helpful. And then Mike, obviously, some nice momentum again in the silicon photonics on the system side. What are the next couple of milestones that we're looking for in that space to see some progress going into the fab itself? Mike Slessor: Yes. I think the key milestones, Tom, are that are going to be externally available or some planned product launches early next year, mid next year. And I think some of our customers have been pretty transparent about the insertion of CPO co-packaged optics into the road map. And I think if those are -- or when those are commercially successful, that will be the next catalyst for CPO. Right now, we're in pilot production, moving towards volume production -- as I noted, we've now installed multiple units of our Triton system, which is positioned for high-volume manufacturing of CPO, so we're ready to go when that begins to ramp. But probably the first externally visible catalyst is going to be some announcement coming in the early part of next year. Operator: [Operator Instructions]. Our next question comes from the line of Krish Sankar from TD Cowen. Kinney Chin: This is Steven Chin on behalf of Krish. Mike, I just had one first for you on the networking opportunity. I don't recall like from my previous conversations, but within foundry and logic is networking silicon and specifically data center type solutions. Are those a meaningful part of your foundry logic exposure today. And could you also talk about the long-term opportunities potentially with a major GPU customer versus merchant networking chip opportunities? Mike Slessor: Yes. I think on the networking silicon side, this is currently, I'd call it an important part of the business, but some of the growth projections that we have are pretty significant. And that's one of the reasons why we highlighted it this quarter. I think you've probably heard pretty recently from some of the AT manufacturers that they see similar drivers in their business. And so as networking becomes a much more important part of the overall internal data center silicon content, that's an area where we're excited to take a strong incumbent position and continue to build revenue around that share position. I didn't understand the second part of the question. Can you repeat it for me. Kinney Chin: Yes. Just in terms of your opportunities for future wins at, for example, a merchant networking companies versus bench opportunities at a major GPU vendor in the market just because the merchant networking companies, they -- as you mentioned earlier, they do use a smaller probe card vendor for some of the ASIC designs. Just kind of curious if that's also similar for some of these higher performing network to silicon as well? Mike Slessor: Yes. I think it's an interesting question, right? As we've seen the ARC over the last 5 years of GPU requirements, for example, move into the space that requires an advanced MEMS probe card technology because of power, speed, pin count, pitches, there's really only two suppliers worldwide that can do that. And I think the evolution as GPUs are now firmly in this space. Obviously, we've got work to do as we qualify and start to win business there. But I think elements of these networking chips are also moving towards that space. And so in the whatever 15-odd years I've been in the probe card business, you've seen the steady progression of all kinds of different pieces of silicon migrate towards where requirements absolutely dictate the need for advanced probe card technologies. And for those of you familiar with our story, you know that, that's one of the areas of key investments and key differentiation that we have, both in foundry and logic and in DRAM. Kinney Chin: Great. And for my follow-up, a question for Aric on the investments for Farmers Branch. You mentioned the is the target of $140 million to $170 million over the course of, I think, calendar '26. Just wondering, how does that break out between -- is that all CapEx? Or is there some component of R&D potentially in there as well? Aric McKinnis: Most of that is capital expenditures. It is a mix of different types of assets building improvements, clean room build-out and equipment. So various lives on those, but that spend is primarily focused on the build-out of the -- physical build-out of the site and the manufacturing equipment that goes along with it. Operator: This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Mike Slessor for any further remarks. Mike Slessor: Thanks, everyone, for joining us today. And let me add my welcome to Aric in his first earnings call. We're going to be doing a couple of conferences and events as we go through to the end of the year, and we hope to see you there and continue to update you on FormFactor's progress on the evolution to the 47% gross margin of the target model. Take care. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Ladies and gentlemen, welcome to the Cognizant Technology Solutions Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Tyler Scott, Vice President, Investor Relations. Please go ahead, sir. Tyler Scott: Thank you, operator and good morning, everyone. Welcome to Cognizant's Third Quarter 2025 Earnings Call. I'm joined today by Ravi Kumar, Chief Executive Officer; and Jatin Dalal, Chief Financial Officer. By now, you should have received a copy of the earnings release and investor supplement for our third quarter results. If you have not, copies are available on our website, cognizant.com. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties as described in the company's earnings release and other filings with the SEC. Additionally, during our call today, we will reference certain non-GAAP financial measures that we believe provide useful information to our investors. Reconciliations of non-GAAP financial measures where appropriate to the corresponding GAAP measures can be found in the company's earnings release and other filings with the SEC. With that, over to you, Ravi. Ravi Kumar S: Thank you, Tyler and good morning, everyone. Thank you for joining us. We are pleased to report another industry-leading performance in the third quarter of 2025 as revenue growth and adjusted operating margin again outpaced our expectations. Our results reflect the momentum we have built over the past 2.5 years, helping clients embrace AI. Our investments in platforms, intellectual property, partnerships and in upskilling our people are evolving Cognizant into an AI builder, capable of scaling agentic AI across the enterprise. As AI infrastructure expands, our clients increasingly need support from partners who can help them move from experimentation to enterprise-wide adoption with speed, precision and trust. Turning to third quarter highlights. Revenue grew 6.5% year-over-year in constant currency to $5.4 billion. All 4 of our operating segments grew revenue organically year-over-year. This breadth of performance across industries and geographies reflects the strength and resilience of our portfolio of capabilities and delivery model. This is the fifth consecutive quarter of year-over-year organic revenue growth, our strongest sequential organic growth since 2022 and another podium finish to our peer group's Winner's Circle. We signed 6 large deals each with TCV of $100 million or more, bringing our year-to-date total to 16. Trailing 12 months bookings is up 5% year-over-year and year-to-date, the TCV of our large deals is up 40% from the prior year period. We are focused on converting value from AI across our 3,500 early AI engagements and embracing AI in the delivery of our services and to drive internal transformation. As we do this, we are also increasing our fixed bid transaction and outcome-based services mix. And we are beginning to see trends of nonlinearity emerge. For example, on a trailing 12-month basis, revenue per employee rose 8% year-over-year, while adjusting operating margin, income per employee grew 10%. As we continue to scale our IP and platforms, we expect more examples of nonlinear AI-led growth to emerge. Importantly, we are expanding margins while continuing to fund our organic and inorganic growth initiatives and increasing returns to shareholders. Q3 adjusted operating margin improved 70 basis points year-over-year, driven by our disciplined expense management along with our increasingly AI-enabled delivery model. Our year-to-date performance has put us on track to outperform the revenue guidance we established at the beginning of the year and we expect to meet the high end of the adjusted operating margin range we set then. For much of the last 30 years, IT services grew through a linear model. More people and more projects drove incremental growth. AI is reshaping that equation by compressing time, cost and complexity and redefining how value is created. The opportunity to partner with our clients and drive outcomes is now more expansive, immersive and elastic. The progress we are sharing today reflects 2.5 years of focused execution, amplifying talent, scaling innovation and accelerating growth to return Cognizant to a leadership position in the AI era. Becoming an AI builder means building the platforms and engineering capabilities that enable agentic AI to scale across the enterprise. Our progress begins with our workforce as we enable AI influence -- fluency across the 350,000 associates. We continue to fuel strength and future readiness for our associates through our learning engine and access to AI tools, which is why we are hiring more new graduates across the world this year and investing in their AI upskilling. In July, our vibe coding initiative earned Cognizant a Guinness World Records title for the world's largest online generative AI hackathon. More than 53,000 associates across 40 countries built over 30,000 working prototypes, improving their AI code assist skills and productivity. And we are continuing to expand into the AI ecosystem. Recently, we entered a new collaboration with Anthropic. Under our agreement, we plan to deploy Anthropic's cloud models and agentic tooling with our platforms to help clients scale AI while also deploying them internally to advance our own operations. Our AI builder strategy is anchored in 3 distinct vectors: AI-led productivity, industrializing AI and agentifying the enterprise. While each vector is advancing at a different velocity, together, they're forming a flywheel of new value creation. Let me provide an update on Vector 1. AI-led productivity is the funding engine for enterprise transformation as we help clients accelerate software development, lower deployment costs and reduce technical debt that we estimate is costing enterprises hundreds of billions of dollars in annual servicing. In the third quarter, approximately 30% of our internal code was AI generated, significantly improving productivity of our developers. We believe it could reach 50% in the years ahead. A great example to illustrate our client impact with code assist platform partners is a recent award as the AI GitHub Services and Channel Partner of the Year in recognition of our achievements in helping clients with our AI transformation initiatives. Many clients have asked us for support in bringing vibe coding and code assist best practices to their organizations. We recently launched a Cognizant Enterprise Vibe Coding Blueprint, bringing our playbooks and insights to clients seeking to build AI fluency across their own teams. This transformation extends beyond the developer community. Internally, we have embedded AI across more than 150 use cases from finance and operations to sales enablement and contract pricing. These applications are streamlining decision-making, improving accuracy and accelerating cycle times. A primary tool for executing Vector 1 is our Flowsource platform, which integrates generative and agentic AI across the full software development life cycle. Flowsource is now being used at over 70 clients with an additional 120 in the pipeline. One of those clients is Pearson, where we are using AI and digital technologies to modernize their learning platforms, products and applications by leveraging Flowsource. Our proactive shift to AI native and platform-driven engineering accelerates the software development cycle by enabling engineers to deliver enterprise-grade AI-infused digital applications with greater speed and scale. This is showing up in our results with our approximately $2 billion annual run rate digital engineering business growing about 8% organically year-to-date. Vector 1 is also fueling our large deal momentum. As clients consolidate their software estates and shift to outcome-based models, they're capturing savings and unlocking higher value, often, reinvesting those gains into Vector 2 and Vector 3 initiatives. It is creating a self-reinforcing cycle of transformation. A great example of this in action is our cloud and infrastructure modernization business, which grew 10% year-over-year in the quarter. Our AI tooling and services in this space has helped over 25 clients so far to build, respond and resolve to reliant and resilient IT infrastructure. Now more on Vector 2 or industrializing AI as the scalability layer. It's about moving AI beyond experimentation into enterprise-grade systems, building AI-ready infrastructure, integrating contextual data and operationalizing AI responsibly. It also involves developing new business operating models, leading to an interplay of software and agentic layers, human and agentic capital and structured and unstructured data to reimagine an enterprise. We are leading this effort with our consulting basis framework and methodology to help clients reimagine business processes as they develop and deploy agents. And we are deepening our expertise with the next level capability set, including Agent Foundry, a framework and library of the industry and workflow-specific agents, helping power agentic AI at scale. Together with our clients, we have developed more than 1,500 agents across the company. Second, AI data training services, where we have over 10,000 specialists fine-tuning models with domain-specific context. We have supported leading tech companies with training their machine learning systems long before generative AI entered the mainstream and we are now bringing this same expertise to Global 2000 clients. Third, small language models development. Fourth, context engineering, which we believe is one of the most critical emerging disciplines in enterprise AI to capture enterprise workflows, domain and tribal knowledge, personas, rules and execution patterns. It is the connectivity tissue between models and outcomes. In partnership with Workfabric AI, we are deploying context engineers who are helping clients build tailored foundations for AI adoption. And finally, IP on the edge, which I began describing last quarter, is a horizontal foundation layer where we are bundling platforms like Neuro AI with services and IP to deliver outcomes. With 400 platform deployments already in motion, we are helping clients modernize core systems to reduce risk, accelerate time to market and improve experiences. As we build layers of contextual value on foundation models through a combination of context engineering, SLMs and multi-agent systems, we are delivering numerous production-grade AI use cases. To bring this to life, we helped a national grocery chain optimize it in-store pickup process for online orders, reducing fulfillment time by 20% to 45% through smarter inventory selection, product substitutions and routing. This is driving a measurable increase in online orders. Lastly, Vector 3 or agentifying the enterprise is about unlocking exponential agentic capital. Historically, we built software for humans. With agentic AI, we now reimagine processes end-to-end by deploying agents with humans in the loop to deliver outcomes. This expands the enterprise's surface area, enabling a blended human plus agent workforce across new domains. The Agentic Development Lifecycle or ADLC differs fundamentally from the traditional software development cycle or SDLC. SDLC is structured and deterministic, input in, output out. ADLC is adaptive and outcome-driven. You design for behavior, supervise performance and evolve capabilities over time. We believe ADLC significantly expands our addressable market, demanding deep ownership to manage human digital collaboration. As an AI builder, we are creating an agentic ecosystem where agents reason, adopt and collaborate, unlocking service capabilities that weren't possible before. Cognizant is an early launch partner for Google Gemini Enterprise, an AI-powered platform designed for enterprises to drive unified secure AI capabilities. It seamlessly connects enterprise data, tools and workflows and leverages Gemini models to enable agentic journeys. And some client examples include reducing order response times from 5 days to 90 seconds with digital sales agents for a leading food distributor, helping a leading provider of cell-free DNA diagnostics reinvent patient education, access and onboarding processes, modernizing order management for a crop sciences company using Agentforce, delivering intelligent lead generation for a top labeling and a packaging provider. With TriZetto's core adjudication platform supporting health plans, we have deployed multi-agent workflows that connect TriZetto agents to front-end experience platforms such as Salesforce, Genesys and ServiceNow to address common interactions such as requesting ID cards from a member or giving provider the status of a claim. We believe much of the Vector 3 will flow into intuitive operations and automation practice, which is our BPO business, including BPaaS services. Our BPO revenue grew 10% in the last 2 quarters and is on track to reach $3 billion in annualized revenue over the next several quarters. We believe agentification will unlock new labor pools, including roles that don't yet exist. As digital labor diffuses into enterprise operations, the nature of human endeavor will evolve. Together, our work across Vector 1, 2 and 3 reflects our evolution into an AI builder company, one that blends deep domain expertise with platform innovation and interdisciplinary talent. 30 years ago, IT services companies were builders, crafting the foundational systems that powered industries. Over time, that role shifted towards integration, development and maintenance and growth became more linear. Today, Cognizant has a unique opportunity to reclaim the builder mindset and capture a greater share of the fragmented AI market. The scale of this opportunity is extraordinary. While global software market is in hundreds of billions of dollars, the surrounding labor spend represents many trillions more. Classical software has barely penetrated that space. We believe AI's winners will be those who diffuse into this labor spend, reshape how work gets done. Software and agent development cycles will coexist and Cognizant is poised to generate layers of value in this expansive new role for enterprise reimagination. In closing, we are proud of our Q3 results and the momentum we are building financially, commercially and strategically. We are evolving from software implementer to AI builder powered by an engineering heritage and AI-ready workforce and proprietary innovation. We know long-term success will be determined by the outcomes we deliver for our clients, our people and our shareholders. Thank you again for joining us. I'll now turn the call over to Jatin. Jatin Dalal: Thank you, Ravi and thank you all for joining us. We are pleased to report third quarter results that include revenue growth above the high end of our guidance range, strong margin expansion year-over-year and double-digit adjusted EPS growth. Our performance once again places us in the winner circle and we are delivering these results despite a complex demand environment and geopolitical backdrop. We continue to execute with discipline, driving improved revenue growth while investing in our people, technology and partnership to support our AI builder strategy and long-term growth. At the same time, we are delivering consistent margin expansion. These results are underpinned by balanced capital allocation framework, which we believe are key enablers to driving long-term and sustained shareholder value creation. Now moving to the details of the quarter. In Q3, we delivered revenue of $5.4 billion, up 6.5% year-over-year in constant currency, again led by strong growth in North America. Belcan contributed slightly less than 250 basis points of inorganic growth. Year-to-date, our revenue grew 7.3% in constant currency, including 350 basis points of inorganic growth. Adjusted operating margin expanded 50 basis points and adjusted EPS grew approximately 11%. And we returned about $1.5 billion of capital to shareholders. With respect to demand environment, trends in Q3 were consistent with last quarter. Clients across industries are navigating elevated levels of uncertainty around trade policy and resulting impacts to their businesses. We are also seeing clients carefully evaluate technology investments, which is resulting in a lower pace of discretionary spending in certain areas like products and resources. At the same time, cost pressures continue to spur demand for productivity-led and vendor consolidation opportunity across segments. And we see a growing pipeline of modernization projects that lay the foundation of AI-led transformation for our clients. Now turning to segments. We delivered year-over-year organic growth in all segments in the third quarter. Financial Services led growth driven by healthy discretionary spending in trends, in areas like digital engineering, legacy modernization and generative AI initiatives and improved spending among insurance customers, particularly in North America. Health Sciences was in line with our expectation and has remained resilient despite the uncertainty around government funding and trade policies. While we have seen pockets of discretionary spending pressure, it is being more than offset by the ramp of recent wins in payer and life sciences. Products and Resources revenue growth has improved and we are confident we can build off these levels in the quarters ahead as we expect new deal wins to ramp up more meaningfully in 2026. And Communication, Media and Technology grew organically and benefited from recent large deal wins that more than offset pockets of discretionary spending weakness in the quarter. Geographically, North America once again led growth and was up nearly 8% year-over-year in constant currency, driven by our large deal success and Belcan. Outside of North America, demand trends in Europe and Rest of World remains stable but not immune to impact from recent tariffs and geopolitical uncertainty. Turning to bookings. On the trailing 12-month basis, bookings grew 5% and represented a book-to-bill of 1.3x. After a strong performance of 18% year-over-year growth in Q2, we experienced some lumpiness in the third quarter and bookings declined by about 5% year-over-year. Our trailing 12-month annual contract value, or ACV, growth was consistent with TCV growth. Overall, our backlog remains healthy and our sustained large deal momentum provides us good visibility as we exit 2025. Moving on to margins. Third quarter operating margin of 16% increased by 70 basis points year-over-year, benefiting from NextGen program savings and the Indian rupee depreciation. Utilization held steady at 85% for third consecutive quarter, up from 84% a year ago. These improvements were partially offset by the ramp of large deals and the dilutive impact from Belcan. Voluntary attrition remained low at 14.5%, down 70 basis points sequentially, the third consecutive quarter of sequential decline and down 10 basis points year-over-year. A brief comment on H1B visas. Over the last several years, Cognizant has significantly reduced the dependency on visas while increasing local hiring and our nearshore capacity. We also stepped up our investments in automation and AI productivity tooling. We, therefore, do not expect a material impact to our operation or financial performance in near term as a result of the recent policy changes in the U.S. Now to additional details. During the quarter, we recorded a onetime noncash income tax expense of $390 million or $0.80 per share. As we discussed last quarter, this charge is related to a deferred income tax asset on the balance sheet that is not expected to be realized due to the enactment of the July U.S. budget bill. Adjusted EPS, which excludes this impact, was $1.39, up 11% year-over-year. DSO of 82 days declined 1 day sequentially and increased 1 day year-over-year. Third quarter free cash flow was $1.2 billion and represented 170% of adjusted net income. This compares to free cash flow of $791 million a year ago. As a reminder, cash income taxes in the third quarter were approximately $150 million, lower compared to our projections prior to the passing of the July U.S. budget bill. For the full year, we expect that reduction to be $200 million. Through the first 9 months of 2025, free cash flow is $1.9 billion and represented approximately 100% of adjusted net income. During the third quarter, we returned $600 million of capital to shareholders through share repurchases and dividends, bringing the year-to-date total to approximately $1.5 billion. We are on track with our plan to return $2 billion to shareholders in 2025. This will bring total capital returned to shareholders since 2022 to nearly $5 billion. We ended the quarter with cash and short-term investments of $2.4 billion or net cash of $1.8 billion. Finally, our M&A pipeline remains active and we have ample flexibility to invest strategically in the quarters ahead while continuing to return substantial capital to shareholders. Now turning to our forward guidance. For the fourth quarter, we expect revenue to grow 2.5% to 3.5% year-over-year in constant currency, which is all organic. We, therefore, now expect full year revenue to grow 6% to 6.3% in constant currency, above our prior guidance range of 4% to 6%. We continue to expect full year inorganic contribution of approximately 250 basis points. We are increasing our adjusted operating margin guidance to approximately 15.7%, which is the upper end of our prior guidance and represents 40 basis points of expansion. We continue to expect margin performance will be driven by cost discipline and SG&A leverage. This year, the fourth quarter will include the impact from a merit cycle compared to its Q3 timing last year. This will be partially offset by year-end seasonal margin strength. We continue to expect free cash flow conversion to be approximately 100% of adjusted net income. This includes the benefit from lower cash taxes as a result of the U.S. budget bill discussed earlier. We expect our adjusted tax rate, which excludes the onetime tax charge, to be in 24% to 25% range. Based on our current visibility, we now expect full year tax rate to be closer to the midpoint versus the lower end that we indicated last quarter. We are increasing our EPS guidance to $5.22 to $5.26 compared to our prior range of $5.08 to $5.22. This represents 10% to 11% year-over-year growth. Our expected weighted average diluted share count is unchanged at approximately 489 million. In closing, we are very proud that our guidance puts us on track to meet or exceed the high end of the initial guidance range we provided back in February despite a dynamically changing market compared to the beginning of the year. While we are not commenting on financial expectations for 2026, we feel well positioned to carry this momentum as we look ahead and remain committed to the long-term financial framework we provided at the Investor Day earlier this year. With that, we will open the call for your questions. Operator: [Operator Instructions] And our first question comes from Jim Schneider with Goldman Sachs. James Schneider: Ravi, I wonder if you could speak to the new business pipeline you're seeing for smaller deals at this stage and whether you're seeing any kind of significant uptick there or not? And then relative to larger deals, are you seeing any pull-in or extension in terms of the commencement date for those large deal new bookings? Ravi Kumar S: Thank you, Jim, for that question. Look, large deals have nicely balanced between the 2 swim lanes I've been talking about. Early on in 2024 and early 2025, a lot of it was consolidation, productivity-led. Now we are seeing a new swim lane evolve, which is AI innovation-led, which is primarily agentic cycles, deploying AI into enterprise landscapes. And therefore, if you've noticed, our digital engineering business has grown at 8% in the last few quarters. Our infrastructure-led AI has grown by 10% in the last few quarters. And our BPO business is rocking. Actually -- it's actually growing at 10% again. And that we are starting to see. So it's a combination of productivity-led, innovation-led. I mean I've always been saying that this is a double engine transformation. While you can apply it on software cycles, get productivity and transfer the lower cost of deployment for higher spend of software, on the other end, you can apply it on -- you can apply agentic capital on enterprises. There's so much of infrastructure spend, which has happened. It has to create a build opportunity. And that's why I keep saying we are an AI builder. So we are seeing discretionary small projects starting to come back in financial services and health care. And that's all related to AI-led spend. So as you save on one side from software cycles, you transfer that money to innovation. So a very healthy pipeline. I'm excited about the large deals. I'm excited about the discretionary coming back on small deals, which is AI-led. I mean so much infrastructure has been spent that it has to trickle down to services. And there's always been a lag between when hardware was spent, then the software, then the services. That cycle has shrunk now and we'll be breaking that cycle. So the services spend is going to catch up because of the extraordinary spend on compute and AI infrastructure. Operator: And our next question comes from Tien-Tsin Huang with JPMorgan. Tien-Tsin Huang: Nice results. Well done. I wanted to ask on the revenue per employee. It looked like up 8%, operating income also better than that, up 10%. So just understanding the lift there and if it's sustainable and or even structural given some of the AI returns that you talked about. Ravi Kumar S: Thank you so much for the question. In fact, just a follow-up on the previous question. We're also seeing mega deals. Last quarter, we did 2. The quarter before, we did 1. So mega deals are also starting to line up because that savings can be underwritten for innovation. Now coming to your question, this is a interesting lead indicator, revenue per person and margin per person. Revenue per person went up by 8%, margin by person went up by 10%. It's indicative of how we are becoming a AI builder company with platforms, intellectual property, software and services, all bundled together. So we're excited about that. It's a combination of things. Our fixed price managed services business is going up. It has gone up from 43% in 2024 to right now almost close to 47%. That gives us a chance to deliver work for outcomes and therefore, create more revenue per person and margin per person. It is actually going to transition and Jatin has been talking about it, that we are a fixed price, time and material and a transaction-based business. We are going to go from more fixed price, more outcome-based, more transaction-based, less time and material in the future. So productivity has gone up 30%, which means there is more throughput, so you can actually create more throughput, share the savings, lower cost of deployment with our clients. So effectively, putting all this together, this is a very good proxy for AI services. And that's why we thought -- we've been tracking this but we thought we should let analysts and investors know about it. Tien-Tsin Huang: Yes. [indiscernible] Good proxy, good data point for us to have. Just on the -- my follow-up, then I'll ask on gross margin probably like I usually do. Just thinking about near-term gross margin performance potentially given the expected deal ramps and the mega deals and what have you. Any specific callouts on gross margin in the next couple of quarters? Jatin Dalal: Sure. Thank you for that question, Tien-Tsin. I would start by saying how we have executed for first 9 months. While you see the headline number a little soft but on gross margin, we have been able to largely maintain the gross margins on an organic basis. The reduction that you see on a year-over-year basis is coming through on account of the consolidation of Belcan, which was expected when we did the deal. So overall, we are quite happy that despite the ramp-up of large deals and investments that we are making, we are able to maintain gross margin in a very narrow range of last year in a organic basis. Going forward also, our endeavor would be to continue to look at 3 or 4 operational levers and the top of that is AI-led productivity that Ravi spoke about. The second is pyramid. You know we have invested 15,000 to 20,000 in recent college graduates. Ravi Kumar S: And it's more than last year. Jatin Dalal: And it's significantly higher than last year. So we continue to improve the pyramid. And third is utilization, which you can see we have kept it at 85%, now third quarter in a row. It is higher by 1 percentage point compared to quarter 3 of last year. So we feel we are making good progress on gross margin and hopefully, that will continue to reflect in the numbers. Operator: And our next question comes from Maggie Nolan with William Blair. Margaret Nolan: Can you shed some insight on how you're tracking the success of upskilling your employees with those AI-related skill sets? Ravi Kumar S: Thank you for that question. I mean we are pioneering this effort. Early on, we were the first company and probably the only company which -- in our peer group, which speaks about percentage of code and software development cycles assisted by machines. That's at 30% and we are constantly tracking to stay ahead of the curve. We are the #1 company on GitHub Copilot. In fact, we are the GitHub Copilot AI Partner of the Year. We have been the launch partner for Gemini -- Google Gemini Enterprise. We just signed a deal with Anthropic on cloud. We have created a hustle inside the company that the only way you should write and the only way you should be assisted in software development is through machines. And that has become the way of doing work at Cognizant. In fact, we are on the Guinness Book of Records for the highest number of people on an hackathon concurrently. In fact, we ran that to create culture and create a permanency in the way we write software. We are the only company which is actually saying we are going to hire more school graduates than ever before. We are doubling those numbers from last year because we think we can actually create a significant productivity leap with our extraordinary training infrastructure. So all of this put together, we seem to be on a pioneering opportunity. This is on one swim lane, which is software development. Of course, there is a ton of work on the agentic development, which is much more surface area, much more spend, more expansive. So our double engine, both on productivity and on innovation is deeply embedded with skilling, reskilling, hiring from schools, building productivity alongside machines and that is the only way we want to do -- create throughput. And if we do this well, software has elasticity to be spent more. If we do this well, that money is going to be transitioned to agentic capital and working alongside agents for human workforce, I think, is going to be an amplifying -- amplifying potential of humans. So we have pretty much trained almost all our employees, more than 250,000-plus employees on AI-led skills. Margaret Nolan: That's helpful. And then should we expect large deal and mega deal signings to impact the quarterly cadence of revenue and margins in 2026? Can you help us think about the ramp over the course of the year from a modeling perspective? Ravi Kumar S: That's a great question. In fact, if you notice, in 2023, our trailing 12 months range of bookings was in the range of $24 billion. And it's now at actually at $27-plus billion. So we've had tailwind from '24 into '25. Our annual contract value is very nicely stacking up to the total contract value. In fact, our total contract value from large and mega deals has gone up by 40%, while the number of deals is 16 and -- so far and we have another quarter to go. Just the TCV value has just significantly gone up. It's gone up by 40%. So we think we have tail velocity going into quarter 4 as well as going into the next year on large and mega deals. I don't see any shift on that. And on the contrary, I actually see that on 2 swim lanes. In '23 and '24, the swim lane was productivity. And in '25, we are starting to see innovation-led, agentic capital-led, much more expansive. I've always been saying one swim lane is software, another swim lane is agentic. The agentic is more expansive, more elastic and more immersive. We are seeing large deals on it. And in '23 and '24, a lot of it was Americas space. Now we are seeing Europe and Asia Pacific starting to be a part of it and we are excited about the momentum we have created in Europe on large deals. Operator: We'll go next to Surinder Thind with Jefferies. Surinder Thind: Ravi, can you maybe talk about the partnership strategy here and how important it is to maybe partner with each of the major providers versus maybe being a bit more selective and becoming more of a partner of choice with maybe some of the individual providers, whether it's GCS versus Anthropic or OpenAI or however you're thinking about that strategy? Ravi Kumar S: Surinder, thank you for that question. Partnerships traditionally were SaaS companies and classical software companies, of course, cloud-based hyperscalers as well. Now I would add more things to the mix. I mean, look, SaaS companies and classical software companies will transition the business logic to the agentic layer, which they build on it. I mentioned this in my remarks that the machine was always with the software companies and we were a system integrator. Now we are a AI builder, which means we have intellectual property platforms built. It's a very heterogeneous and a fragmented AI market. Our clients are not saying, come in with your capabilities. They're saying, come in with your machine, which means you have to actually have the platforms. It could be partner-led, it could be our own. And we are actually, therefore, investing into platforms and intellectual property. In addition to that, we have this new thing because now the machine actually belongs to the frontier model companies, which is OpenAI, Anthropic kind of firms. In fact, that's one of the reasons why we partnered with Anthropic. So we are activating multiple swim lanes. Our own custom platforms built on enterprise software companies where we have long-term partnerships, SaaS companies but we also are partnering with frontier model companies because we could create custom AI agentic capital directly. And the Anthropic partnership is an indication of the -- of that particular swim lane. So it's a much broader partnership lens, including start-ups. I mean I work with WRITER, I work with Workfabric AI. These are layers of value on top of the LLM. And some of those layers are owned by us, built by us, some of them are partnered. And of course, the frontier model companies allow us to create a swim lane on -- with the engine actually belonging to them but we build the layers of service around it. So we think it's more expansive and more broad-based. Surinder Thind: That's helpful. And then as a follow-up, can you maybe talk about the IP that you're building? And more specifically, you mentioned having upwards of 1,500 agents in production. How does that impact the revenue model at this point? Are you able to charge for some of that? Do you keep some of that IP? Or is it more of a core base and then you kind of custom build agents, that then [indiscernible] Ravi Kumar S: I think it's a combination, Surinder. It's a combination. Look, on Flowsource, which is a platform which sits on top of code assist platforms, it gives us the opportunity to get better productivity and that productivity passes on to our revenue per person and margin per person metrics. Our other IP and platforms we are building are the ability to take the raw power of AI and make it enterprise grade, which means it could be the accuracy of the models. Yesterday, we got a patent on changing the -- on a new way of pretraining a model, not based on reinforcement learning but based on evolution strategies, which our labs got in. So we are building a platform around it. We have a platform around multi-agent systems, which means you could have agents talking to each other. One example is in TriZetto, our TriZetto agents talk to Salesforce agents and Genesys and the ServiceNow agents and they actually deliver outcomes like ID cards and status of a claim automatically and auto adjudication of claims and stuff like that. So the platforms are all about taking the raw power of AI and making it enterprise grade. It could be on accuracy, on responsible AI. It could be on new ways of pretraining the model, a variety of things which are needed to make it enterprise grade. There is so much infrastructure spend, which has happened. That value has to trickle down. And the use cases which are now coming out, production grade, we are able to generate more of it because of the intellectual property we have built. We are also closely monitoring partnerships. I mean the context engineering piece is a unique pioneering opportunity for us. This is a contextual computing era, which means, you need to feed the context, could be the tribal knowledge, the workflows, the data flows, the hustle of a company and you have to feed it into the LLM and create a contextual agent who is much more productive than a generic agent. That actually needs -- it's a science which is evolving. So we're building intellectual property along with a partner of ours. So I think this is going to be a platforms plus capability kind of a model. And therefore, I call myself a AI builder company and we are pioneering that effort of transitioning from just a capability firm to a platforms plus capability. And historically, we had that culture with our health care business where a lot of it is platform plus services with TriZetto. Operator: And our next question comes from Darrin Peller with Wolfe Research. Darrin Peller: Just a financial question first. Just when I look at the guide of 2.5% to 3.5% constant currency for fourth quarter, just what are the puts and takes there? Any early insights into how budgets are shaping up also into '26 would be helpful. Jatin Dalal: So as you can imagine, difficult to call about -- talk about '26 at this juncture. We will come back in January and speak about it. But overall, there is no major change in the demand environment. We continue to win share and that is reflected in the superior execution of the quarter that went by. Quarter 4 seems to be a customary quarter 4 with its lower number of bill days and furlough. Nothing out of ordinary. Our guidance range reflects, essentially if things could go a little worse, then it's the bottom end. And if we can get some additional momentum in revenue and bookings, then it's the upper end. So that's how we have worked through quarter 4 and that's the full year guidance. Ravi Kumar S: Just one quick addition there. I would say, look, the activation of AI-led innovation use cases, we've gone from 2,500 to 3,500 this quarter. So literally 40% jump. So the money you save on the software cycles on productivity is going to be underwritten to innovation cycles. That is triggering off very well. And I don't think CIOs are saying they're going to cut their budgets. Nobody has told me that. They're all going to -- they're all saying, how can you give me more value? And that's why we are benefiting out of this. Darrin Peller: Okay. That's helpful. And then maybe just one quick follow-up would be if you could just discuss -- just you're obviously doing well with larger deals, maybe just discuss the competitive dynamics for some of the large deals you're seeing and what's allowing you guys to continue winning them? And then how important is price in the discussion and maybe build into that what AI can do for you on pricing, if you could pass through some of your savings into this? Ravi Kumar S: Yes. Look, price was always a linear thing in the past because it was labor related and productivity of tooling was not in the mix. I would say it was a minority. Right now, pricing is productivity-led and it depends on how much you can use your platforms and how much you can use your AI tooling and the culture we have established now. So pricing is kind of linked to how fast we can keep that runway on productivity. Large deals on consolidation and productivity will always be price sensitive because they're done for savings and creating more velocity. The innovation side of it, I mean, that's going to be much more -- that's going to be less sensitive to price because you are actually delivering new products and new services using AI. I don't see much of a change in the pricing. I would actually say if the other swim lane gets activated, which is innovation-led, you will get the strength behind the pricing. Operator: And our next question comes from Yogesh Aggarwal with HSBC Bank. Yogesh Aggarwal: Just have a question actually totally disconnected to the quarter and demand, et cetera. Just in the past few quarters, Cognizant performance has consistently improved and now you're growing almost at the top end of the peer range. But I'm sure you would have noticed as well the stock still is at a significant discount to the peer group. So just curious, any thoughts on secondary listing in India? I mean, is it something on the table and any puts and takes for the same? Just curious to know your thoughts, please. Jatin Dalal: Yes. So Yogesh, thank you. That is an interesting question. Cognizant's Board and management team regularly assess opportunities to enhance the shareholder value. Towards this end, we have been assessing a potential primary offering and a secondary listing in India with our legal and financial advisers. As part of this comprehensive review, which is still in its early phase, we are engaging various stakeholders from both India and U.S. to evaluate the implications of such a potential offering and listing. The process of a primary offering and a secondary listing in India by an overseas company is complex and involves multiple steps. We view this as a long-term project. While no decision has been made and any offering and secondary listing would be subject to market and other factors, we continue to assess and review the idea and are committed to acting in the best interest of our shareholders. So that's our response, Yogesh. Operator: Our next caller comes from Rod Bourgeois with DeepDive Equity Research. Rod Bourgeois: All right. Yes, guys. So I want to talk for a second about Financial Services vertical. You mentioned improved spending there. We are seeing some of that across the broader sector. Can you speak to what form that improved spending is taking in the Financial Services vertical? And in particular, are you now seeing those clients moving beyond AI for cost savings and into more AI-based reinvention at those clients? Ravi Kumar S: Thank you, Rod, for that question. Absolutely. I think this is probably my fourth or fifth quarter where we have done year-over-year growth as well as from the start of the year, we've been sequentially growing in Financial Services. It's been one of our best-performing industry groups. I think the spend has gradually transitioned from cost takeout consolidation to more innovation. I would say if you take the 3,500 projects we are doing on AI-led innovation, a significant chunk are actually moving from experimentation to enterprise-grade AI. And all the platforms I'm speaking about in the call, a lot of them are getting implemented in Financial Services. In fact, insurance, which is a part of BFSI has also started to spend. It's a sector which kind of was lagging a little bit but it has started to spend as well. So we are very, very excited about the future of Financial Services. Over the last few years, Cognizant per se, we have had quarters where we haven't performed in the previous years. But from -- the turnaround has started from the middle of, I would say, 2024. And here we are, it is actually one of -- it is actually our best-performing industry group. The spend cycles are great and clients are actually innovating much more. Every segment of Financial Services has accelerated in terms of spend and the discretionary is coming back because the value you get out of discretionary now is much higher because the cost of capital is high but the deployment costs have gone down. So that is giving clients the confidence to experiment more and actually take it to production. So Financial Services will be one of our bellwether industries in the -- in 2026 as well. Rod Bourgeois: Great. And then moving to health care. I mean, there's been some policy uncertainty in that vertical. You've also got the TriZetto asset. Just can you speak a little bit about the outlook for the health care vertical in general? And in particular, with TriZetto and the -- all of the AI work that you're doing, are you seeing BPaaS as a increased opportunity there? Just any color on the health care outlook. Ravi Kumar S: Absolutely, absolutely. In fact, if you look at health care, I mean, if you take the last 20 years, the number of surgeons and the number of doctors has pretty much remained flat. But if you look at administrative costs, they've probably got up like 600% to 700%, number of administrators in that business. So transitioning that spend to predictive care, I think, is the future. We have 200 million-plus members on our TriZetto platform. We own the BPaaS cycle. In fact, you have -- you answered my question. BPaaS is our hottest offering. It gives us the opportunity to not just share our platforms but equally, the operational strength of running health care operations, I think, is an important consideration. One of the reasons why our BPO business is 10-plus percent growth this year is also because of BPaaS. So we are very, very excited about our BPaaS offering, AI-led instrumentation in our TriZetto business and our lead in health care. I mean we are probably the #1 player in health care in the United States. Operator: We'll go next to Jonathan Lee with Guggenheim Partners. Yu Lee: Good to see the outperformance here. You called out last quarter that you were expecting the 4Q exit rate to be just under 4% at the high end of the outlook range. Given the outperformance this quarter, can you help bridge the gap between the 3.5% at the high end of your 4Q outlook today and the 4% exit rate you pointed to last quarter? Jatin Dalal: Yes. I think this is in -- 2.5% to 3.5% is the view that we have of quarter 4 as we look at next few -- next couple of months. It is -- we have great momentum in terms of winning the large deals. We have been able to execute better in quarter 3. And that will really decide -- I mean, continued momentum on those factors will really decide where 2026 comes through. But overall, we are very happy with the way we have executed 2025. As I spoke in my opening remarks, when we gave guidance, since then the environment has been very, very dynamic and still to be able to come in the last quarter and guide above the original guidance range is very heartening. So we have executed well and we hope we'll continue to do so as we move forward. Yu Lee: Can you help us also better understand your pyramid initiatives and how you're balancing the needs of clients while managing margins, particularly as you move into higher-value AI-related work in Vectors 2 and 3 that may require higher skilled talent beyond that of freshers? Jatin Dalal: So we have been very vocal about that -- about the fact that we see actually freshers and AI, a very complementary strategy. And we believe that expanding pyramid at the bottom in our industry really helps us accelerate the organization's journey on AI. So from that context, we more than doubled this year, the number of freshers we took last year to this year. And that journey will continue; one, from a cost management standpoint of pyramid but even greater context is how we can accelerate the enterprise to become more AI-ready and AI builder as Ravi spoke about. Ravi Kumar S: And also, we are now hiring freshers in the markets, which is primarily our principal market being U.S. So we are doubling down on this with a broader pyramid and a shorter path to expertise. Operator: Thank you. And that does conclude our question-and-answer session. I would like to turn the floor back over to Ravi Kumar for closing comments. Ravi Kumar S: Thank you so much for joining us today. We are very excited about our strategy of being an AI builder company, which is a combination of AI-led capability, platforms, intellectual property and partnerships, which allow us to be on those 2 swim lanes, one on productivity, one on AI-led innovation with a much expansive, elastic and a more immersive opportunity to serve our clients. So we're very, very excited about our future and thank you again for listening to us today. Operator: Thank you. This concludes today's Cognizant Technology Solutions Third Quarter 2025 Earnings Conference Call. You may now disconnect.
Operator: Hello, everyone, and welcome to the UMB Financial Third Quarter 2025 Financial Results Conference Call. My name is Carla, and I will be coordinating your call today. [Operator Instructions] I would now like to hand the call over to the Investor Relations at UMB Kay Gregory to begin. Please go ahead when you're ready. Kay Gregory: Good morning, and welcome to our third quarter 2025 call. Mariner Kemper, Chairman and CEO; and Ram Shankar, CFO, will share a few comments about our results, then we'll open the call for questions from our equity research analysts. Jim Rine, President of the holding company and CEO of UMB Bank, along with Tom Terry, Chief Credit Officer, will be available for a question-and-answer session. Before we begin, let me remind you that today's presentation contains forward-looking statements, including the discussion of future financial and operating results, benefits, synergies, gains and costs that the company expects to realize from the acquisition as well as other opportunities management foresees. Forward-looking statements and any pro forma metrics are subject to assumptions, risks and uncertainties as outlined in our SEC filings and summarized in our presentation on Slide 50. Actual results may differ from those set forth in forward-looking statements, which speak only as of today. We undertake no obligation to update them, except to the extent required by securities laws. Presentation materials are available online at investorrelations.umb.com and include reconciliations of non-GAAP financial measures. All per share metrics refer to common shares and are on a diluted share basis. Now I'll turn the call over to Mariner Kemper. J. Kemper: Thank you, Kay, and good morning, everyone. We'll share some brief comments about our third quarter results, then open it up for questions. As you may have seen in our recent release, I'm very excited that we've reached the important milestone in our acquisition of Heartland Financial early this October. We successfully completed the full systems and brand conversion of all HTLF locations. I'm incredibly proud of the teams that have been working together around the clock to make the smooth transition for our clients as well as for our associates, all while continuing to excel at their day jobs, which is evidenced by our strong third quarter results. We saw a new record for gross loan production, strong fee income, consistent credit quality and continued positive operating leverage. Reported net income available to common shareholders of $180.4 million included $35.6 million of acquisition expenses compared to $13.5 million in the second quarter. Excluding these and some smaller nonrecurring items, our third quarter net operating income was $206.5 million or $2.70 per share. Third quarter net interest income totaled $475 million, an increase of $8 million or 1.7% from the second quarter, driven primarily by continued organic growth in average loans and earning assets, partially offset by the impact of strong growth and higher cost interest-bearing deposits from our institutional businesses. Fee income was strong, increasing 12.4% on a linked-quarter basis, excluding the impact of market valuation changes on our equity positions. Trust and securities processing income was positively impacted by solid contributions from corporate trust, fund services and private wealth. And in investment banking, increased activity in agency and mortgage-backed trading drove nearly a 14% increase from the second quarter. Looking at the balance sheet, we had solid increases on both sides with 8% linked-quarter annualized growth in both average loans and deposits. Quarterly top line loan production surpassed $2 billion for the first time with strong organic growth momentum supplemented by the continued success from our acquired markets. The rate of payoffs fell slightly to 3.6% and remains in line with historical trends. C&I was our strongest contributor for the quarter with more than 14% annualized growth over the second quarter average balances. Additionally, as I mentioned last quarter, we've begun offering mortgage products in our new regions in the spring and have been encouraged by the early success, which has led to nearly $20 million in closed loans. We continue to see a strong pipeline. Looking ahead in the fourth quarter, overall loan activity and pipeline remains strong, both in legacy and HTLF markets. Our loan growth has continued to outpace our peer banks. Banks that have reported third quarter results so far have reported a 5.5% median annualized increase in average loan balances compared to our 8% growth. With the recent discussions around lending to companies designated as nondepository financial institutions, we've added some stats on our C&I page to give some context. Expanded definition from the Fed on loans to NDFIs was merely a reclassification of a broad range of exposures that includes high-quality working capital or capital call lines, private equity partnerships and loans made to insurance companies. These have long existed within bank C&I portfolios. After recalibrating our reporting to meet these updated definitions, our portfolio was approximately $2.1 billion at the end of September, representing just under 6% of total loans. Approximately 1/3 of these are subscription lines, largely to our fund services and private equity clients. And like all of our loans, these are strategically underwritten and actively monitored and managed and have historically had excellent credit quality. Speaking of credit quality, our allowance increased to 1.07% of total loans on September 30. Total net charge-offs for the third quarter were 20 basis points, with the largest portion being credit card as has been consistent in past quarters. Net charge-offs on legacy UMB loans were just 8 basis points of average loans, down from 13 basis points in the prior quarter. Given what we know today, we continue to expect charge-off levels to remain near or below our historical averages for the remainder of the year. Total nonperforming loans were $132 million or 35 basis points of loans. The quarterly increase was driven by 2 legacy HTLF loans that have substantially adequate PCD reserves today. Banks that have reported third quarter results so far have reported a median NPL ratio of 48 basis points. While we've seen a slight increase in NPLs, we don't expect that there will be any significant change to our outlook for charge-off levels. We continue to build capital with a September 30 common equity Tier 1 ratio of 10.70%, a 31-basis point increase from June 30, moving closer to our pre-acquisition levels. Finally, as announced yesterday, I'm pleased to report that our Board of Directors declared a quarterly dividend of $0.43 per share to common shareholders. This represents an increase of 7.5% from the prior quarter and marks the 23rd dividend increase in the past 20 years. You can see our strong track record of growing our dividends on Slide 46. Since 2004, we've increased our annual dividend almost 300% while continuing to grow our balance sheet and tangible book value. Now I'll turn it over to Ram for more detail. Ram Shankar: Thanks, Mariner. I'll begin with the purchase accounting update included on Slides 9 and 10 of our materials. Our third quarter results included $40.7 million in net accretion and net interest income, $5.6 million of which was related to accelerated accretion from early payoffs of acquired loans. The net benefit to net interest margin from total accretion was approximately 26 basis points. Our operating expenses again included $23.4 million in acquisition-related amortization of intangibles. On Slide 10 is the projected contractual accretion for the next 5 quarters as well as for full year 2027. Slides 12 and 13 include some key highlights and drivers of our quarter-over-quarter variances as well as a breakout of onetime costs by expense categories. You will see the accretion income there, along with the solid noninterest income growth Mariner mentioned. Metrics behind our fee income included a 6.8% increase in total institutional assets under administration, which now stands at $642 billion. Additionally, our Specialty Trust and Agency Solutions team have seen a 49% increase in new business year-to-date and public finance has closed 117 deals in 2025, an increase of 22% over 2024. Fee income will continue to be impacted by changes in market value of our 904,000 share ownership in Voyager stock. As noted, the September 30 closing price was $29.78 compared to $39.25 on June 30. The second quarter gain from the IPO of $29 million and a $9 million mark-to-market from the change in stock price during the third quarter resulted in a negative $38 million swing in fee income sequentially. As we've said previously, our pipeline remains strong in our private investment business, and we are likely to see periodic monetizations going forward. Also, as noted, excluding the investment gain line item and normal mark-to-market accretion on BOLI and COLI investments, we also benefited from some onetime fees this quarter to the tune of $6 million. These primarily included a $2.3 million BOLI debt benefit and a $2.5 million legal settlement paid to us. On the expense side, we had $35.6 million of merger-related costs compared to $13.5 million in the previous quarter. Excluding the impact of merger and onetime costs, operating noninterest expense was $385 million, an increase of just 1.3% compared to the second quarter. Looking ahead, we would expect fourth quarter operating expense to be in the $375 million to $380 million range to include a $2 million charitable contribution and the expected ramp-up in performance-related incentive comp net of cost saves. We remain on track with our announced acquisition-related expenses as well as cost synergies. Turning to the balance sheet and margin. Reported net interest margin for the third quarter was 3.04%. Excluding the 26-basis point contribution from purchase accounting adjustments, core margin was 2.78%, down 5 basis points sequentially. The primary drivers of the linked-quarter decline in net interest margin were a 3-basis point negative impact from free funds and 4 basis points compression due to a strong 4% growth in average interest-bearing deposits, led by higher cost deposit balances held by our institutional clients. These balances totaling over $1 billion, coupled with the seasonal decline in DDAs, drove our cost of interest-bearing deposits higher by 2 basis points and our cost of total deposits up by 7 basis points. We realized blended betas in line with our expectations on our index deposits in the month of September, but the benefit was muted due to the mid-September timing of the FOMC cut. On Page 27, we disclose our current composition of deposits by rate sensitivity. As a reminder, our interest rate simulation on that page shows us positioned as essentially neutral and is a static balance sheet analysis where cash flows are replaced by similar instruments at current market yields. It does not contemplate growth in the balance sheet, which may impact overall margin. Relative to the third quarter core margin of 2.78%, excluding accretion, we expect fourth quarter margin to be essentially flat. Key assumptions include one additional 25 basis points rate cut in October and the residual benefit from the September rate cut, along with a slight seasonal rebound in DDA balances and positive churn in the bond and fixed rate loan portfolios as highlighted on Slides 25 and 27. Offsets include the impact of September and October rate cuts on our variable rate loan portfolio and lower benefit of free funds in a lower rate environment. Finally, our effective tax rate was 20.4% for the third quarter compared to 19.2% for the same quarter last year. For the full year 2025, our effective tax rate is expected to be between 19% and 22%. Now I will turn it back over to the operator to begin the question-and-answer session. Operator: [Operator Instructions] And our first question comes from Jon Arfstrom with RBC Capital. Jon Arfstrom: I asked about this last quarter on production trends, and I just want to go back to it because trends are up again. Curious, Mariner, you touched on it, but can you dissect it a little bit more for us? Is that improvement from borrower sentiment? Anything you're doing differently? Is it Heartland? Or is it something else? And then maybe comment on the sustainability of that? J. Kemper: Yes. Thanks, Jon. It's a long-standing answer. We use the term runway and penetration often when we talk about our loan growth. And it's really across all categories, all regions. It's coming from Heartland, it's coming from UMB. And as we've talked before, our loan growth budgeting and forecasting comes from what the penetration is locally, the size of the opportunities that we have from the towns that we're in and then importantly, what the capacity and capability of the officer core is. So it's a bottoms-up exercise and the tenure of our associates building long, deep pipelines and the sheer opportunity we have across our footprint. So nothing really new to report, lots of execution opportunity as long as we keep our people, keep let them build their pipelines. And the exciting thing is it's really early days on seeing the penetration opportunities in the new footprint. So we're seeing some already early signs from it, but I mean, it's just super early days. When we did the acquisition, we talked about the chassis and the engine. So the chassis is that we picked up through Heartland is absolutely what we thought it was going to be, and we're seeing the early indications of that success. But again, really good news. It's still very early. Jon Arfstrom: Okay. Good. Maybe for you, Tom, credit has been topical. I think yours looks just fine and you guys touched on it a little bit. But anything new on credit? It looks like the balance changes are primarily Heartland driven, but anything to note on some of the core trends on credit? Thomas Terry: No, we're still very pleased with how we're handling the new Heartland credits. And we've talked about the last couple of quarters, the fact that we've identified a lot of these. We have already put reserves against them, and now we're just working them through. So still feel very good about where we are today and what we see over the next couple of quarters in terms of charge-offs. We think we'll be right in line with what we've talked about and the one thing to keep in mind is we did have a couple of larger additions to the nonperforming. We still expect those to come out in good shape. We're secured. We have reserves against them. We're secured. We just need to work through them. So still feel optimistic about the economy. Our borrowers are making money. So it's kind of the same message we've had the last couple of quarters. J. Kemper: And I would just reiterate that our comments on guidance around charge-offs, I just reiterate that, which is that we don't expect anything different, and we'd expect the remainder of the year to be at or below our historic charge-off levels. Operator: And our next question comes from David Long with Raymond James. David Long: Ram, I appreciate the color on the fourth quarter outlook on the expenses. But as we look into the first quarter of '26, you guys have completed the core conversion. How should we be thinking about the step in expenses into the first quarter with the conversion being done then? Ram Shankar: Yes, I'll take a stab at it. And we don't give specific guidance beyond the next quarter. And I'll speak to the top of the house. We expect all the cost saves that we expect from Heartland at the time of the announcement to materialize by the end of first quarter, right? So I had said at legal day 1, which was back in January, we got close to $70 million of the cost saves on an annualized run rate basis. Following the conversion, we've taken actions on another $5 million quarterly, so call it $20 million of additional cost saves that leaves about $30 million left which we'll get over the next 3, 4 months. So that will be fully baked in. The reason I can specifically answer your question is, obviously, there's core inflation that's going on at UMB in terms of investing in certain things. So -- but just said, like as I said before, we expect $375 million to $380 million. We have some more cost saves to come in, and then there will be some normal inflation as part of UMB's investment, legacy UMB investment. David Long: Got it. And then just to be clear, so it sounds like there's still -- in the first quarter, there still could be some costs that need to come out. So is the second quarter the clean quarter? Ram Shankar: Yes, I would say that. David Long: Okay. Okay. Perfect. And then switching gears, just on the lending side, with the acquisition of HTLF and bringing in their lenders, how have they been integrated? And are they continuing to operate with the same sort of customer focus as they had under the HTLF brand? Or are there opportunities for them to step up and maybe take on some larger relationships? Just talk about that integration process. J. Kemper: I'll take a stab at this and then let Jim jump in. But as we talked before, the beauty of this -- the combination was we got to drop the UMB way of doing things in holistically across the organization day 1. And we had enough talent in our group with regional credit officers to drop them in across the whole footprint to provide guidance and quick turnaround times, access to decision makers, et cetera to not only keep up what they were able to deliver, but I would argue to improve what they're delivering as far as turnaround times and quality of the way we lend. So they've been, I think, really pleased with what we're bringing to the table. And so the uptake has been very quick because it was -- we were not meshing 2 cultures. Jim, I don't know if you want to add anything to that? James Rine: Yes. There, I don't have much else to add other than the former HTLF officers certainly embraced it. They have more support in market, more turning -- ability to turn answers around to the clients quicker. And our sales process, it differs in various banks, but we feel like our credit culture is extremely strong, and they've embraced what we do, and it's also increased their ability on higher hold limits where it's necessary. So it's working great. It really is. J. Kemper: Yes. Most important thing is we're not meshing 2 people. I mean the really important thing is we're not really -- we're not meshing 2 cultures. So that would slow things down. So there's really 0 of that to contend with. Operator: The next question comes from Brian Wilczynski with Morgan Stanley. Brian Wilczynski: Maybe just staying with Heartland and the opportunity there. It definitely sounds like you're still early innings in terms of the benefit. Can you just elaborate a little bit more in terms of where you see the most opportunity for new loan production, either across Heartland's regions and in particular or any particular loan categories where you're seeing the most opportunity? J. Kemper: How much time do you have? I mean it's really across the board and in different stages in different places. I mean just a couple of examples. California, as we all know, is a very significant market opportunity, for example. So to get -- there's just an unending opportunity with what we can do in California. So it's about what pace we do that, what kind of hiring takes place. So that's an example of California. So without a loan, like it's hard to even put a number on that one. Other things like Rockford were really -- was a real positive surprise for us. We knew it would be additive, but where it's placed on the map, being close to Chicago and the team up there and the production that we're already seeing has been a really nice upside surprise. Wisconsin at all across Wisconsin, lots of really fantastic opportunities. There's a really, really neat team there. And I hate even starting doing this because there's great people across all the markets that we picked up, seeing a lot of really great activity in New Mexico. So some of it's kind of population based where we see maybe more opportunities. It's going to be some of these markets with more population. And then you back into where we are in the life cycle of how many people were already hired and how many people we could -- can hire. And yes, how penetrated we are already. So there's really low penetration. It's the age-old story for UMB even before Heartland, which is there's really significant penetration opportunity just to get our -- just getting our small share, let's say, we're aiming to take 10% of all those markets. I mean, that would triple the size of UMB just by itself. So it's an enormous opportunity, and we're in just early days about just retaining this great talent we picked up and adding to it over the next few years. Brian Wilczynski: That's really helpful. And then I wanted to ask about bank M&A activity clearly picking up across many parts of the country, including in your footprint. I was wondering what opportunities that presents for UMB, either as an acquirer or as a way to win business from other banks who are doing deals? How do you think about the opportunity for the bank here? J. Kemper: Yes. I'm going to reiterate some comments I've been making about this subject for some time. We don't need to do M&A. We have a very strong engine. But because of that very strong engine, we do believe strategically, over time, we want to augment our loan growth ultimately as a company with acquired deposits through M&A because they're sticky, they're granular, they're low cost and they're hard to come by to ultimately keep up with the kind of loan growth we've had over time. So we think it is a good strategic move for us to back up the engine we have with augmented acquired underlevered deposits to really great franchises across our footprint. So we don't have anything other than a desire and a strategic focus. It is part of our strategy. So we build relationships and are looking for good partners over time. No need from a time line perspective other than we just think over the life cycle of UMB, it's good and additive to add good partnerships to the well-run banks to the mix. Operator: And the next question comes from Jared Shaw with Barclays. Jared David Shaw: I guess sticking with the capital discussion, you grew CET1 this quarter. It's still below where it was before the Heartland deal. Do you think you could deploy capital through a deal with the CET1 here? Or would you want that to be above 11% before sort of embarking on any capital strategies? J. Kemper: Well, there's a lot of moving pieces in the M&A space. Anything from picking up a bank that has excess capital itself to our ability to earn back very quickly after an M&A transaction to raising capital, et cetera. I mean, there's any number of variances and variables to answer that question with. We certainly think over time, psalms 1 quarter or 2 or a couple of quarters connect to each other, we'd like to be at higher levels of capital. We're very comfortable dropping down for a couple of quarters if it's based on a high-quality transaction. Ram, I don't know if you want to add anything to that? Ram Shankar: Yes. Just on the capital side, Jared, related to the M&A comment, our capital build to get back to 11%, that will happen within 1 or 2 quarters on the pace that we're growing, right? So we are ahead of our schedule in terms of what we thought would happen to our capital accretion from the Heartland transaction because of both the benefits of the merger as well as for UMB outperformance. So that could be a couple of quarters away. J. Kemper: Yes. And so the answer to the extent that M&A played a role on that, those were my answers. Jared David Shaw: Great. And then on the securities portfolio, last quarter, you sort of implied that we could see higher growth in securities. How are we -- are you thinking about sort of that cash securities mix here going into the end of the year? Ram Shankar: Yes. What I said last time was our treasury managed portfolio, which includes the Fed account will be about $24 billion. So we've added a new line on the summary pages you noticed what's between AFS held to maturity and the portfolio. So we could see based on the overbuy activity that we were doing, we could see that going up to about $24.5 billion versus the $23.7 billion that you are seeing for third quarter averages. Jared David Shaw: Okay. If I could just sneak one last one in on the accretion. If we get the cut as expected -- as you expect in your outlook, what could that do to accelerated accretion? How much do you think is sort of, I guess, you could say, at risk with another cut in terms of being able to accelerate? Ram Shankar: It's really hard to say whether -- what's driving the prepays. It could be market, it could be property selling. It could be a lot of variety of things. I don't know if the first 50 basis points cut is enough to move the needle on refinancings at this point. But again, it's anybody's guess, Jared. What we do on Page 10 is just do the contractual accretion. So we know in all likelihood, it will outperform that because of just the prepays and what happens with the loan portfolio churn. But in terms of trying to quantify it or tie it to how many rate cuts we get, it's challenging. Operator: The next question comes from Janet Lee with TD Cowen. Sun Young Lee: I want to talk about your Institutional Banking division. Obviously, that is a key differentiator and growth driver for you. If I look at the trust and secure processing fee line, it's up almost 18% year-over-year. And if I look at the assets under administration, it's up very strong over the past year. What is the key driver behind that? Are you just taking more market share away from the competitors? Or are you seeing more accelerated growth from the Heartland acquisition where maybe you're picking up some growth? I would assume a lot of that is just like legacy UMB. But I want to get a sense of where your outlook is for this division. I would also assume the one big beautiful bill that could also increase the TAM for your HSA deposits. So I just want to get a sense of where you think this business is headed. J. Kemper: I'll hit a couple of high-level things, and Jim might add some things because those businesses report to him directly. At the high-level basis, 2 of these business lines drive most of that, and that would be assets, our asset servicing business, which is you'll see on Page 36 in our investor deck. And majority of that comes from alternatives, which would be like hedge funds and private equity. We're a top player on a national basis in that particular space. And there's been a lot of disruption. PE has been -- acquired a lot of these firms, and that's been disruptive to the boardrooms. So because of that, we've picked up a lot of the business that has been available through boardroom conversations. And the momentum is very, very strong. We have exceptional reputation. If you look again on Page 36, upper right-hand corner, you can see some of the best in fund accounting, the awards we get year in and year out. And so we have an exceptional reputation and a deep pipeline converting all the time. And lastly, I'd say there's a trend in the space, which is the democratization of private investing, which you've been reading about, I'm sure. And we have partnered with a couple of the major players as their service provider who are providing vehicles on a broad basis across the nation to democratize the availability of private investing. So we're seeing a lot of growth just through those large partnerships we have. And so that's what I say about fund services. It's a really, really great profile. They're marching their way towards -- aiming towards $1 trillion in assets under administration. So there -- it's a really strong team. On corporate trust, which would be the other big driver, we're a consolidator on a national basis. We're top 1 or 2. You can see that on Page 37. And we're doing #3 by number of issues and by dollar volume. And we recently, over the last 5 years, we opened offices in L.A. and New York, which allow us to upscale the opportunity to go up on the lead table. So for example, if you do a -- like a sewer or water deal in Des Moines, Iowa, it's going to be a couple of hundred million. You do a sewer water deal in L.A. it could be a couple of billion. So by doing business on the coast, it really lifts our ability to go up the lead tables and take more share. So that's exciting for that business. And we have some new verticals there that are doing really well, CLOs, ABS and then our aviation business is really on fire. So we're sort of a top-tier player, taking more share all the time in that space. You mentioned HSAs, good solid business. Mostly we pick up business through the business we already have largely during the enrollment seasons. It's a good, steady, solid addition for us. As far as the big beautiful bill, there could be some benefit there, but I think it's been overplayed a bit. Jim, I probably took most of your thunder but go ahead. James Rine: It's okay, Mariner, I'm used to it. But I would add that this is all legacy UMB as far as the business and the opportunity is very strong in the corporate trust space, especially in these new markets as you know a lot of this sort of local issuance and when you're doing business in those markets. So it will be a great referral source from the HTLF team and also be able for us to expand our footprint. But institutional banking will continue to benefit from the Heartland acquisition. J. Kemper: Our wealth business, there's other businesses in there that are very additive and doing a great job, but our wealth business is on fire as well. But those are the 2 big drivers right now. Sun Young Lee: Got it. And you called out that $6 million sort of onetime benefit in the third quarter to your fee income. But is -- so if I exclude that $6 million, is that a good run rate? Or is there more to come down a little in the fourth quarter? Ram Shankar: Yes. The best way -- if you go to Page 15, Janet, I'll just do a waterfall, if you will. So our GAAP fees were $203 million. If you add back the $4 million security losses that we had, that's $207 million. And then if you look at the BOLI line, this quarter around, we broke out BOLI and COLI. The absolute amount was $16.5 million, of which $2.5 million was that debt benefit that I mentioned in my prepared comments. And then the remaining $14.5 million, there's always an equal offset on 50% of that with deferred comp expenses, they were up $7 million because of that. So there's a market volatility to it. It's not something that we can control. So those get written up or written down based on what happens to the equity markets. And then if you look at the other line, excluding the COLI and BOLI, we have $16.5 million. I had mentioned $2.5 million of a onetime legal settlement that was a benefit to us. There was another $1 million of some onetime fees. So the run rate there is about $13 million. And as you see in one of the other pages, the biggest driver of that was back-to-back swaps. So our derivative team had a pretty impressive quarter with $5 million of fees this quarter compared to about $3 million, $3.5 million last quarter. So those are the big drivers. So if you add all that, subtract all that, you could end up with -- again, depending on what happens with COLI and BOLI, you could end up with $190 million. The last point I'll make is what I said in my prepared comments, our private investment portfolio, we expect some monetizations more frequently. So that's been a good trend for us. And then the other thing that can happen is the volatility with some of our existing equity investments. Operator: And the next question comes from Timur Braziler with Wells Fargo. Timur Braziler: Maybe tying fees into NII, but really strong quarter for some of the trust and securities processing fees. And then I noticed you called out the asset servicing client deposit balances as part of the mix shift that was maybe weighing on margin. I'm just wondering, in general, as we look out and we get a couple of rate cuts in here, the remixing on the institutional side for the deposit base, just the puts and takes of whether or not incremental dollars of deposits coming in are still dilutive to the cost of funds. Does that kind of neutralize as we get a couple more rate cuts? Just maybe talk us through some of the mix shift on the deposit side and what that might portend for cost of funding as we start getting some rate cuts here. Ram Shankar: Yes. And it's really hard to predict what happens with some of these large clients. It can be for a variety of reasons that we typically don't have some visibility into it, why the buildup happens. It could be they're holding cash before they invest in the markets, they're rebalancing. So a lot of things can happen. But when you look at the asset servicing, just using that as an example, they are one of those hard index deposits. And so they'll be priced at Fed funds minus 25 basis points, for instance, right? And so when you look at our total cost of interest-bearing deposits at 3.30% and based on the Fed funds rate, that will be higher than what the current prevailing deposit costs are, right? So that can happen. And then as I said, going back to the margin puts and takes, we're going to get absolutely in the fourth quarter, somewhere between $1.5 billion and $2 billion of new deposits coming from our public funds business between the second half of December through February. So those would be positive things that happen for deposit growth. As I noted in my prepared comments, we expect a slight pickup in DDAs from the low point of seasonality in the third quarter. And then there's all the index deposits that get repriced down for the September rate cut. So we didn't see the full benefit of the third quarter. So we're going to see that in the fourth quarter. And then today's rate cut, assuming that we get one today, that will also -- the fact that it's so early in the quarter will also help bring down the cost of deposits. J. Kemper: And over time, I mean, again, some of this is just guessing, but from history, if we get all the cuts that are anticipated, there's less interest in the rate paid, the further you get down. And so moving rates down becomes easier in a lower rate environment. So that history has played its way out. That's a few quarters away. Timur Braziler: Okay. That's good color. And then looking at the 2 legacy HTLF loans that were moved to NPL status this quarter. I know earlier in the call, you had referred to the fact that a lot of these had already been reserved for. But with these 2 specific ones, were these part of kind of the purchase accounting mark taken at deal close? Or did something happen kind of subsequent to deal close that drove the credit migration there? J. Kemper: Tom, do you want to take that? Thomas Terry: Yes. The larger of the 2, we had identified in due diligence and had a specific reserve against it. There's a smaller one that is -- was newer, that was on their watch list, but we hadn't reserved for until this quarter. So... J. Kemper: But again, I'd reiterate our comments around charge-offs, which is even with them being further deteriorated, we still feel confident in our charge-off rate comments. Operator: And the next question comes from Brian Foran with Truist. Brian Foran: Just circling back to the M&A discussion, I guess when you talk about the primary attraction being deposits that can feed the loan growth engine over time, beyond whole bank acquisitions or anything like branch divestitures, maybe consolidation in the trust and custody space, I think people immediately think to like buying a bank outright. But are there any other kind of other avenues that might accomplish the goal of getting some low-cost funding to help you going forward? J. Kemper: Sure. All things are on the table. I would just say that we are diligent and disciplined around profitability. So it's harder to make sense of branch deals than it is whole bank deals just from a profitability standpoint. And I would also say that oftentimes, branch deals, I mean, just by definition, when somebody is getting rid of branches, it's the branches they don't want. So it's harder to pick through branch deals in my mind. We've looked at them, and you can continue to get excited about them. But if you kind of parse what you're looking at, sometimes it's kind of hard to see something better than what the people getting rid of and we're seeing. So they're all on the table, and we're just, I guess, disciplined about profitability. And all those other ideas are always on the table. The deposits are probably -- the engine for UMB is loan growth, and we're really, really good at it. And so we just don't want to be distracted. So if we do other deals, we don't want to distract from making sure we keep the engine or the golden goose or whatever -- whatever analogy you want to use, we got to make sure we keep it healthy. So we're disciplined, what I'd say about that. Operator: And the next question comes from Nathan Race with Piper Sandler. Nathan Race: Just a point of clarification on the margin outlook for the fourth quarter. I think you said stable versus the 3Q level. Were you referring to the reported margin or the core margin that I think came in at 2.78% in the quarter? Ram Shankar: The 2.78%, yes, core margin. As I said earlier, it's hard to predict what might happen with accretion outside of the contractual part. So my comments were about the 2.78% core margin, excluding all accretion. Nathan Race: Okay. Got it. And then I know you guys don't provide guidance into next year but just thinking about some of the margin factors at play. I mean, is there still an opportunity to continue to work down the cash levels as we saw here in the third quarter? And then I imagine with the cash flow coming off the bond portfolio and just the higher beta nature of your deposit base that the margin can maybe kind of grind a little higher if we get Fed rate cuts spread out over the course of next year. And I know you guys provide the NII sensitivity in your deck, but I don't think necessarily we're going to see a parallel shift down in rates. So if we just see some movement on the short end, is that generally a positive scenario in terms of the margin outlook? Ram Shankar: Yes, absolutely, Nate. Definitely, I would say, based on cash flows, right? So have -- for instance, if you look at Page 25, where we show our securities portfolio cash flows over the next 12 months, we have $2.1 billion of cash flows rolling off at 360 yields. We would say that today's repurchase yields are about 450 on mortgage backs and maybe even 100 basis points or 80 basis points higher on the municipal side, if we can find the muni supply that we want to. So definitely, that churn, as I talked about, positive churn still exists in the bond portfolio. Really, the buy yields have to come down by 100 basis points before that becomes neutral in terms of the breakeven on what's rolling off versus what's rolling on. Similarly, if we look at our fixed rate loan portfolio on Page 27, we added this other bullet in here. We have $3 billion of fixed rate loans that are going to reprice within 12 months. The average rate today on those is less than 5%. So arguably, that's another 150 basis points pick up. And then as you rightly mentioned, we have close to 50% of our deposits, total deposits that are indexed to movements in short-term rates. So those are the positive impacts from a margin perspective outside of accretion and everything else. The only other flip side is what happens with loan pricing, right? As we see on Page 27, 2/3 of our loan book is also repricing on a lag basis to either prime rate or 1-month SOFR. So that will have some detrimental impact. And that's where the interest rate simulation comes in. And to my comments in the prepared comments, we are pretty neutral from a balance sheet perspective. On year 1, for 100 basis points rate cut, you can see a 1.1% increase. And then in year 2, because of the 1.7% drag because of loans catching up with what happens on the deposit side. So if you factor both those in, that's pretty neutral from a rate positioning perspective. Nathan Race: Okay. Really helpful. And then not to beat a dead horse on the M&A commentary. But Mariner, can you just remind us if the right opportunity came along, what type of acquisition should we be thinking about in terms of maybe size, geography and what kind of earn-back period you would look to include in that type of deal on tangible book dilution? J. Kemper: Well, you're not going to like this answer because I'm not going to give you much of one. But what I'd say is that I kind of come back to discipline. There are some pretty standard. There's really good data around market acceptance of deals around how many years payback the Street has been comfortable with, et cetera. So we're well aware of kind of what the norms are, and we're disciplined around how we think about that. As far as size goes, we're -- there's just a lot of variables. I mean we're just looking for high-quality partners. Certainly, now with what we've been able to accomplish already, you do the same amount of work for a small deal as you do a bigger deal. So we know we can do a bank per loan size and do it well. So there's no real guidance I'd give you on size. There are a lot of dynamics ahead of us right now that make that answer really complicated around crossing $100 billion and regulatory environment. Is that changing? Is it not changing? So it's kind of a hard conversation to get into you on a call like this, but we're -- I hope that helps. Operator: And our next question comes from Brendan Nosal with Hovde Group. Brendan Nosal: Just wanted to ask a follow-up on M&A, but more about the perspective of how you folks think about preserving what you already have in that scenario. Specifically, how do you think about preserving your fee franchise and your strong fee revenue mix with a potential deal, just given that your fee franchise is one of the most unique characteristics of UMB and seemingly any deal you do would probably dilute that mix at least a little bit? So how do you approach balancing that? J. Kemper: Yes. Well, first of all, I think the absolute growth rate of our fee is more important than a percentage to total. So as long as -- in my mind, anyway, as long as we continue to grow those very healthily and maybe even accelerate their growth rate, I'm personally with about its percentage to total revenue than I -- if all things are working. It's all about staying disciplined. I mean we're not going to do a deal that picks up more net interest income than fees if it's not going to contribute handsomely, right, to the overall story. So as long as they're all growing and all improving their profit profiles, I'm not sure I really care what the percentages to total are. That's how I feel about it. Operator: [Operator Instructions] And our next question comes from Chris McGratty with KBW. Christopher McGratty: Ram or Mariner, just going back to the fee income discussion. I mean, for the industry, fees aren't really growing. You've got unique businesses, which I think have some structural tailwinds that you talked through. But I just want to try to put a little bit of a finer point on the opportunity in the trust and securities processing asset servicing. I mean, would you think this is kind of a mid- to high single-digit opportunity growth annually, double digit? I'm just trying to get a sense because I think we've all been underestimating the potential here. J. Kemper: Yes. I mean it's hard to -- obviously, we don't give guidance, so I can't really directly answer that. So we're aiming much higher and I think we have the capability to continue to grow the profile. The thing that's happening, I was in New York with our team making calls a couple of weeks ago. And because of the profile, what's happened to the businesses is we've gone from calling on and winning smaller profile boutique business to winning business from household names that you would recognize that have global profiles, right? So the sort of this -- the profile of the business has changed dramatically. And so the types of business we're winning is different. And there's really not any business on the landscape of fund services or corporate trust or any of the businesses that we can't win. And so the technology is there, the people are there, the profile is there, the momentum is there, and it's just sheer execution. It's about keeping our people and staying invested in the technology. And so if I retain the team and we stay invested in the technology, which we can do through the -- you've seen what's happened to our profitability metrics, which allows us to stay invested in our businesses. There's nothing from keeping us growing the profile of those businesses and taking more share. Christopher McGratty: Okay. And I guess as a follow-up or an extension, maybe the question is operating leverage, efficiency ratio. I guess what's the -- I'm trying to get a little bit of a sense of now that you're through the deal and you've got the growth kicking up again. Where do you think, especially in light of regulatory costs, like where do you think this company as it is today, what's the potential of in terms of KPI? J. Kemper: Do you want to take that? I mean there's a lot of improvement. You see it in the numbers. You see it in the numbers already. Our profitability metrics are up very nicely, and that was intended. It's part of why we did the deal. And back to my last comment, I mean, this profitability allows us to invest in our businesses more efficiently. So we can invest in our retail business more efficiently than we could before, which allows us to grow the business more profitably. And you could say that about several of the lines. I don't know what else... Ram Shankar: On the regulatory front, we're going to be really mentioned, right? There's a lot of dialogue about what $100 million might look like in the future. So we're not going to -- we're going to researching it, but in terms of spending any dollars relative to that in '25 or even in '26, we're going to be measured until we know what the rules that we are going to face are. So at this point, I wouldn't consider or contemplate any big significant investments from that standpoint because the overtones are certainly positive that most of the $100 million requirements will continue to move higher or go away. Operator: And that was our final question. So I'll hand back over to the management team for any closing remarks. J. Kemper: Thanks, everybody, for joining. That was a full and thorough -- lots of great questions. As you know, we love talking about UMB. It was a great quarter, and we look forward to reporting our results next quarter. Thank you. Operator: Thank you, everyone, for joining today's call. This concludes the call. You may now disconnect. Have a great rest of your day.
Operator: Good afternoon, and welcome to the Third Quarter 2025 Connection Earnings Conference Call. My name is Marvin, and I'll be the coordinator for today. [Operator Instructions] As a reminder, this conference call is the property of Connection and may not be recorded or rebroadcast without specific permission from the company. On the call today are Tim McGrath, President and Chief Executive Officer; and Tom Baker, Senior Vice President and Chief Financial Officer. I'll now turn the call over to the company. Samantha Smith: Thank you, operator, and good afternoon, everyone. I will now read our cautionary note regarding forward-looking statements. Any statements or references made during the conference call that are not statements of historical fact may be deemed to be forward-looking statements. Various remarks that management may make about the company's future expectations, plans and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of the company's annual report on Form 10-K for the year ended December 31, 2024, which is on file with the Securities and Exchange Commission as well as in other documents that the company files from the commission from time to time. In addition, any forward-looking statements represent management's view as of today and should not be relied upon as representing views as of any subsequent date. While the company may elect to update forward-looking statements at some point in the future, the company specifically disclaims any obligation to do so other than as required by law, even if estimates change. And therefore, you should not rely on these forward-looking statements as representing management's views as of any date subsequent to today. During this call, non-GAAP financial measures will be discussed. A reconciliation between any non-GAAP financial measure discussed and its most directly comparable GAAP measure is available in today's earnings release and on the company's website at www.connection.com. Please note that unless otherwise stated, all references to third quarter 2025 comparisons are being made against the third quarter of 2024. Today's call is being webcast and will be available on Connection's website. The earnings release will be available on the SEC website at www.sec.gov and in the Investor Relations section of our website at www.ir.connection.com. I would now like to turn the call over to our host, Tim McGrath, President and CEO. Tim? Timothy McGrath: Thank you, Samantha. Good afternoon, everyone, and thank you for joining us today for Connection's Q3 2025 Conference Call. I'll begin this afternoon with an overview of our third quarter results and highlights of our performance. Then Tom will walk us through a more detailed look at our financials. I'm pleased to share that our third quarter was another solid one for the company. We continue to execute well, delivered record gross profit and expanded our margins despite some expected headwinds in parts of the business. Our overall results this quarter highlight our success in higher-value solutions, deeper customer relationships and consistent operational execution. Let's start with the overall results. Gross profit increased 2.4% year-over-year to $138.6 million, the highest in our company's history. Gross margin expanded 90 basis points to 19.6%, driven by strong growth in cloud software, cybersecurity and services, all recognized on a net basis. Our Business Solutions and Enterprise Solutions segments both performed well with gross profit up 7.8% and 3.4%, respectively. As anticipated, the public sector business experienced some challenges this quarter given the timing of some large federal projects and ongoing funding uncertainty at the federal, state and local levels. We believe the budget issues have caused a temporary pause, not a shift in our long-term demand. Total net sales were $709.1 million, down 2.2% from last year. The decline is largely the result of a decrease in net sales in the Public Sector Solutions segment, driven by large federal projects previously mentioned that did not repeat in Q3. If you exclude those, underlying sales were healthy, especially in cloud, storage and services. Now let's take a look at the segments. In Business Solutions, we saw another strong performance. Net sales grew 1.7% to $256.8 million, while gross profit increased 7.8% to $68 million. Gross margin reached a record 26.5%, up 150 basis points year-over-year. These results reflect the continued strength of our cloud and cybersecurity offerings, 2 areas in which we built recurring profitable revenue streams. In Public Sector Solutions, net sales were $132.5 million, down 24.3% from a year ago. The decline was driven by the timing of federal projects and reduced funding at the federal, state and local level. Even with lower revenue, gross margin increased 230 basis points to a record 17.2%. Thanks to a higher mix of cloud and cybersecurity solutions sales. Once funding cycles normalize, we expect this segment to rebound. And in Enterprise Solutions, net sales grew 7.7% to $319.8 million, led by strong demand for advanced technologies and endpoint devices. Gross profit was up 3.4% to $47.8 million. Gross margin came in at 14.9%, down slightly due to changes in subscription license programs and software mix. The important takeaway is that we're continuing to win business in high-growth areas, particularly in AI infrastructure, data center modernization and edge computing. Turning to profitability. Operating income was flat year-over-year, showing good cost discipline despite continued investments in areas of our business that will drive future growth. Net income was $24.7 million compared with $27.1 million last year, which included a onetime legal settlement and higher interest income. Diluted earnings per share came in at $0.97, down $0.05, while adjusted diluted earnings per share was also $0.97, flat from the prior year, another sign of earning consistency despite the challenges in the public sector environment. Looking ahead, our strategy remains clear. We're focused on expanding our solutions-led business, deepening customer relationships and driving profitable growth in cloud, cybersecurity, AI and services. We're seeing strong engagement from customers who are modernizing their infrastructure and investing in AI-driven technologies. These are areas where we bring real customer value and where we expect to see continued momentum. While funding cycles and project timing can affect quarter-to-quarter results, we believe the long-term trends are all moving in the right direction. Our record gross profit, expanding margins and growing base of recurring and solution-driven revenue give us confidence as we finish the year and head into 2026. I'll now turn the call over to Tom to discuss additional financial highlights from our income statement, balance sheet and cash flow statement. Tom? Thomas Baker: Thanks, Tim. In the third quarter, SG&A expenses increased 2.9% year-over-year, primarily driven by higher personnel-related costs. We continue to take a disciplined approach to expense management. Notably, our headcount is down 2.8%, which has enabled us to keep our total payroll costs flat compared to last year. As a percentage of sales, SG&A increased 80 basis points to 15.3% of net sales compared to 14.5% in the prior year quarter, reflecting both the impact of higher benefit costs and sales mix dynamics. Operating income margin improved slightly to 4.3% compared to 4.1% last year, reflecting continued focus on profitability despite cost pressures. Interest income for the quarter was $3.7 million compared to $4.9 million last year, mainly due to lower average cash balances and lower interest rates during the period. Our effective tax rate for the quarter was 27.1%, up from 26% in the prior year. As a result, net income for the third quarter was $24.7 million compared to $27.1 million last year, a decrease of 8.6%. Diluted earnings per share were $0.97, down $0.05 year-over-year, while adjusted earnings per share remained flat at $0.97, demonstrating the underlying stability of our earnings profile. On a trailing 12-month basis, adjusted EBITDA was $122.7 million compared to $123.6 million a year ago, essentially flat year-over-year, reflecting continued operational consistency. During the quarter, we returned capital to shareholders through both dividends and share repurchases. We paid a quarterly dividend of $0.15 per share and repurchased approximately 84,000 shares at an average price of $61.21 per share for a total cost of $5.1 million. Year-to-date, we've repurchased over 1 million shares at an average price of $63.17 for a total cost of $65.4 million. At quarter end, $44.3 million remained available under our existing share repurchase authorization, providing continued flexibility to return capital to shareholders. We also announced today that our Board of Directors declared a quarterly dividend of $0.15 per share payable on November 28, 2025, to shareholders of record on November 11, 2025. Turning to the balance sheet and cash flow. Operating cash flow for the first 9 months of 2025 was $38 million. This reflects a $40 million increase in inventory and a $6.5 million increase in accounts receivable, partially offset by an $11.9 million increase in accounts payable. The increase in inventory was intentional, tied to our decision to stage inventory earlier in the year to support customer rollouts, and we continue to work that inventory down. The increase in accounts receivable was primarily due to the timing of customer payments. Cash generated from investing activities for the first 9 months of 2025 totaled $49.3 million, driven by $108.8 million in proceeds from the sales of investments and $101.3 million in investment maturities, partially offset by $155.6 million of new investment purchases. Cash used in financing activities for the first 9 months of 2025 was $77.8 million, reflecting our ongoing share repurchase activity of $65.5 million and dividend payments of $11.5 million to shareholders. We ended the quarter with a strong liquidity position, $399.2 million in cash, cash equivalents and short-term investments, which we believe provides ample flexibility to support our strategic priorities and shareholder returns going forward. Overall, we remain confident in the strength of our balance sheet, the resilience of our business model and our ability to execute with discipline. While we continue to manage through a dynamic cost environment, our focus remains on driving sustainable growth, improving operational efficiency and creating long-term value for shareholders. We believe our continued commitment to prudent capital allocation, margin discipline and strategic investment positions us well for the remainder of the year and beyond. I will now turn the call back over to Tim to discuss current market trends. Timothy McGrath: Thanks, Tom. We executed well on our 3-part growth strategy, driving data center modernization, digital workplace transformation and supply chain solutions against the backdrop of a challenging economic environment. Let me take a moment to walk through how our key verticals performed. In retail, we saw another strong quarter. Net sales grew 25% and gross profit was up 42% year-over-year. Retailers are really leaning into improving customer experience and several large brands chose Connection because of our proven ability to deliver tailored vertical market solutions. In financial services, net sales were up 23% and gross profit increased 19% year-over-year. The focus here remains on modernizing infrastructure and improving resiliency, areas where our solutions and expertise continue to resonate. Manufacturing grew 8% in net sales and 28% in gross profit year-over-year. This segment continues to navigate a lot of macro challenges from trade dynamics and inflation to workforce shortages and higher input costs. We've heard from many of our customers that these pressures are affecting demand and future outlooks. That said, manufacturers are turning to Connection as a trusted partner to help modernize their operations, upgrade their legacy systems and adopt AI, cybersecurity and new infrastructure solutions that their in-house teams may not be equipped to manage on their own. As we look ahead, we're encouraged by several technology trends driving our pipeline and customer activity. The PC refresh continues as customers gradually replace their aging systems with higher-performing AI solutions. Data center modernization is gaining momentum, especially as customers repatriate workloads from the public cloud to get more cost predictability, better security and the benefits of server consolidation. AI-driven demand across the edge, security and smart endpoints continue to expand. Unstructured data at the edge is fueling demand for next-generation storage solutions. We're continuing to grow our technical services organization, helping customers design, implement, migrate and manage their IT infrastructure end-to-end. And we're investing in training and tools to ensure our teams are fully equipped to guide customers through AI and next-generation architectures. As we move into the fourth quarter of 2025, our backlog remains strong. In fact, it ended Q3 at its highest level in nearly 2 years, largely driven by our enterprise business. We feel confident about where we're headed, and we're continuing to invest in projects and programs that strengthen our sales capabilities, service delivery and systems, all while maintaining disciplined about cost management and productivity. We're positioning Connection for sustained long-term growth, and we believe we can outperform the U.S. IT market by 200 basis points for the rest of the year. Our strategy remains tightly aligned with how customers are evolving in the way they deploy, consume and manage technology. We help them navigate the complexity, modernize their infrastructure and make confident informed decisions. In a world where technology changes fast, expertise wins, and that's where Connection continues to differentiate. We'll now entertain your questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Adam Tindle of Raymond James. Adam Tindle: I just wanted to start with some of those last comments there, Tim, where you were talking about some of the forward indicators that looked very positive here. I just wonder how you're thinking about year-end and Q4 being a typical budget flush year. What you're seeing here in the first month of Q4 relative to what you experienced in Q3? And is there a case to be made here that we might return to growth on the top line in Q4? Timothy McGrath: Well, thanks, Adam. So yes, in our Enterprise segment, there's -- for the first time in many quarters, there is talk of budget flush. We do see our pipeline building there and a number of projects and opportunities that could well pass through the fourth quarter. So enterprise has some good solid momentum. Also, I think our Business Solutions group has some good momentum and forecasting a good Q4. The wildcard remains our Public Sector business. The question really becomes when will that recover? We know that's going to happen. The timing, though, is still a big question mark. Adam Tindle: Got it. Okay. And I wanted to ask about the backlog. I think you talked about Q3 backlog was the largest in years. I wonder just what's leading to that? Is this something -- I would imagine you would have liked to have shipped more, obviously, in the quarter. if I look at sort of the revenue numbers. So is this something that's -- that backlog is building because of incremental supply challenges? Or is it more the customers putting off projects and not wanting to accept delivery? Just some of the rationale for why that backlog build is happening and when you think it ultimately unentangles here? Timothy McGrath: Well, thanks, Adam. I'll start, and I'll let Tom come in behind me. But clearly, the majority of our backlog is all customer-driven. I think it's solid. I don't feel there's any risk in our backlog, but it's absolutely customer-driven and the delays on the customer side. Thomas Baker: Adam, I'd say a couple of things. One, when you look at our revenue line, we had a lot of software and cloud in our numbers this quarter. And while that's a real headwind for the revenue line, the -- obviously, it came through in the gross margins were over 19.5%. So I think when you look at the gross profit line growing, 7.8% for PSG was pretty good and Enterprise numbers up as well. So I feel like things are better maybe than you look at the first glance that revenue line with the notable exception of Public Sector, which we had a really large rollout last year, and some of that will fall into next quarter as well. So we're thinking sales mid-single digits next quarter year-on-year. That's kind of how we're thinking. Adam Tindle: Okay. That's super helpful. Yes, and that makes sense to kind of disaggregate and look at gross profit dollars. I guess maybe just last one for me real quick, and this is probably way too early to tell. But as you start to hear back from your vendors and your sales force and sort of the early indications on 2026, Tim, you mentioned PC refresh continuing. I think there's some fear that, that's going to create some difficult comparisons in 2026. And just as we think about the year in total and budgets, sort of the moving parts and how your early take is on what IT spending will look like next year? Timothy McGrath: So to begin with, we talk a lot about gross profit being a better indicator just based on the amount of solutions that are delivered on a net basis. But clearly, 2025 didn't prove out to be the year that the analysts and the pundits anticipated. And if we begin with the PC refresh, the latest numbers show that in terms of conversion to Windows 11, about 60% of the population have made that conversion. So we think the refresh will still continue, but definitely at a lower pace. We just didn't see Windows 11 get the adoption and the time lag that we did see with Windows 10. But still a case for refresh continues. And as you know, the productivity around the newer technology clearly makes that case. And the same is true when we think about the data center server consolidation, for example, many of our customers are looking at the ability to take 10 servers and bring them down to 2 or 7 servers and bring them down to 1. The power savings alone offset a lot of that expense and the productivity gains and the improvements in security really make that a very strong value proposition. So for 2026, we see continued growth in data center, continued growth in cloud, in cyber. And we see certainly AI PC perhaps leveling off, but will continue to deliver some good results for us. So overall, we're thinking about mid-single digit for 2026 with the understanding that could go well above that as things start to normalize. Operator: And our next question comes from the line of Anthony Lebiedzinski of Sidoti. Anthony Lebiedzinski: Nice to see the record performance for gross profit. So first, maybe if you could just comment on the cadence of your sales during the quarter. And I know there was some noise, obviously, with the netting as well. But just overall, maybe can you speak about the demand trends that you saw as you went from July through September? Thomas Baker: Yes. July was like 34-ish percent, 33%. August was down a bit and then September proved to be the best of the quarter. I think it was like 35%. So I think that's pretty typical, Anthony, when I look back at the past few years. Anthony Lebiedzinski: Got you. Okay. And then just thinking about the Public Sector, obviously, it was down here in the quarter. As far as it relates to the federal government shutdown, did that have -- is that having an impact on your fourth quarter numbers now? Or how do we think about the potential impact that may have? Timothy McGrath: Anthony, So thanks. Obviously, the federal government being shut down does affect the quarter. We're trying to forecast when we think that will change. But for right now, we clearly have orders and products that we can't ship because there's nobody there to receive them. And the longer this goes on, the more that will challenge the Public Sector business in the quarter. So we're hoping this gets resolved. And when it does, we're hoping that we have that demand catch up and we finish back on plan. But for right now, it's a big concern. Anthony Lebiedzinski: Understood. Okay. And I know, Tim, you also talked about your expectations for the fourth quarter and a little bit for next year. That was more on the, I guess, on the revenue side. As far as just thinking about gross margins and your ability to leverage expenses, how do we think about just overall profitability as it relates to gross margins and operating margins here going forward? Thomas Baker: Yes. So the caveat of Public Sector is a little bit of a wildcard. We're thinking kind of mid-single digits year-over-year next quarter for growth. The margins -- the gross margins, I don't think will be as high as they were this quarter because I don't see all the same mix of cloud and software revenues coming through that could netted down. So I think probably year-on-year margins will be about flat. And then spending next quarter, depending on how high the revenues so probably be a little bit higher than this quarter in terms of G&A. Anthony Lebiedzinski: Okay. Got you. And then lastly for me, as far as just thinking about your strong cash position, are you still looking at potential acquisitions? How do we think about that? Timothy McGrath: Thanks. So there's a lot of activity out there. We continue to look at tuck-in acquisitions that would enhance some of our solutions capability. And so we've got our eye out there. We're looking. But at this point, nothing to report. Operator: This concludes the question-and-answer session. I'll now turn it back to Tim McGrath for closing remarks. Timothy McGrath: Thank you, Marvin. So I'd like to thank all of our customers, vendors, shareholders for their continued support and once again, our coworkers for their efforts and extraordinary dedication. I'd also like to thank all of you listening to the call this afternoon. Your time and your interest in Connection are appreciated. Have a great evening. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good morning, and welcome to Industrial Logistics Properties Trust's Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kevin Barry, Senior Director of Investor Relations. Please go ahead. Kevin Barry: Good morning. Thank you for joining us today. With me on the call are ILPT's President and Chief Operating Officer, Yael Duffy; Chief Financial Officer and Treasurer, Tiffany Sy; and Vice President, Marc Krohn. In just a moment, they will provide details about our business and our performance for the third quarter of 2025, followed by a question-and-answer session with sell-side analysts. Please note that the recording and retransmission of today's conference call is prohibited without the prior written consent of the company. Also note that today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on ILPT's beliefs and expectations as of today, October 29, 2025, and actual results may differ materially from those that we project. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call. Additional information concerning factors that could cause those differences is contained in our filings with the Securities and Exchange Commission, which can be accessed from our website, ilptreit.com. Investors are cautioned not to place undue reliance upon any forward-looking statements. In addition, we will be discussing non-GAAP financial measures during this call, including normalized funds from operations or normalized FFO, adjusted EBITDAre, net operating income or NOI and cash basis NOI. A reconciliation of these non-GAAP measures to net income is available in our financial results package, which can be found on our website. I will now turn the call over to Yael. Yael Duffy: Thank you, Kevin, and good morning. I will begin today's call with a brief overview of ILPT's portfolio and highlight our third quarter results before turning the call over to Marc to discuss our leasing activity and pipeline. From there, Tiffany will review our financial performance. Despite macroeconomic and tariff uncertainty, the industrial real estate sector continues to demonstrate resilience as reflected in our solid third quarter results. We are seeing tenants show greater confidence in their long-term space needs, especially compared to the start of the year, and we are making significant progress addressing our 2026 and 2027 lease expirations. Though industrial vacancy rates remain elevated compared to pandemic lows, new supply is limited and long-term demand drivers such as e-commerce growth and reshoring initiatives continue to underpin demand in the sector. ILPT's third quarter reflects continued demand for our high-quality portfolio of industrial and logistics properties and growth in many of our key metrics. Same-property cash basis NOI increased 3% compared to the same period a year ago, supported by strong renewal activity and rent growth. Additionally, normalized FFO increased over 100% year-over-year, primarily from the refinancing we executed in June. ILPT's portfolio consists of 411 distribution and logistics properties across 39 states, totaling 60 million square feet with a weighted average lease term of 7.4 years. Our well-diversified portfolio is further highlighted by our unique Hawaii footprint, consisting of 226 properties totaling 16.7 million square feet. Our portfolio has a weighted average lease term of 6.5 years and is anchored by tenants with strong business profiles and stable cash flows. Over 76% of our annualized revenues come from investment-grade rated tenants or from our secure Hawaii land leases. We finished the quarter with consolidated occupancy of 94.1%, outperforming the U.S. industrial average by 150 basis points. Turning to our leasing activity. During the third quarter, we completed 836,000 square feet of leasing, including a rent reset at weighted average rental rates that were 22% higher than prior rental rates for the same space and for an average lease term of 8 years. Renewals accounted for 70% of our activity, highlighting strong tenant retention. As we continue to execute on our leasing priorities, we are simultaneously focused on evaluating opportunities to improve our balance sheet and reduce leverage. To that end, we have identified 3 properties for sale totaling 867,000 square feet. We are in various stages of the sale process and anticipate a combined sales price of approximately $55 million. One property is encumbered by debt and the proceeds from the sale will be used to partially repay ILPT's $700 million loan, which comes due in 2032. We anticipate these transactions to close in the fourth quarter and into early 2026. I will now turn the call over to Marc. Marc Krohn: Thank you, and good morning. As Yael mentioned, we executed 836,000 square feet of new and renewal leasing during the quarter, including one rent reset. Renewals represented most of the leasing activity and our Mainland portfolio accounted for over 80% of the leasing volume, including notable transactions with FedEx and the United States Postal Services. Looking ahead, approximately 4% of ILPT's total annualized revenues are set to expire by the end of 2026 and approximately 11% expires in 2027. Our leasing pipeline continues to grow and now exceeds 8 million square feet with the majority relating to renewal discussions for leases expiring in 2026 and 2027. We anticipate a near-term conversion of approximately 75% of our pipeline, which is in advanced stages of negotiation or lease documentation. Additionally, our leasing pipeline could result in positive net absorption of 3 million square feet, including continued interest for our vacancies in Hawaii and Indiana. Overall, we expect the leasing in our pipeline to yield average roll-ups in rent of 20% on the Mainland and 30% in Hawaii, further supporting our objective of enhancing cash flow and creating long-term value for our shareholders. I will now turn the call over to Tiffany. Tiffany Sy: Thank you, Marc, and good morning, everyone. Yesterday, we reported third quarter normalized FFO of $17.4 million or $0.26 per share, which was in line with our expectations and represents an increase of 26% on a sequential quarter basis and 116% compared to the same quarter a year ago. Same-property NOI was $86.4 million and same-property cash basis NOI was $84.2 million, both representing an increase on a year-over-year and sequential quarter basis, supported by strong tenant retention and rent roll-ups. Adjusted EBITDAre ended the quarter at $84.1 million. Interest expense decreased by $4.4 million compared to the second quarter of 2025 to $63.5 million, reflecting the impact of our $1.16 billion fixed rate debt refinancing completed in June. We expect interest expense to remain flat in the fourth quarter with $58.5 million of cash interest expense and $5 million of noncash amortization of financing and interest rate cap costs. As Yael mentioned, we have 3 properties held for sale. During the quarter, we recognized a $6.1 million impairment charge on one of those properties to write down its carrying value to its estimated sales price less cost of sale. At September 30, the carrying value of the 3 held-for-sale properties was approximately $31 million. Turning to our balance sheet. We ended the quarter with cash on hand of $83 million and restricted cash of $95 million. Our net debt to total assets ratio decreased slightly to 69.3%, and our net debt coverage ratio remained unchanged at 12x. All of ILPT's debt is currently carried at a fixed rate or is fixed through an interest rate cap with a weighted average interest rate of 5.43% as of September 30. ILPT has no debt maturities until 2029, except for the $1.4 billion floating rate loan related to our consolidated joint venture. Including its remaining extension option, this loan is not due until 2027, providing us the flexibility to continue monitoring the capital markets as we evaluate opportunities to move to a fixed rate, extend the maturity and reduce our overall leverage. In closing, ILPT's operating and financial performance during the third quarter remained strong and continues to benefit from our high-quality industrial portfolio, investment-grade tenant roster and skilled asset management and leasing teams. Looking ahead to the fourth quarter of 2025, we expect normalized FFO to be between $0.27 and $0.29 per share, excluding incentive fees and adjusted EBITDAre between $84 million and $85 million. That concludes our prepared remarks. Operator, please open the line for questions. Operator: [Operator Instructions] The first question comes from John Massocca with B. Riley. John Massocca: Maybe touching on guidance first. I noticed it was net of or not including incentive fees to the external manager. Do you have any kind of range you're expecting for what those fees may be? I know it's contingent on the stock price performance. But I guess maybe based on where the stock would be today, how would that look? And just to confirm, is that going to flow through your reported normalized FFO per share number in 4Q? Tiffany Sy: All right. So if we were to use results as of September 30, we would pay full year incentive fee of $6.3 million, which would -- we would record less than $2 million in Q4 for that to get to that amount. We do not plan on including that in normalized FFO for Q4. John Massocca: That would be a cash payment. You would basically be paying a full cash payment for the year in 4Q, though, if we're thinking about CAD and cash flow? Tiffany Sy: It's paid in January of '26. John Massocca: Paid in 1Q. Would that impact then the 1Q '26 normalized FFO per share number? Tiffany Sy: It's in January. So... John Massocca: Okay. Maybe I'm just saying, like is that essentially, you're thinking about normalized FFO, maybe even on a go-forward basis, if there are more incentive fees that are paid in future years, right? Obviously, you back that out of normalized FFO because it's kind of an accrual, right, in kind of past quarters. Tiffany Sy: Yes. John Massocca: As it's paid out in cash, I mean, that is going to impact the normalized FFO number as it is reported. Tiffany Sy: Normalized FFO is intended to exclude onetime nonrecurring activities. And so this is not a normal payment we've had in recent times. I hope that's helpful. John Massocca: Okay. And maybe moving on to the portfolio itself. noticed the positive GAAP leasing spreads on the overall portfolio, but it seems like the Mainland wholly owned assets only saw a 1.8% increase in GAAP rent. Was there something specific driving that, maybe one re-leasing transaction, or just kind of curious why that number was so much lower than the rest of the portfolio? Yael Duffy: No. John, I think it was really one deal that kind of drove down the deal with the United States Postal Service was just about a 2% GAAP roll-up. This is a little bit of a unique building. And so we were happy to be able to get it leased, but it wasn't at the spreads that we usually see. John Massocca: In terms of the dispositions, how much, if any, of the $55 million includes the user owner buyer that was discussed last quarter? And I guess maybe as well, what are you kind of seeing today on pricing for those sales, maybe in terms of cap rate and even if you have it kind of price per square foot? Yael Duffy: Sure. So the one we -- the property to the owner user is really the bulk of the proceeds, about $50 million of it actually. And the other -- it's a unique situation because it's an owner user and they generally pay a premium. So that's the cap rate there would be under 6%. And then the other 2 are both vacant properties and one is actually also being sold to an owner user. And so I would say they're paying a premium. And the third property, it's early days in our process. So I don't have pricing guidance at least at the moment. John Massocca: Okay. And then in terms of the impairment, was that driven by the vacant asset sales? Tiffany Sy: Yes. John Massocca: And then as we look out to 2026, what are you seeing in terms of kind of the disposition opportunity set? I mean, is there an opportunity to do more transactions? Do you kind of want to shore up the balance sheet on the Mountain JV side before you get more active overall in the portfolio in terms of selling assets to delever? I mean, is that a strategic priority? Just any kind of color on what you're expecting in 2026 from a sales perspective. Yael Duffy: So we're constantly evaluating the portfolio and really opportunities where we've either maximized value or pruning the portfolio to kind of optimize it. I do think we will -- you might see us selling some more properties in 2026. They might be within the Mountain joint venture. I don't know if it will be coinciding with a potential refinancing or beforehand. So I think that's where you'll see most of the disposition activity, if there is any. John Massocca: Okay. Does completing the refinancing open up more assets to sell in that JV? Or are you pretty open just given the structure of that debt to sell assets out of that JV as you see fit or as opportunities arise? Yael Duffy: As opportunities arise, we do have flexibility. So the refinancing is not really reliant on the refinancing. John Massocca: Okay. And then one last one. You kind of mentioned it in the prepared remarks, but any update, particularly on potential lease-up in Indianapolis? I know Hawaii is kind of a unique situation, but any kind of progress on the leasing front in Indianapolis? Marc Krohn: I can certainly jump in on Indianapolis. We have 3 proposals out right now. We're very optimistic, but realistic in many ways. And so perhaps we can lease that up in the first half of next year. John Massocca: Okay. I really appreciate the color. Yael Duffy: Sorry, I didn't know if you wanted an update on Hawaii as well. So we have one tenant, one prospect actually, full site user that's in diligence. And so John, you're a little bit new to the story, but it does take a long time for this parcel because it's undeveloped land, but they're about halfway through an access agreement that's 90 days, and they're digging in. So we're hopeful that this could lead to a lease. John Massocca: And then one last one with kind of leasing in mind. Anything else to be aware of on the leasing front or the renewal front in 2026, as we start to kind of build out the model for that and impacting potentially '27 numbers? Yael Duffy: No. I mean we're making good progress on our '26 and '27 expirations. As Marc mentioned in the prepared remarks that we have a lot of signed LOIs or active lease negotiations. And there isn't anything material in terms of expected vacates. Operator: [Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Yael Duffy, President and Chief Operating Officer, for any closing remarks. Yael Duffy: Thanks for joining our call today. Please reach out to Investor Relations if you're interested in scheduling a meeting with ILPT. Operator, that concludes the call. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning. My name is Debbie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2025 Earnings Call for The Bank of N.T. Butterfield & Son Limited. [Operator Instructions] I would now like to turn the call over to Noah Fields, Butterfield's Head of Investor Relations. Please go ahead. Noah Fields: Thank you. Good morning, everyone, and thank you for joining us. Today, we will be reviewing Butterfield's Third Quarter 2025 Financial Results. On the call, I'm joined by Michael Collins, Butterfield's Chairman and Chief Executive Officer; Michael Schrum, President and Chief Financial Officer; and Jody Feldman, Managing Director of Bermuda. Following their prepared remarks, we will open the call up for a question-and-answer session. Yesterday afternoon, we issued a press release announcing our third quarter 2025 results. The press release and financial statements, along with a slide presentation that we will refer to during our remarks on this call are available on the Investor Relations section of the website at www.butterfieldgroup.com. Before I turn the call over to Michael Collins, I would like to remind everyone that today's discussions will refer to certain non-GAAP measures, which we believe are important in evaluating the company's performance. For reconciliation of these measures to U.S. GAAP, please refer to the earnings press release and slide presentation. Today's call and associated materials may also contain certain forward-looking statements, which are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by these statements. Additional information regarding these risks can be found in our SEC filings. I will now turn the call over to Michael Collins. Michael Collins: Thank you, Noah, and thanks to everyone joining the call today. I am pleased with our strong third quarter results, which continue to demonstrate our ability to drive long-term value. Our financial performance was supported by solid net interest income, disciplined capital management and a conservative and stable balance sheet. We delivered higher noninterest revenue and improved efficiency across the organization, underpinning our continued profitability and growth. Butterfield is a leading offshore bank and wealth manager with franchise-level market shares in Bermuda and the Cayman Islands and a growing retail banking presence in the Channel Islands. We offer a full suite of services from trust and private banking to asset management and custody tailored to meet the needs of our clients across these markets. We also serve international private trust clients in the Bahamas, Switzerland and Singapore and provide high net worth mortgage lending for prime London properties from our London office. I will now turn to the third quarter highlights on Page 4. Butterfield reported net income of $61.1 million and core net income of $63.3 million. We reported core earnings per share of $1.51 with a core return on average tangible common equity of 25.5% in the third quarter. The net interest margin was 2.73% in the third quarter, an increase of 9 basis points from the prior quarter with the cost of deposits falling 9 basis points to 147 basis points from the prior quarter. We again are announcing a quarterly cash dividend of $0.50 per share. During the quarter, we continued to repurchase shares with a total of 700,000 shares at a cost of $30.3 million. We continue our active capital management and plan to return excess capital that we do not require to support the business and growth initiatives. I will now turn the call over to Jody for an update on our Bermuda and Cayman markets and businesses. Jody Feldman: Thank you, Michael. During the third quarter, Bermuda's business environment remained stable with continued expansion of international business and the local economy showing signs of growth. The government is forecasting its first budget surplus in over 2 decades. And with corporate income tax introduced this year, there are expectations this will generate meaningful revenue that could help ease cost of living and business pressures while reducing sovereign debt over time. Overall, the outlook is positive for Bermuda's fiscal position with solid performance and growth continuing in the international business sector, particularly in reinsurance. Tourism in Bermuda had a good 2025 season, supported by improved hotel occupancy rates. Average daily rates were up 10% August year-to-date with occupancy levels remaining stable. Air arrivals are steady and visitor expenditure is up 2% despite a lower overall room inventory. Looking ahead, airlift capacity and hotel inventory are expected to benefit from ongoing foreign direct investments in the island's hospitality infrastructure. The 593-room Fairmont Southampton is currently projected to reopen in summer 2026, while Grotto Bay Beach Resort has announced expansion plans. Additionally, the announced complete redevelopment of Elbow Beach Resort expected to commence in 2026, reflects overall investor confidence in the long-term prospects for Bermuda's hospitality sector. Bermuda will also gain visibility from major international events, including the PGA Tour Butterfield Bermuda Championship and SailGP, a high-speed global professional sailing league set to return in May 2026, further reinforcing the island's position as a premier tourism and event destination. The Cayman Islands continues to enjoy steady population and financial services growth with a 2.5% GDP increase expected in 2025. A number of major residential and mixed-use projects nearing completion reflects sustained demand and confidence across the property market. Financial services and tourism remain key pillars of the economy, representing approximately 50% and 35% of GDP, respectively. Through adherence to its fiscal responsibility framework, the government maintains discipline that keeps the budget generally close to balance. Looking ahead, growth is expected to continue at a measured pace following several years of rapid expansion. I will now turn the call over to Michael Schrum for more detail on the quarter. Michael? Michael Schrum: Thank you, Jody, and good morning. On Slide 6, we provide a summary of net interest income and net interest margin. In the third quarter, we reported net interest income before provision for credit losses of $92.7 million, an improvement of $3.3 million or 3.7% from the prior quarter. The net interest margin increased 9 basis points to 2.73% compared to 2.64% in the prior quarter. This increase is largely due to lower cost of deposits and the redemption of the subordinated debt during the second quarter. Average loan balances were slightly lower compared to the prior quarter, predominantly driven by lower originations relative to amortization and to a lesser extent, the impact on foreign exchange translation from the weakening of the pound sterling against the U.S. dollar. Average interest-earning assets in the third quarter decreased $132.3 million to $13.5 billion. Treasury and loan yields were 7 basis points lower, while average investment yields were unchanged at 2.67%. During the quarter, the bank continued to pursue its conservative strategy of reinvesting the paydowns of investment maturities into a mix of U.S. Agency MBS securities and medium-term U.S. treasuries. Slide 7 provides a summary of noninterest income, which totaled $61.2 million, an increase of $4.2 million over the last quarter. This was due to higher banking fees, which benefited from growth in card volumes and incentive programs. Foreign exchange revenues also rose as volumes increased in the third quarter. The fee income ratio increased to 39.9%, compared to the prior quarter, continuing to compare favorably to historical peer averages. On Slide 8, we present core noninterest expenses. Core noninterest expenses decreased compared to the prior quarter from lower performance-based incentive accruals included within core salaries and benefits. Property expenses also declined, benefiting from a consolidation of premises in the Channel Islands. In addition, indirect taxes were lower, reflecting reduced payroll taxes and work permit fees. Slide 9 shows that Butterfield's balance sheet remains liquid and conservatively positioned. Period-end deposit balances were in line with prior quarters. Butterfield's low-risk density of 28% continues to reflect the regulatory capital efficiency of the balance sheet. On Slide 10, we show that Butterfield's asset quality remains very strong. The investment portfolio carries low credit risk, consisting entirely of AA or higher rated U.S. treasuries and government-guaranteed agency securities. Credit performance in our loan and mortgage portfolios was stable this quarter. Net charge-offs were negligible. Nonaccrual loans held at 2% and our allowance for credit losses stayed at 0.6%. Our loan book remains 70% full recourse residential mortgages with nearly 80% having loan-to-values below 70%. We continue to take a conservative underwriting approach, focusing on high-quality residential lending across our Bermuda, the Cayman Islands and the U.K. and Channel Islands segments. On Slide 11, we present the average cash and securities balances with a summary of interest rate sensitivity. Net unrealized losses in AFS portfolio included in OCI were $101.5 million at the end of the third quarter, an improvement of $18.5 million over the prior quarter. Interest rate sensitivity has reduced slightly against the prior quarter, driven by a reduction in short-term investments that were deployed into fixed rate investments. We continue to expect improvement with additional burn down of OCI over the next 12 to 24 months of 31% and 37%, respectively. Slide 12 summarizes regulatory and leverage capital levels. The Board of Directors has once again approved a quarterly dividend of $0.50 per share. TCE/TA continues to be conservatively above our targeted range of 6% to 6.5%. Finally, our tangible book value per share continued to improve this quarter by 5.4% to $25.06 as unrealized losses on investments improved. I will now turn the call back to Michael Collins. Michael Collins: Thank you, Michael. Butterfield's presence in leading international financial centers provides a strong foundation for continued growth, both through disciplined M&A and organic business development. Our balance sheet and liquidity position remain conservative and fully aligned with business model and regulatory frameworks. Our capital-efficient fee-based businesses continue to deliver differentiated products and services to meet the needs of our clients. As we move forward, we remain focused on enhancing operational efficiency and maintaining prudent expense discipline. Capital management remains a core component of our strategy. The strength of our earnings generation allows a balanced approach, funding sustainable cash dividends, supporting organic growth, pursuing strategic and accretive acquisition opportunities and repurchasing common shares. Butterfield is well positioned to support our clients and create long-term value for our communities and shareholders. Thank you. And with that, we would be happy to take your questions. Operator? Operator: [Operator Instructions] The first question comes from David Feaster with Raymond James. David Feaster: I just wanted to -- I wanted to start -- curious how you think about the margin trajectory as we look forward. There are a lot of puts and takes here right now. You got the likelihood of Fed cuts. You've got also a pretty substantial repricing tailwind as well. And then you've got the lagging impact of repricing on deposits. I was hoping you could help us think about the margin trajectory and maybe where we could bottom out if the forward curve does come to fruition? Michael Schrum: Yes. David, it's Michael Schrum. So yes, there are a lot of moving parts. I think we saw deposit costs come down this quarter. Just starting off, like I think the exit run rates for the quarter were broadly in line at a margin of 2.71% and cost of deposits is 1.45%. As we look forward, we do have some room on the deposit side. There's about $10 billion of interest-earning deposits. So we could see in the short -- and these are relatively short deposits 3 to 6 months term deposits and some demand interest-bearing. So we could obviously see some of that being beneficial to us. And then as we look at the investment securities, we're sort of thinking at the moment, certainly for the quarter is about a 150 or 150 basis point uplift on reinvestment. Over the coming sort of 12 months, we have about $1 billion of AFS and HTM assets that are going to reprice. So that's going to be, again, very beneficial, and that's something that we're clearly focused on. And then finally, on the loan side, this quarter, we've sort of seen broadly a 100 basis point uplift between the fixed rate resetting loans and the new lending that we put into the book. So over the next about 12 months, we have about $400 million of loans resetting as well. Obviously, some of that will depend on customer preference. We've seen a little bit of a mix shift into floating over the last quarter, last couple of quarters. So we're now at 54% floating and where we used to be more like a 50-50. So -- and then finally, the yield curve, if we get a steepener, obviously, that's going to be very beneficial. If we get a sort of lag in short rates going down, that's going to dampen the impact on the negative effect on the margin. So I think within a handful of basis points, we could probably see the next -- or the current outlook would be for NIM to be relatively stable, maybe expanding a little bit as we get this tailwind of asset repricing. David Feaster: That's extremely helpful color. And then, Michael Colin, you talked about some of the unique products and services that you've got in the fee income lines. In the Trust and Asset Management business, you've obviously opened some unique and differentiated assets. I'm just curious, how do you think about crypto or stablecoins? Is that something that's on your radar? Is that something your clients are even asking about? Just curious your thoughts on that as some of the larger U.S. companies seem to be exploring it to some degree. Michael Collins: I think we describe ourselves as a slow follower, watching closely. We're not getting a lot of pressure from clients. I mean, just in terms of -- maybe in terms of custody and that sort of thing for digital assets. Stablecoin is obviously something we're watching closely. But I think the approach we would take is to piggyback off our correspondent banks. So Bank of New York, obviously, is heavily analyzing and participating in this sector of the market, and we would piggyback off that, which actually provides us with a lot of safety and cover, it's not something that we would take the lead on in any sense. But you're right, the fee income lines are really well diversified. So we've got trust, foreign exchange, banking fees, custody. But foreign exchange, I think, is what makes us pretty unique compared to U.S. regional banks, and we had a very good quarter there. And we're continuing to look for acquisitions on the fee income side. So very focused on private trust in the jurisdictions in which we already operate, and we're having constructive discussions, nothing to announce at this point, but our goal is to try to continue to increase our fee income ratio as rates start to change. So we're watching, but I would say we're very conservative. We've talked about in the past. We have no lender of last resort. We are not going to take the lead in these sorts of things, but we will piggyback off our correspondent banking relationships. David Feaster: That's great color. And then just last one, just you guys have done a great job managing expenses. We moved more back office to Halifax. We had the early retirement, consolidated some back office space in the Channel Islands, I believe it was. Just curious what other initiatives are on the horizon? And just how do you think about expenses going forward and your ability to continue to drive positive operating leverage? Michael Schrum: Yes. No, thanks, David. It's Michael Schrum. So obviously, a great quarter this quarter. We did have some noncore expenses in this quarter related to some of the retirement of senior executives. And I think we've said before, we're sort of thinking if we can stave off the inflationary pressures in the system with some of those expense initiatives, moving back-office functions to Halifax. That will be great as we are starting to see some pickup in pipeline on loans and interest -- net interest income seems to be relatively stable. So really, it's the same thing. We've obviously gone through a lot of investments into our infrastructure. So we did a cloud migration of our core banking system last year, and we're just catching up on the patch sets of those. So that -- while that's truncated the expense run rate a little bit higher because we're using Software as a Service, we're gradually exiting some of the older or out-of-date systems that we've been using. So I think broadly speaking, it was a little -- good improvement this quarter. We should be thinking about the $90 million run rate as a good sort of estimate for the future, at least for the near to medium term. And then as some of the things that we're thinking about is exactly continuing to move back-office functions to Halifax. Operator: [Operator Instructions] The next question is from Tim Switzer with KBW. Timothy Switzer: You guys have already touched on this a little bit, but really strong momentum across your fee income businesses here. Could you provide just a little bit more commentary on what drove the pretty significant upside in banking here quarter-over-quarter and year-over-year, very strong. And then are you able to kind of give us an idea of where there any kind of like nonrecurring revenues in there, kind of one-offs? And I know Q4 is usually seasonally strong, but will be maybe not quite as strong just given the performance in Q3 on like a relative basis? Michael Schrum: Yes. Thanks, Tim. Yes. So banking has been very strong, continues to be obviously a really solid and very capital-efficient line for us. The combination of banking really is sort of recurring of periodic fees, which are sort of account maintenance fees and then a combination of that plus the card services fees or transaction-related fees, and we've really seen an uptick in volumes. And that uptick in volumes with -- on our card product really has also driven some incentive accrual increases this quarter. So there wasn't really anything to call out, particularly, obviously, tourism-related card services fees were both an acquirer and an issuer has just benefited us quite tremendously over the summer as Bermuda has had a pretty good tourism season. So that's been an uptick there. And by all means, Cayman looks to be in decent shape for this upcoming tourism season as well. FX is -- we don't take any proprietary positions, as you know, but these are really commission-based FX exchange revenues. And I think clients have just taken the opportunity to rebalance a little bit as we've seen some movements in foreign exchange rates. And so that's driven volume in there. There were a couple of sizable deals that we did for some private trust clients in the FX side, but nothing really to call out. It may be a little bit seasonal, but we're pretty constructive on the outlook. Timothy Switzer: Okay. Great. That was really helpful. And then I appreciate the kind of overview you gave across your different jurisdictions and the growth there. Which jurisdictions are you expecting to be driving the most growth from a loan and deposit perspective over the next year or so? And what are like some of the loan categories that you have the most opportunity in? Michael Schrum: Yes. Maybe I'll start on deposits, and Jody can just comment on loan pipelines, et cetera. I mean deposits continue to be a little bit elevated for us. I think we've certainly seen some significant movements. It's netted out to be not very much movement this quarter, but we have seen some sizable client inflows, which are probably masking a little bit of the outflow. So we continue to expect that deposit levels will sort of come down a little bit. I think Bermuda has certainly seen the most growth in the deposits. And normally in the fourth quarter, we would see a little bit of a seasonal increase in Cayman as funds kind of rebalance their cash held in the fund and cash held with us as an intermediary. So really, that's it on the sort of mid-market corporate side. I think deposit levels have been increasing in the Channel Islands as well as we've sort of pivoted a little bit more to a retail growth strategy there. And I think that's great to see more sticky deposits and a better composition of deposits in that segment. But it is, as you know, with retail clients, it's a pretty slow growth in terms of the impact overall. And I'll let Jody just cover loan pipelines. Jody Feldman: Sure. Tim, it's Jody Feldman. I would just comment quickly on loans. I mean, as you know, we're not a loan growth story at Butterfield, and we're not going to be stretching for credit at this point. Obviously, we maintain a low-risk density balance sheet, and we're very conservative with our underwriting, and that's not going to change. That being said, we are seeing some encouraging signs in the loan pipeline, particularly in Cayman, a slight pickup in Bermuda due to kind of macro backdrop, which is encouraging. But I think it's pretty consistent from previous times. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Noah Fields: Thanks, Debbie, and thanks to everyone for dialing in today. We look forward to speaking with you again next quarter. Have a great day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Ulla Paajanen-Sainio: Good afternoon, everyone. Welcome to Outokumpu's Third Quarter 2025 Results Webcast. My name is Ulla Paajanen, and I'm currently in charge of Outokumpu's Investor Relations. Our speakers today are CEO, Kati ter Horst; and CFO, Marc-Simon Schaar. Kati will explain us about the highlights of the quarter, progress of our EVOLVE strategy, as well as the fourth quarter outlook. Marc-Simon will concentrate on business areas and financials. Before handing it over to Kati, let me remind you about our disclaimer since we might make forward-looking statements during the presentation. Kati, please go ahead. Kati Horst: Thank you, Ulla, and warmly welcome also from my side to our Q3 results call. So today, we'll be talking about the Q3 results and the outlook for Q4 as usually, but I'll be also making some comments on how are we moving forward with our EVOLVE strategy with an important step. But let's start then with the Q3 results. So our adjusted EBITDA amounted to EUR 34 million during the quarter, and this was very much reflecting the weakness in the European market. If we look at the highlights of the quarter, I could also say that we are really very much now focusing on cost competence on one side and then the transformation on the other side. If we start with the stainless steel deliveries, they decreased by 11% and mainly due to the very continued subdued demand in Europe. If we look at Europe alone, deliveries decreased by 12% and then the decrease in Americas in stainless steel market for our deliveries was 6%, so half of the Europe. Then if we look at our short-term cost-saving measures, we are very well on track. So year-to-date, Q3 end, we have now reached EUR 42 million of savings and will reach the promised EUR 60 million by end of the year. We are also proceeding with our planned restructuring plan for EUR 100 million before the end of 2027. So we have started now collective negotiations in all our key production countries in Europe and are proceeding with those. Hopefully, everything being clear then by the end of the year. And then the exciting news of today, we are investing about USD 45 million in a new pilot plant in the U.S. to scale up our proprietary technology for low-carbon metals, and I will come back to that a bit later. If we look at the market conditions now in Europe and Americas, especially through the lens of imports, you can see here that in quarter 3, in Europe, the imports increased to 29%. And this is very much what we've been commenting in the past quarters as well that the tariffs in the U.S. will put more pressure on the European market, and we will see more Asian imports coming in. And this is exactly what you see on the left side of the chart. Regarding then the Americas imports, we currently don't have the Q3 figures because of the government shutdown. So the only weaker figure from Q3 we have is July, which shows here now an increase to 33%. I would think that the imports probably are bit a similar level in Americas in Q3 as Q2 once we get the numbers. Then commenting on a group level, the overall picture, you can see that our deliveries were at a low level in Q3. This comes really from the weak market conditions in Europe. We have not lost market share. It is really the weakness in the market. And then if you look at what is the bridge from our Q2 result to Q3, you can see that it's very much about deliveries, getting some help from raw material costs. And then in Ferrochrome side, we had a bit higher deliveries, but when you translate the U.S. dollar euro rate, then that was now hitting us on the pricing side. And then we had also maintenance stops in the quarter, which impacted the result. We comment every quarter now on the EBITDA run rate improvement. This is an initiative that started in '23 and we will end the program by the end of '25. So currently, we are at EUR 336 million of cumulative savings and improvements and will reach the EUR 350 million as targeted. Many of these improvements are something that you only will see really coming through in our books when the market conditions improve. But to highlight a bit what did we -- for instance, what kind of improvements we had in Q3, it's very much about Circle Green -- bigger volumes for Circle Green, where we have a clear premium, and then also some good impacts from district heating solutions. And then in Americas, we had further savings through process optimization in Calvert. Then to the more exciting news. So you know that in Capital Markets Day in June, we talked about our new technology, and we said that we are looking at the next phase and the investment for that. So now we have made that decision, and we'll be investing in a new pilot plant in New Hampshire in the U.S. to scale up the technology from this daily 1 kilogram production level to 1 tonne. And here, we are concentrating in the first instance on chromium. So we would be producing enriched Ferrochrome and also chromium metal. And these new production pathways we're looking at for high-purity metals are very much applicable to high-value markets like aerospace, defense and energy sectors. And in the future, then we can also look at other metals, like we said before, for instance, nickel. But now we concentrate with the scale-up on chromium. And then if we look at a bit what we communicated before, what is the phase we're talking about here. So the lab scale, we spent about 4 years to really arrive at the technology. And now we will want to show that we scale it up for industrial feasibility and then also so that we have a competitive production cost with this process. And once we have achieved this, the idea is that this plant would be operational during the first half of '27, then we are in the next step looking at industrialization, probably with a commercial plant with a capacity of about 10,000 tonnes in the first instance and then really taking advantage of the technology in the next step for bigger scale up. But this is the phase where we are. And now it's time to show that this technology can be scaled up and it's feasible in industrial production with a cost competitiveness. So that's our focus right now in the next phase. So very excited about that. Then a couple of comments on sustainability and starting with safety. So the news that I'm not so happy about is our safety performance during the Q3. We were fully on track with our safety targets by the -- until the end of August, but we had a disappointing month of September with 6 incidents that involved 9 people, both our own people and contractors. And now our -- very much our target is to get back on track. So our target level on total recordable incident frequency rate is 1.5, and now year-to-date, we are at 1.9 after the disappointing September, and we have all hands on deck to get back to the performance we are used to. On the positive side then, we continue to have a very high recycled material content, now 3 quarters in a row at a record high level of 97%. This talks to a very high scrap use and also some other raw materials, which is also good for our sustainability result. And we are also continuously progressing towards our SBTi climate target. And then the last item here is, we're developing our portfolio for Circle Green. We're getting more customers for that. And I'm very happy to announce that we now have a collaboration with Parcisa. And Parcisa is a leader in design and manufacture of tankers for liquid transport. So very nice to have new customers for Circle Green. And now I will then hand over to Marc-Simon to go more in detail in our business area results and the finance in overall. So Marc-Simon, the floor is yours. Marc-Simon Schaar: Thank you, Kati. Good afternoon, good morning, everyone, and thank you for joining us today. It is clear that given the current market environment, maintaining strong capital discipline remains one of our key financial priorities. Let's start by taking a closer look at our financial position at the end of the third quarter. During the third quarter, our net debt increased to EUR 230 million. And despite the increase, we maintained our strong liquidity of EUR 1.1 billion, supported by a new 3-year term loan. This clearly demonstrates the continued strong support from our lending partners. And in light of the weak market conditions, we are continuing to emphasize capital discipline, particularly through tight working capital management. With that, let's move on and look at the performance of our business areas during the third quarter, starting with BA Europe. In Europe, the demand from end users remained soft across key sectors, especially in construction and domestic appliances with no real signs yet of any immediate recovery. The European manufacturing PMI showed some improvements in August, but soon fell back to below 50, indicating contraction. The construction PMI dropped even further to around 46. Distributor inventories declined somewhat, particularly in Germany, but still remain at medium to high levels given the weak demand. Added to that, and despite being positive, ongoing uncertainty around the CBAM mechanism, as well as timing and the final definition of the new safeguard measures has created additional caution among buyers. As a result and combined with a typical seasonal slowdown, volumes in business area Europe fell by 12% quarter-on-quarter. The higher share of Asian imports now around 29%, also continued to put pressure on sales prices. According to CRU, standard 304 prices in Europe fell sharply by more than EUR 150 per tonne compared to the previous quarter. The negative volume and price impact was partly offset by lower raw material costs and ongoing cost-saving measures, as well as higher fixed cost absorption due to increased production ahead of the annual maintenance shutdown and the ERP rollout. However, as guided earlier, the planned maintenance activities in business area Europe had a negative impact on our profitability. Let's now move across the Atlantic and take a look at business area Americas. Also in the U.S. and in Mexico, the manufacturing sector remained in contraction during the third quarter with only a slight improvement visible in Mexico. The increase in U.S. tariffs on steel and aluminum imports from 25% to 50% in early June this year continued to support domestic producers. However, underlying demand across North America remained subdued. Only the oil and gas sector is holding up somewhat due to the higher energy demand from the increase in data centers and activities from reshoring manufacturing into the U.S. are not yet visible. With the weak demand, distributor inventory days increased further and above year-to-date averages. Overall, deliveries in business area Americas declined by around 6% quarter-on-quarter, while average prices improved, supported by the tariff changes, as mentioned earlier. The benefit from higher prices was partly offset by increased raw material costs and lower fixed cost absorption due to reduced production, a deliberate move to balance working capital in a weak market. Then next, let's look at the performance of our business area Ferrochrome. Globally, Ferrochrome producers in Southern Africa continued to face capacity shutdowns driven by high electricity costs. This led to higher chrome ore export, especially to Asia, where margins are more favorable. In the U.S., new tariffs on the Brazilian imports strengthened the demand for our Ferrochrome products, which are not subject to U.S. tariffs. In Europe, we have also seen an increasing interest as steel mills are looking for European low-emission alternatives for raw materials, which are subject to CBAM regulation. So the demand for our low-emission Ferrochrome remained solid throughout the quarter with deliveries up by 3% despite the usual seasonal slowdown. On the other hand, sales prices declined, largely due to a weaker U.S. dollar. Our profitability was also affected by timing differences between foreign exchange derivatives and the realization of the weaker U.S. dollar in sales, as well as higher energy costs and lower fixed cost absorption linked to the seasonal lower production. With that, let's turn to the group's overall financial position and working capital development. As mentioned earlier, net debt increased to EUR 230 million during the quarter, mainly reflecting lower profitability in a weak market, a few one-off items and our annual insurance premium payments. Now the one-off items include costs related to the U.S. wage class action settlement as well as foreign exchange impacts from the weaker U.S. dollar. Those stemming from internal currency swaps we use to optimize our cash across the group. Normally, in a soft market, we would expect a reduction in working capital. However, this quarter reductions were limited as we prepared for our annual maintenance shutdown as well as the ERP system and supply chain solution rollout in business area Europe. Nevertheless, we continue to focus on tight working capital management and preserving our strong liquidity position going forward. With that, I will now hand it back to you, Kati. Kati Horst: Thank you, Marc-Simon. So let's then move to look at our outlook and guidance for the Q4. So on the outlook, we said that the group stainless steel deliveries in the fourth quarter are expected to decrease by 5% to 15% compared to the third quarter and mainly due to the market weakness in business area Europe, and the seasonal slowdown in business area Americas that happens in the fourth quarter. Asian imports to Europe still remain high compared to the low demand in the stainless steel market. Then we have maintenance breaks in business area Europe and Americas as well as the rollout of the new ERP system and supply chain solution in business area Europe. And those impacts are expected to have about -- are expected to have an impact of about minus EUR 20 million on our adjusted EBITDA in the fourth quarter compared to the third quarter. And then with the current raw material prices, no major raw material-related inventory or metal derivative gains or losses are forecasted to be realized in the fourth quarter. And therefore, our guidance for Q4 2025 is that the adjusted EBITDA in the fourth quarter of '25 is expected to be lower compared to the third quarter. Moving then forward to discuss and summarize a little bit, what I really want to emphasize that, despite the current challenging market conditions we are now having in Europe and that heavily impact our performance, I'm very confident about our future direction. With the EVOLVE strategy, we take clear steps towards the higher resilience and better performance through cost restructuring and investments in profitable growth that support diversifying both our offering and geographical footprint. And as you know, today, we announced that we are now investing for growth through the pilot plant for innovative proprietary technology in the U.S. So that's the transformative part. And then on improving our competitiveness, we are trying to implement as quickly as we can this EUR 100 million restructuring program to get the structural savings in and to help our competitiveness, especially in Europe. Then in Americas, we see Americas as an interesting growth market, but rather beyond standard stainless steel. And the change I have made in Americas' management is that we have Johann Steiner, who has been also leading our strategy work at Outokumpu now appointed as President in BA Americas, and he will be an excellent support to the team there to work further on the Americas strategy. And our recruitment for Johann's successor is ongoing in final stages. Then there are also some positive news from the market, I would say, a bit of light in the end of the tunnel when you look at the European market. We are very happy and very supportive of the strong proposal that European Commission has made for more effective safeguards. And I think the important items there are that the quotas are halved by nearly half. That the tariffs then on top of the quotas will propose to be in the rates of 50%. And then the principle of melted and poured is planned to be introduced and then we would get these new safeguards latest by the end of -- or by the mid-'26. So I think the package as such is very strong. Now of course, we are very much hoping and supporting decisions on this still this year, and -- so we get clarity on, is it going to be mid next year or is it going to be, hopefully, also a little bit earlier that we get these safeguards in. And then the other item that is important for Outokumpu because we are clearly the sustainability leader in the industry, both in Ferrochrome and stainless steel, that we do get a Carbon Border Adjustment Mechanism in place in Europe to ensure that the green transition in Europe can continue the investments that are needed for that. And those who have invested in that finally start getting some benefit out of that, and we can keep this industry in Europe. So I think own actions, very important, cost competitiveness, investments in growth, and next to that then some of the positive things that we see next year with the safeguards and with the CBAM being implemented. So I will end the presentation there. And I think then it's time for us to move to the questions and answers. Operator: [Operator Instructions] The next question comes from Tristan Gresser from BNP Paribas Exane. Tristan Gresser: First, maybe on the quotas. Can you share a little bit more your view on the implementation of those new quotas as they are? And also, are you optimistic about the new quota that could be implemented before July next year? And on their own, are those quotas enough? I mean it seems to me that the issue is more about the prices than volumes. In the past, we've seen imports falling and plunging a lot, but not really helping the market. So would love to have your view there. Kati Horst: So maybe I'll start, and if Marc-Simon you have something to add then you can do that. I think the total package not only that the quota levels will be halved, but then also the tariffs above the quotas, the melted and poured principle, that the measures don't have a definite deadline but will be reviewed. I think the whole package as such, and you cannot move quarterly quota from one quarter to another. There are like many elements in this proposal that I think altogether support and give an impression of clearly stronger safeguards. So therefore, I'm quite positive about the proposal. And then if you look at the Asian import level is now almost 30% in Europe, this quotas would have that import level to about 15%. And I think that is what we need in Europe to create a level playing field for European producers so we can utilize the capacity enough, otherwise it's going to be closed. So if we want to keep a steel industry in Europe, it's important that these measures are now taken. Marc-Simon Schaar: And then maybe on the timing, you asked about the timing of the quota here as well. So as Kati was mentioning earlier, the latest being mid of 2026 just before then the current safeguards expire. Now it's very difficult to speculate, and we don't want to speculate really on the timing of it. I think we have seen a very good proposal by the Commission and now we are waiting here, the discussions also within the member states of the -- of Europe and also within the parliament and then seeing whether we have then also the support from the member states basically. Tristan Gresser: Okay. No, that's clear and helpful. My second question is on CBAM. What would you need to see in the text of CBAM, whether provisional or final, to really make a difference for your European business next year, given that most of the carbon intensity differential is on Scope 3 with Asia, how optimistic are you that it's going to be implemented? And also just following up on CBAM, you said that uncertainty around CBAM is putting order activity a bit behind. But what we've seen for carbon steel makers is that CBAM uncertainty is actually pushing more buyers towards domestic producers because of that uncertainty. So I'm just trying to square that out and why this uncertainty that is placed on importers should not benefit you near term? Kati Horst: Yes. I would say -- so first of all, I think it's quite clear, at least from the discussions that we have recently had with the Commission that CBAM will be implemented as of January. What we are, of course, hoping is clarification before the end of the year, what are the reference values and how will it exactly work? What scopes are included. So there are, of course, question marks still, and I think it's also not good this uncertainty for our customers, both on Ferrochrome and stainless steel that there's not more clarity right now. But CBAM will come. And whatever form it comes, I think it will be supportive. But of course, from our perspective, having all the scopes in it would be helpful for us and even better. But I think even a form that is not perfect is better than nothing. That's how I would see it. And then if we look at our customer industries, we have, of course, discussed a lot with our customers as well. There is a discussion with the Commission also that how would you compensate them for export business, if I look at our customer side. But I would also say that we have many customer sectors that also support CBAM and actually would want to be included under CBAM as steel-intensive users, so that for instance, in appliances, you don't then get a situation that products are brought to Europe with a much higher carbon footprint and then they have to face that. So there's definitely still work to be done to make CBAM an effective system. But I think starting it with now is the first step that has to happen in January. Operator: The next question comes from Adahna Ekoku from Morgan Stanley. Adahna Ekoku: I've got 2 questions from my side. So first, just on business area Ferrochrome. Could you help us a little bit here with the outlook into Q4? So we saw higher volumes quarter-over-quarter, but then this was partly offset by the dollar and higher electricity costs. So how are you expecting these factors to trend looking into the next quarter? Kati Horst: So you know that we don't guide the business area. So I will not be very specific. But I think in general, I would say that we see our Ferrochrome business being in a good place and continuing to deliver good result. So quite confident of Q4 on Ferrochrome. Marc-Simon Schaar: Maybe if I can just add 2 further points to it. Certainly, we see a weak market environment and demand situation from the stainless steel sector. But as we pointed out earlier as well, the demand for our Ferrochrome is solid. So while you see some negative impacts on the one hand side in terms of volume, then the offsetting on the other side here as well. But then -- yes, then going forward as well, I mentioned earlier, and that is valid for the group, that we are having strong focus on tighter working capital management that will also impact our production then in the fourth quarter and something to be taken into consideration as well. Adahna Ekoku: Okay. That's clear. And maybe looking to 2026 and on CapEx and whether you could provide any kind of early steer here. At the CMD, you outlined the higher maintenance needs. So I was wondering, is there any flexibility here? And any indication as to how much growth CapEx will be allocated to next year given the kind of continued weak backdrop? Marc-Simon Schaar: Yes. Good question. I think in the Capital Markets Day, I mentioned indeed that our maintenance CapEx going forward at a level of EUR 100 million with some backlog recovery for next year, bringing it to EUR 200 million. But at the same time, also clearly stated that we are observing the market environment, the market situation as well. And we are clearly observing the situation and making the plan for next year. Right now, as we are, certainly, we will adjust our CapEx, what we have communicated to the Capital Markets Day, taking the weak market situation into account, but we'll come back with further guidance then in our next report. Operator: The next question comes from Anssi Raussi from SEB. Anssi Raussi: I have a couple of questions left, and I start with your guidance. So you mentioned that you expect some negative impact on your EBITDA for Q4 quarter-over-quarter due to maintenance break. But I think you guided EUR 10 million negative impacts also for Q2 and Q3, so what's the net impact now? And have you ramped up your maintenance activity all the time during this year? Or how should we think about this? Marc-Simon Schaar: Anssi, good afternoon. We do have had maintenance work in the second quarter, yes, and in line with our guidance. But this maintenance work was towards the end of the quarter. It will also -- or has continued into the fourth quarter as well, number one. We also see maintenance break in the Americas with our annual maintenance shutdown on our melt shop and other assets in the U.S., which having an impact. And I think in our guidance, we were also talking about our rollout of our ERP system and supply chain solution here as well, which will have an impact on volume on the one hand side, which is already covered on the volume side, but certainly also on our production and the cost level. And these both together is then what makes then the EUR 20 million impact quarter-on-quarter. Anssi Raussi: And just to clarify that we are talking about net impact quarter-over-quarter. Marc-Simon Schaar: Yes. So this is a bridge impact, so quarter-on-quarter. Anssi Raussi: Okay. And maybe my second question on these tariffs in the U.S. So if you look at your deliveries in the business area Americas, I guess it's clear that your average selling price has increased less than the so-called list price if we look at the price data from CRU. So what's the mechanism here like? Does it take longer to see the full impact? Or how does it work? Kati Horst: Yes. Maybe if I comment on that, I think the full impact will be seen more in Q4, I would say. But then we need to also take into account that the Americas market as demand as such is not very strong. There's also new capacity coming to the market, and there's also a mix impact always when you look at the pricing. But prices have increased in Q3, and I think the full impact will be visible in Q4. Marc-Simon Schaar: Indeed, the full impact is in Q4, but quarter-on-quarter I would not take any significant improvements into account here just to be more cautious and realistic. And then maybe just to add, when it comes to CRU data, I think also here we need to see what is the -- where is the timing difference between order intake and then also the realization of prices as well. Operator: The next question comes from Dominic O'Kane from JPMorgan. Dominic O'Kane: So I have 2 questions. My first question actually follows on from your last comment. I note you, obviously, practice is not to comment on specific business areas. But given the Q4 guidance for shipments and given the pricing outlook, I think it's reasonable to assume we'll see another negative EBITDA quarter for Europe. So I'm just wondering if you could just help us contextualize maybe what you're seeing in terms of pricing currently for Europe. You've talked to the Q3 CRU comment, which is obviously backward-looking. But have you seen any discernible change in your customer behavior or order book following on from the European Commission safeguarding proposal earlier this month? Has there been any indication that customers are looking to acquire metal sooner than that framework comes into existence? That's my first question. Marc-Simon Schaar: Maybe if I can start and then you can add, if needed. While we're not in a position to guide on prices here, particularly going forward, I think in our outlook for the fourth quarter, we're talking about a volume decrease quarter-on-quarter in the range of 5% to 15%. And I think the split between Europe and Americas is almost 50-50 here to say. And we also talked about the maintenance costs and impact from our ERP rollout here as well. As well, we also mentioned that Asian imports are still on a high level. They actually have increased towards the end of the third quarter. And of course, that is also impacting then our business. This is probably as much I or we can say here on the current situation and outlook. And in line with what we mentioned also earlier is that, yet we do see a wait-and-see attitude still in the market with customers or the industry being cautious around the definition and the mechanism on CBAM and the safeguards here as well in terms of timing. So that needs to be taken into consideration as well, as such no clear signs yet of any improvements, as I mentioned in my part of the presentation. Dominic O'Kane: That's clear. And then my second question, just on net debt stepping into Q4 and the working capital bridge. Given the maintenance, is it reasonable to assume that we would expect to see a higher net debt at the end of Q4 versus Q3? Marc-Simon Schaar: While we're not giving specific guidance on our net debt going forward, there are a couple of elements we need to take into consideration. On the one hand side, we have paid our second tranche of the dividend in October. I think it was the 22nd of October with a cash out of EUR 61 million. And in my part, I also clearly stated that we continue to focus on tight working capital management, and this is what we will have in focus in the fourth quarter. I also mentioned the impact on our profitability as a result thereof. And having said that, so with the current assumptions, we don't expect a major increase in net debt in the fourth quarter. Operator: The next question comes from Joni Sandvall from Nordea. Joni Sandvall: Maybe a bit of follow-up on the quotas that we have been speaking already. I know it's a bit early looking into '26, but is there -- do you see any risks of import surging ahead of potential implementation of these quotas? Kati Horst: Maybe if I answer that. There can be some, but let's remember as well that the delivery times are still quite long also from Asia. I think the most important thing now is that the decision comes this year and the timing is communicated and the decision comes. And I think that will then already be helpful earlier than when actually the quotas come in place. Because you need to take into account then what's the moment that your deliveries would actually be on the European border. So there can be some surge in the Q1 or something, but I would think the most important thing is now we get the decision and clarity and then that will start impacting markets. Marc-Simon Schaar: I think most important is really lead times. Kati Horst: Yes. Marc-Simon Schaar: On the one hand side we do have a quota system still in place. It's not sufficient, I know, I understand, and that's what we are reporting for many quarters and years right now. But the window of opportunity is rather short. Joni Sandvall: Okay. That's clear. Then a question related to the pilot that you announced today. You are speaking already towards end of this century the 10-kilotonne industrial size production. So could you give any indication of what kind of CapEx we could be looking for this kind of industrial facility? Kati Horst: It is very, very premature. Also depends where the investment would be. So no, I cannot give a figure. I can say that it's more than EUR 45 million that I can say for the next phase. But I'm sorry, I can't give a better number right now. So that we will need to really look at then more detailed, because we also learn now in this process about what would that kind of investment look like when it comes to machinery and setup. And where we would invest, would it become kind of being part of our Ferrochrome plant or somewhere else has also influenced. So it's too premature, unfortunately, to comment on that. Joni Sandvall: Yes. That's clear. And then lastly from me, the ERP rollout that you have been mentioned many times and the supply side solutions. So could you give any indication, have you completed this? Or have you faced any interruptions on that front? Marc-Simon Schaar: Well, it's quite a sizable project, I must say, with -- we started basically a couple of years back in Germany and also in Sweden. And now we have our largest site in Tornio, Finland. And with that rollout, we're closing the loop, so to say, and have all of our assets or the majority of our assets on the same platform, which provides certain opportunities and advantage for us. Having said that, we are -- we have started the rollout at the beginning of the quarter, and it has been going in the size and magnitude of these kind of projects relatively well, and we're still in the process of rolling it out. Joni Sandvall: Okay. And lastly, maybe a quick question on the Ferrochrome and the FX impact on the profitability. Now here in Q3 you were speaking about timing impacts there, but could you give any indication how much that was? Marc-Simon Schaar: Yes. I think the impact is around EUR 8 million quarter-on-quarter. So you have a positive impact in the second quarter of EUR 4 million from the derivative and then the realization in the sales price, then the negative EUR 4 million impact in Q3. So the delta is around EUR 8 million. Operator: The next question comes from Maxime Kogge from ODDO BHF. Maxime Kogge: My first question is on Ferrochrome. So we have seen actually quite significant cutbacks in South Africa. I think Merafe talked about a 50% decrease in the own production year-on-year in 2025. So I guess that opens some volume opportunities for you. Do you expect to benefit from that perhaps not in Q4, but further ahead? And do you see room to get back to nameplate capacity in Ferrochrome because you're currently running at below 80% there? Kati Horst: So maybe I start by saying, yes, we do see that we do benefit from that situation. And I think the way it shows currently is that we are getting new customers. We have more trial orders. And even though there may be -- there have been some rumors on the market one of the producers probably coming on stream in February, at least for a short time, I think the customers maybe are not trusting that fully. So I think going forward, we see strong demand for our Ferrochrome. And as you know, there is still capacity to be utilized. So we are somewhat flexible in that, and we'll follow how the market develops. Now Q4, our focus is to make sure that we prioritize cash. So we will also make sure that our inventories come down also in Ferrochrome. But we have opportunities to increase the production when the market needs that. Maxime Kogge: Okay. Second question is on your chrome investment. I was curious to understand why you had chosen the U.S. for this investment actually because the raw material will come from Europe. So isn't there the risk of tariff impact associated with this decision? Kati Horst: So here, we are still in the pilot phase what we are talking about now for the coming 2 years. We are still talking about scaling up the technology. And our scientists that have been working on the technology for 4 years in our lab close to Boston, that's where they are. And in this phase it doesn't really matter to be close to the metal where that comes from. In the next phase that would be different depending on what metal you use. So in this phase, I think it's more important that we can use the capabilities and the knowledge to build the Phase 2 plant, and it's handy for us to have it close to the lab in the U.S. So that's the main reason it's in U.S. Maxime Kogge: Okay. Makes sense. And just the last one is on your U.S. strategy. So you seem to be considering rather the high-end segment of the market and try to get away from the mass market. But I found that curious given that one of your competitors is precisely investing in that segment, plus given the lower import pressure that also opens some opportunities there for lower-end products, yes. So any light on that would be helpful. Kati Horst: No, I think we've been just kind of clarifying it that we are not necessarily looking at increasing our capacity in standard stainless steel in U.S., but looking at how we can develop our portfolio, for instance, in Calvert to the higher-end products or do investments or acquisitions that support our strategy to more -- to advanced materials. So our feasibility study on high-nickel alloys in Avesta is still ongoing and progressing well. And if you, in general, look at that kind of products, they travel quite well in the world. Of course, there are tariffs now in the U.S. Will they be there forever? It's a global market for that kind of product, so I think we definitely have interest for that kind of markets also in the U.S. And then developing our technology, there are probably different paths that could be for Europe, could be for U.S. So we definitely continue exploring the U.S. market and continue with our strategy work. But I think one thing we have defined if we just add capacity in the standard stainless steel, we are not transforming this company. So that's, I think, is a clear sign that we are looking at different kind of products. Operator: The next question comes from Meet Mehta from Barclays. Meet Mehta: So I have one question. So in the presentation on Slide #23 for BA Europe, you are saying that there was a positive raw materials impact. But if I look at your press release, it is saying that there was a raw material related inventory losses of EUR 4 million. So what am I missing here? Marc-Simon Schaar: The raw material impact is -- our raw material costs, the EUR 4 million, EUR 5 million impact, I guess you're referring to is the net of timing and hedging effect of buying alloys basically. So the difference between when you buy and when you sell. This is the timing impact and then netted by your hedging activities. Meet Mehta: So that you are considering under this line item, right, the net timing of hedging, right? Marc-Simon Schaar: This is under net of timing and hedging, yes. Meet Mehta: Yes. And I've -- a second question is on net debt. So I mean, this, I mean, as you have said, right, this was a sudden increase and even if you try for this type raw material -- so is there a chance that we might see a decrease on the net debt side? Or should we consider that it will remain in line with EUR 230 million? Marc-Simon Schaar: I think the latter one, as I was mentioning earlier before. So remaining around the current level. Operator: The next question comes from Bastian Synagowitz from Deutsche Bank. Bastian Synagowitz: My first one is actually also a quick follow-up on the situation around the, I guess, the ERP and the maintenance costs. So do you expect that to possibly drag into the first quarter as there are any other maintenance break coming up? I guess, you had a very high intensity of maintenance costs this year. And clearly, it makes a lot of sense to do those when the market is weak to be ready whenever the market does come back. But I guess, just for our purpose, wherever you've got the visibility, if you could, I think it would be very helpful for you to flag these things a little bit earlier. I guess, the ERP side, at least, would generally have caught you by surprise. But first of all maybe if there anything which comes and drags on into the first quarter, if you could share that with us, that will be great. Marc-Simon Schaar: Sure. Right now, as far as we can see, it does not drag into the third quarter, to answer your question. And then maybe on the ERP rollout, this is also something which I mentioned in the last interim or webcast here as well as part of our working capital development. But now going forward, with maintenance and then also being in the U.S. and Europe and the ERP rollout all in one quarter, clearly know the impact in Q1. So these are really one-off items, so to say, if you compare quarters with each other. Bastian Synagowitz: Okay. Very clear. The second one is on CapEx. So I guess in the release, I guess you stated that the EUR 200 million investment into the annealing line is under review. Now from my understanding, a very large part of the targeted EUR 100 million cost savings was actually tagged to that. So what does this mean for the cost savings? Do you think that you can fully compensate for that somehow and find different areas of savings even if that investment does not happen? Could you maybe just talk about that? And also maybe if you have any visibility already on how much cost savings contribution we can pencil in for 2026? Marc-Simon Schaar: Yes. So the -- Bastian, the EUR 100 million does not include -- is not depending on the AP 1 investment, so the annealing and pickling line investment in Tornio. So that is not included. The EUR 100 million are coming from other measures such as streamlining, delayering layoffs, reduction in positions, other quality and efficiency improvements. Bastian Synagowitz: Got you. Okay. So that stands totally separate and the EUR 100 million target basically is still fully intact. Kati Horst: Yes. Marc-Simon Schaar: Absolutely. Absolutely. Bastian Synagowitz: Perfect. And then just also coming back to, I guess, the most cryptic part here, which is around CBAM. And of course, it does seem like the situation is still vague with regards to the benchmarks, et cetera. But I guess, we're just a couple of weeks away really from, I guess, when it starts. And I guess, you must already be discussing the current order book. So I'm wondering, how do real-life discussions on that front really look like at the moment? So do you start to reflect this in Q1 already with customers? As Tristan said earlier, in carbon steel, we can see that happening. And if the -- if whatever impact comes and even we don't know how much it is, but there will be something, I guess, there must be some increment also on the pricing side. So even without going into any details, I mean, could you just say that you're basically looking a little bit more confident here into Q1 pricing? I guess, you've been always a bit more confident on Ferrochrome than stainless actually. So maybe you can start with Ferrochrome first here. Kati Horst: So maybe I can come back on your question on CBAM and maybe repeat a little bit what I said. So I think there's a lot of confusion and uncertainty among our customers, whether it's Ferrochrome or stainless steel, what it actually means. And what we are missing, we are missing the clear message on the reference values. And that's why we are really hoping that we would get more information now before the end of the year. And based on our latest discussions with the commissioner, for instance, that we are expecting that there would be more information before the end of the year. So I think that would clarify more the situation to our customers. Of course, we try to educate our customers, how does this kind of situation work, but we don't have the reference values from a Commission yet. So that is the uncertainty on the market. I think there's no uncertainty that CBAM wouldn't come, but it's just what does it exactly mean in different products and what scopes are included, so that is still the uncertainty. But we have not seen -- and I think because of this uncertainty, we have not really seen it yet influence buying behavior, for instance, now in the end of the year. And maybe that's also reflected with a weak market, our customers also doing their cash management. But of course, it should support pricing going forward. Marc-Simon Schaar: Yes. Pricing and lead times are very short right now with a weak market environment. Bastian Synagowitz: Okay. So it's not yet in that sense reflected. But how do you -- how will you treat this from your end at the moment, given the uncertainty? Do you just -- would you just, for example, would you just put in the flexible component there in your pricing discussions, whatever the outcome is in the course of the fourth quarter? Kati Horst: I don't think we are in -- we want to discuss our pricing strategy at this moment. So sorry, I can't answer that. Operator: The next question comes from Tristan Gresser from BNP Paribas Exane. Tristan Gresser: Just on the downstream project in Tornio that's been put on hold. Just wanted to confirm with you the status of the 2 lines in Krefeld, they're shut or not. And also in Q2 already, you shared some estimates on the negative impact on the mining tax in Finland and the removal of the state aid on energy. Can you now confirm those negative headwinds for next year? Kati Horst: No, we cannot confirm them yet. The discussion is ongoing. That's a proposal based on which we have commented. And we are, of course, discussing with different instances in Finland. The proposal is now in the parliament, and it's a big issue for the whole mining industry in Finland, not only for Outokumpu. And why the AP 1 investment is on hold is that if this tax impact and electrification removal comes, all that together, of course, impacts also our mining cost, Ferrochrome cost and therefore, also then the stainless steel cost. And then our calculations for the AP 1 investment, comparing it also with Krefeld and the cost position will need to be looked at again. But we don't have clarity yet whether this proposal will hold or not. So that's why the investment decision is on hold. Tristan Gresser: Krefeld Kati Horst: Yes, Krefeld, of course, we have -- it's linked to the investment decision. So we will wait with the investment decision to see what happens. Marc-Simon Schaar: Yes. But again, I think very important to clarify that those -- the impact or the improvements from such investments are not included in the EUR 100 million restructuring measures, which we have. They still hold, and we are very confident to get those also, as communicated earlier. Tristan Gresser: Okay. So the government can still change course and it's still in parliament. And for the stated, on energy, how much of a benefit was it last year, or even this year? Usually, do you receive in Q4, Q1? What was the number? And is it in Europe EBITDA, Ferrochrome EBITDA? How does it work? Kati Horst: In Finland, it's about EUR 20 million, which is divided between Ferrochrome and stainless steel. But on Finland level, on group level, it's about EUR 20 million annual. Marc-Simon Schaar: Yes, from a cash impact and half of that with a P&L impact and the other one then requires investments into decarbonization. Tristan Gresser: Okay, that's very clear. And maybe last question, the Avesta melt shop, is the decision to be made still before year-end? Or can it be pushed to early 2026? Kati Horst: Well, we have progressed really well with our feasibility study. So that starts to be ready. But I think we still are looking at different options. So let's see what it looks like. I would think more probably next year's topic also given the current market environment. Marc-Simon Schaar: Tristan, I need to qualify, I think, not 100% sure in which way I said it. But the P&L impact is EUR 20 million, the cash EUR 10 million because you need to invest into decarbonization, just to make that sure, clear that we're on the same page. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Kati Horst: So thank you very much for joining our Q3 call, and thank you for being so active with very, very good questions. So market conditions in Europe continue to be challenging. That's something we have to deal with. That's why we are driving our cost restructuring plan to improve our competitiveness. At the same time, we are also taking steps with our EVOLVE strategy and investing in the pilot plant in the U.S. to develop our technology in enriched Ferrochrome and chromium metal. So thank you very much for joining and then talk to you again when we have the Q4 result ready. Thank you very much. Marc-Simon Schaar: Thank you.
Daniel Schneider: All right. Well, welcome to Photocure's Third Quarter 2025 Results. I'm Dan Schneider, President and CEO. And with me today is Erik Dahl, our CFO. A reminder that the usual disclaimers are in effect for today's presentation.  So I'd like to start with this slide, the strategic priorities and initiatives. It's our guide to how we execute and allocate resources across the company. At a high level, our strategy is centered around 3 key pillars: strengthening the core Hexvix/Cysview business, advancing blue light cystoscopy as a definitive standard of care in bladder cancer, and expanding our reach into the broader uro-oncology and precision diagnostics space.  The first pillar, accelerate and expand, is about delivering on our financial guidance for disciplined growth in revenue and EBITDA in our core business, and to continue generating operating leverage, which we continue to do so. It's also about driving the blue light cystoscopy mobile strategy, ForTec, in the U.S., and increasing penetration in EU, particularly in the priority growth markets, France, Italy, U.K. through blue light expansion and the image upgrades, most recently, Visera III, by Olympus. And thirdly, expanding our geographic footprint and leveraging our distribution partnerships across the globe.  In the second pillar, positioning and access, we're building on the foundations of BLC as a primary precision diagnostic, and you watch throughout today's presentation, I talk often about precision diagnostics in this space that's exploding as a tool to facilitate early and appropriate use of non-muscle invasive bladder cancer, the detection, the surveillance, and the therapeutic monitoring. Inclusive of life cycle management is demonstrated by our recent strategic collaboration to develop the world's first and only Blue Light AI system, which we'll discuss more later today.  We also want to support high-def Blue Light Cystoscopy technologies entering the market. Upgrades of the 3 big OEMs, so the big Wolf, Olympus, Karl Storz, support the efforts of other manufacturers who want to enter into the U.S. market via the reclass process that's still ongoing or other methods. And also the partnership with Richard Wolf on building an adoption in Europe for the flexible Blue Light Cystoscopy interim solution, while we continue to advance the development of the high-definition 4K state-of-the-art and world's only Blue Light flexible system for global use. These efforts will not only drive near-term growth, but will also solidify our long-term competitive positioning.  And finally, third pillar, acquire and transform. We are looking ahead and actively assessing opportunities within non-muscle invasive bladder cancer and the uro-oncology indications, which focus on rapidly growing interest in precision diagnostic indications, biomarkers, artificial intelligence, new technologies, digital pathologies, all about diversifying our portfolio and building on our commercial footprint and bladder cancer expertise.  The real-time examples would be Richard Wolf's collaboration on the blue light flexible high-def system and the ForTec mobile strategy employed in the U.S., both leveraging our existing commercial infrastructure in the broader uro-oncology segment. M&A is a focus this year in an effort to expand our footprint, grow faster, increase our ability to generate a strong cash flow into the future.  So I'm pleased with third quarter results, and the highlights are very evident. Overall, we had 12% product growth. That's 14% minus FX impacts. In North America, we delivered 14% unit growth and 12% product revenue growth. That would have been 19% without foreign exchange impacts, offsetting the continued Flex decline, which was measured at about minus 52% versus third quarter last year. I will remind everyone that Flex now has reached a level of below 5% of our total sales. There are several accounts that still use Flex sparingly, and we intend to keep them alive as long as we can to continue to generate data in anticipation of our future launch of the Richard Wolf collaboration.  The installed base of Saphira Blue Light equipment continued to increase with 7 tower placements and 7 upgrades in the U.S. In July, Karl Storz implemented a promotional program that does take time to take hold. So we expect this development and momentum to continue to build into Q4. We had a fantastic 20% unit growth in the rigid surgical market, inclusive of ForTec medical mobile solution. And actually excitingly, ForTec added 6 more rigid Saphira systems to their national fleet of rentals and began deploying them in September, underscoring the growing demand for Blue Light Cystoscopy in the U.S.  The number of active accounts increased by 23% year-over-year to 373 accounts, and this sets the stage for continued momentum into the future. In Europe, revenue was up 11% and units up 4%. We continue to execute in Europe with strong growth in the Nordics and DACH, driven by Olympus upgrades of the Visera III, and that continues to be a focus throughout Europe. Approximately 30% to 40% of the accounts in Europe use Olympus equipment and particularly strong, as we've talked in the past, in the Nordics, Germany, and France.  The launch early this year of the Olympus Visera III BLC-equipped system continues to gain momentum with 49 Visera installs in the field. The funnel is very strong. Our strongest country to date with conversions is actually Austria. So we're looking forward to the future of these continued upgrades and their impact because every upgrade has an impact of double-digit growth.  We generated positive EBITDA of NOK 10.2 million BD expenses of NOK 14.1 million. So when we look at our EBITDA, we look at an adjusted EBITDA, and that growth was to NOK 14.1 million positive. It's a 10th quarter in a row of positive EBITDA, continue building operational leverage throughout 2025, strong balance sheet of NOK 247.8 million in cash, and no term debt. And we completed the 500,000 share buyback program. On the news flow, on September 22, a new publication from the Italian Society of Urology, the first national recommendations on Blue Light Cystoscopy. Blue Light is recommended for the first TRBT, the second resection, and the recurrence of non-muscle invasive bladder cancer in populations of high risk, very strong recommendation in the Italian Society of Urology, and we expect that will start impacting the Italian market.  On September 16, a publication came out that was derived from the EU roundtable on bladder cancer. The recommendations published were based on an important meeting of experts in April of 2025 by the International Center for Parliamentary Studies, ICPS, that organized senior-level roundtable on bladder cancer with leading clinicians, industry experts, the EAU, and the World Bladder Cancer Patient Coalitions. The objective of the collaboration was to establish a set of recommendations for the EU and member state policymakers to enhance awareness, prevention, and optimizing early diagnosis and treatment of bladder cancer in Europe.  The resulting recommendations were published, and they basically stated about -- talked about equal access to advanced technologies, identifying tumors in bladder cancer that reduce the burden on patients and health care systems. Bladder cancer is one of the most costliest cancers to treat, and precision medicine and precision diagnostics are exactly the future, and that's exact positioning for Blue Light Cystoscopy.  On partner news, and we'll talk a little bit about this as well. I know many are questioning what's going on. Asieris announced that Cevira advanced to the second round of technical review, and anticipating an approval that would trigger an $11 million milestone. They are in active conversation with the NMPA, and there has been no pause in the process; they're moving forward. On October 15, we announced our strategic partnership with Intelligent Scopes Corporation, agreeing to develop the first and only blue light cystoscopy artificial intelligence, and more about that on my next slide.  So Intelligent Scopes Corporation, the U.S. subsidiary of Claritas HealthTech, is set up to develop an AI software for real-time tumor detection using Blue Light Cystoscopy.  The overview through this collaboration, Photocure and ISC are combining complementary strengths, Photocure's leadership in bladder cancer detection and ISC's deep AI expertise, to build an intelligent diagnostic platform designed to improve accuracy and consistency in tumor detection. The pilot program analyzed over 200 cystoscopy procedures with over 80,000 images. It demonstrated extremely strong early performance in detecting high-risk and early-stage lesions. It's a joint development work is underway, and the ENABLE clinical study is initiated in both U.S. and Europe. Following the development phase, we plan to pursue FDA and CE submissions, with Photocure holding exclusive perpetual global commercialization rights once the software receives its clearance. The rationale of the value creation we see in this -- the partnership is strategically important for several reasons. It strengthens our position as a reference company for next-generation cystoscopy, integrating artificial intelligence and Blue Light Cystoscopy. It leverages the synergy of AI and BLC to enhance the detection, accuracy, and completeness of tumor resection, which directly translates to better patient outcomes and stronger clinical adoption. It extends our technology moat around the data-driven precision care. Paving the way for future AI-enabled diagnostics in uro-oncology. Importantly, it adds a high-margin, scalable software component to our business model, creating durable value beyond our current consumable base. Moving to segment trends. So looking at North America and Europe, both delivered continued growth. In North America, the business has significantly overcome the continued decline of Flex surveillance market, which in the first half overall was minus 60%. It was minus 71% in Q1, minus 46% in Q2, while rigid surgical market delivered a 20% unit growth in Q3. In Europe, the Q3 units surpassed previous Q3 high watermarks as momentum continues to build throughout the region through upgrades. Europe is beginning to see the impact of the Visera 3 upgrades rollout, particularly in DACH, and I called out specifically Germany and Austria, France, and the Nordics with 49 through Q3, with more in the pipeline, particularly in the Nordics and the DACH region. Upgrades deliver positive double-digit impact. And a reminder on the impact of these upgrades, 40% of Europe is dominated by Olympus. So we see this as a significant development and opportunity for the European continent. Turning to North America and trends in North America. Sales still impacted by the downturn of Flex, but despite this, we see adjusted unit growth increasing 20% with the addition of the ForTec mobile solution. 14 new Saphira were installed at 7 upgrades, 7 new, adding to the active BLC account growth of roughly 23% year-over-year, and this bodes well for quarters ahead. The ForTec mobile solution now reaching 121 accounts as of the start of service. That's plus 19 from Q2, and over 185 different physicians have now had access to Blue Light Cystoscopy that otherwise would not have had access to it. This is up 19 accounts from Q2, demonstrating growing momentum and demand. And as I mentioned in the kickoff, ForTec has added 6 more Saphira systems to the fleet, bringing their total to 24. And it remains -- bringing access of Blue Light Cystoscopy in the U.S. remains a top priority as demonstrated by our efforts with the FDA in reclassification and reimbursement. Europe growth has also remained strong with solid growth in the DACH and Nordics, which make up a majority of the revenue, and the priority markets of France, U.K., and Italy seeing double-digit growth. As I mentioned, 49 so far, Visera III Olympus systems have been installed and has very strong healthy pipeline behind that as we move through Q4 and into 2026. The picture at the bottom is just a picture of the presence is our presence at DGU.'s the German Urology Conference held in Hamburg, Germany. Bladder cancer was one of the headline areas at ESMO 2025, which took place in Berlin just a couple of weeks ago, with significant momentum around earlier intervention. I'm excited to say that Blue Light Cystoscopy was frequently mentioned as the key to finding the right patients who can benefit from these precision medicines that are coming on the market, thus reinforcing the growing strategic and scientific interest in this space. Looking specifically U.S. and growth, significant growth in accounts of 23% of active accounts who have ordered at least once in the last 12 months. The ForTec accounts continue to be a significant portion of our business, reaching over 11% or 12% of our total, spiking up as high as 15%. We believe this is a strong business opportunity for Photocure, and we'll continue to support the ForTec initiative with the mobile solution. This slide is an illustrative representation. I think it's good to just sort of step back for a moment and look at where we're at and what we see as inflection points that can bring us significant growth potential. Despite the progress we are making, we are still in the early stages in the U.S. market and remains a single most important opportunity for Photocure and is significantly underpenetrated with less than 10% market share today. We have a long runway for growth as awareness, access, and equipment availability expands. Bladder cancer represents a major unmet need in the U.S. There are approximately 85,000 new cases every year and 0.75 million patients living with the disease. Across the U.S. and Europe, there are over 700,000 TRBT procedures and 1.6 million surveillance cystoscopies annually. The total addressable market for flexible cystoscopy exceeds USD 1.3 billion globally. And we believe Blue Light Cystoscopy, in particular, the one we're developing with Richard Wolf, is uniquely positioned to capture a meaningful portion of this opportunity. We expect several catalysts to help drive the next wave of growth in the U.S. market. First, improved CMS reimbursement, which we are pursuing through direct conversations with CMS and through legislative efforts in Washington, D.C. Both would further support adoption for BLC across academic and community settings. The return of the BLC Flex system to the market, with a proprietary development work with Richard Wolf, will enable broader access for outpatient and office-based procedures. In particular, in light of the many therapeutics are being used, the therapeutic monitoring aspects will be increasingly important. Entry of additional Blue Light OEM partners would expand the installed base and provide more choice to urologists in all types of institutions. And finally, the FDA reclassification of Blue Light Cystoscopy equipment, for which there is an ongoing citizens' petition. This could be a potential milestone that would significantly lower barriers and accelerate nationwide uptake. And overall, the momentum. The momentum in the macro environment as reinforced at ESMO, the expensive precision therapeutics are turning to precision diagnostics like Blue Light Cystoscopy as necessary to find the right patients who can benefit from their therapeutic. Taken together, these drivers support the long-term growth trajectory for the U.S. business that is both scalable and sustainable. The bottom line is we have a proven product with growing clinical endorsement and an enormous underpenetrated market, giving us a potential exponential upside as these catalysts materialize in the coming year. Our growth initiatives. Jud just really briefly hit on a couple of them. Two key updates. We now have 121 ForTec accounts actively using 185 different users, gaining experience to patients who would otherwise not have had access to Blue Light Cystoscopy. The Richard Wolf interim solution for Flex is on track. When I announced that a year ago, we said it's a 30-month development that is totally on track. And this would open up the market for a $1.3 billion total addressable market in the U.S. and EU5. Super excited about it. The final comment in the third box, as mentioned earlier, AUA, EAU, the trends are clearly blowing in favor of Blue Light Cystoscopy. The momentum and pressure continues to build behind the notion of accurate diagnosis and complete resections in line with the precision pathway for bladder cancer patient care. We believe Blue Light Cystoscopy can play a central part in determining that precision pathway, and that is being echoed at every conference we attend, currently. The precision pathway starts with a precision diagnostic like Blue Light Cystoscopy that leads to the right precision therapeutics that are bombarding the market. And most recently, there's been 5 most recent FDA approvals, 2 in the last several months. There are over 26 unique therapy-focused non-muscle invasive bladder cancer trials going on. Billions are pouring in, and they're looking for solutions in the diagnostic place, and we believe Blue Light Cystoscopy plays a central role going forward.  And 2 value-generating Asieris programs. The partnership continues to progress favorably. We have taken over $18 million in milestones across both programs, with the potential for significant cash in the future to help fuel our corporate ambitions. Here are the highlights of the 2 deals, which are very different.  On the Cevira out-license program to Asieris, the Cevira NDA remains under regulatory review for potential approval in China later this year into early next year. This will be one of the first Chinese-approved drugs before the rest of the world. In other words, they're getting the product approved in China first, and then they're going for the rest of the world. Typically, it's the other way around. What we can say is only what Assyis is publicly disclosed.  They are a public company in their annual report. They remain under review with the NMPA. If it approved, it would be the first product approved in China before rest of world. They've had meetings with the EU and U.S. regulators to determine a way forward in both these large markets. in U.S. and EU. And Asieris also disclosed interest in pursuing a secondary indication, which brings additional milestones to Photocure upon approval.  On the Hexvix commercial partnerships, we're still awaiting the approval of the Richard Wolf Blue Light system that could come at the end of this year or early 2026, with a 2026 commercial launch of Hexvix in China. And with that, I'd like to turn it over to Erik to review the financials.  Erik Dahl: Thank you, Dan. So I will give an overview of the third quarter financials, including the consolidated income statement. We're looking at the segment report for our 2 main segments. And finally, we'll be looking at the headlines for the cash flow as well as the balance sheet.  A couple of words about foreign exchange first, year-over-year and measured by unweighted monthly averages, the Norwegian kroner in Q3 appreciated 5.7% against dollars and depreciated 0.3% against the euro. If you measure this in kroner, the year-over-year FX impact for Q3 revenue was negative approximately NOK 3.4 million, and for OpEx, positive approximately NOK 2.9 million. And the consolidated impact of foreign exchange on EBITDA was negative approximately NOK 0.5 million.  Final remark, as always, all financials in the presentations are in Norwegian kroner unless other currency is specified. Now I go looking at the consolidated income statement. Hexvix/Cysview revenues in the third quarter increased year-over-year 12% to NOK 134 million, which follows the trend from the record second quarter.  The revenue increase was mainly driven by a combination of volume increase of 6% and higher average pricing in both regions. Partially offsetting this was the expected decline in the flexible kit sales in the U.S. and the impact of foreign exchange. Total revenues in the third quarter increased 12% to NOK 135 million. No milestone payments have been received in the third quarter for either year. Year-to-date, total revenue increased 3%, impacted by milestone payments received from Asieris in Q2 last year related to the development of Cevira.  Q3 total operating expenses, excluding depreciation and amortization, but including business development, were NOK 112.8 million compared to NOK 107.3 million Q3 last year. The increase is mainly driven by business development expenses, merit, and inflation. Foreign exchange had a positive impact on operating expenses of approximately NOK 2.9 million.  Operating expenses, excluding business development expenses, were NOK 109 million compared to NOK 106 million in Q3 last year, an increase of 3%, reflecting merit and inflation. As previous quarters, personnel expenses were relatively stable year-over-year, except for the merit increase. However, project-driven expenses, particularly within business development, may vary significant year-over-year as well as sequentially between quarters.  Business development expenses in Q3 were NOK 3.9 million compared to NOK 1.2 million in Q3 last year. The expenses relates mainly to advisory services, market research activities, and legal fees related to partnership contract support.  EBITDA in Q3, including business development expenses, was NOK 10.2 million compared to last year of NOK 5 million. The company did not receive milestones in Q3 this year and last year.  EBITDA, excluding business development expenses, was for Q3 NOK 14.1 million compared to Q3 last year of NOK 6.3 million, an improvement of NOK 7.8 million from Q3 last year, reflecting improved operating leverage for our core business.  Depreciation and amortization was NOK 7.3 million in Q3. Main cost item was [indiscernible] of the intangible assets related to the return of the European business from Ipsen. Net financial items in Q3 were a cost of NOK 3.3 million compared to a net cost of NOK 2.8 million Q3 last year. And net financial costs were driven by foreign exchange losses as well as accrued interest costs included for the deferred earn-out liability due to Ipsen, offset by gains on foreign exchange and incurred interest income.  Net profit after tax was NOK 4 million for the third quarter, compared to a loss of NOK 3.5 million in Q3 last year. Now let's look at the segment performance. Next slide, please.  In segment reporting, we will focus on the 2 main segments, North America and Europe, and I'm starting with North America segment, which includes U.S. and Canada. Revenue for North America increased 12% in Q3 to NOK 54.8 million. The increase was driven by volume growth of 14% and higher average pricing. However, the growth was partially offset by $3.4 million unfavorable impact from foreign exchange. The volume growth was driven by increased volume for the rigid market, including ForTec Mobile. This was partly offset by the impact of the phase-down of system usage in the Flex segment. However, the impact from the Flex decline gets less and less over time. Q3 direct cost, NOK 42.1 million, below Q3 last year. Cost containment and revenue growth has resulted in significant improvements in financial results for the North America region. The contribution has more than doubled to NOK 9.9 million and have secured an EBITDA close to breakeven for the quarter.  Also, our European business had a positive development in the third quarter with year-over-year revenue growth of 11%, mainly driven by DACH and Nordic. We also experienced strong growth in priority growth markets such as U.K. and Italy. Q3 direct costs decreased 9% year-over-year, driven by headcount adjustment. We ended Q3 with a contribution of NOK 38.2 million, which is 48% of revenue, and EBITDA was NOK 19.7 million, driving an EBITDA margin of 25%.  Now let's look at the cash flow and balance sheet. Next slide, please.  So I'm looking at cash flow first. And as usual, I'm focusing on year-to-date cash flow and ending balance. Year-to-date cash flow from operations was positive NOK 26.4 million compared to positive NOK 61.1 million last year year-to-date. The difference is mainly due to the milestone of NOK 21.6 million received from Asieris Q2 last year, as well as the development in working capital driven by increased product revenue year-over-year.  Cash flow from investments was NOK 7.2 million year-to-date and includes interest received and paid and investments in intangible and tangible assets, including partnerships with ISG and Richard Wolf. Cash flow from financing year-to-date was negative NOK 65.3 million compared to negative NOK 32.8 million year-to-date last year. And the amount is driven by the Ipsen earn-out payment for both years, as well as the share buyback programs current year. In total, we paid NOK 29.6 million for the 500,000 shares we acquired this year. Year-to-date, the net cash flow was negative NOK 46.1 million compared to positive NOK 31.5 million year-to-date last year. The 2 main drivers for the decline are, first of all, the Asieris milestone last year, but also the share buyback program this year. Excluding the share buyback program, we had year-to-date a positive net cash flow of NOK 16.5 million, of which NOK 8.7 million in the third quarter. So I believe we're reaching -- we have reached a turning point, being cash flow positive. We see it now. Looking at the balance sheet, we ended the quarter with total assets of NOK 696 million. Noncurrent assets were NOK 322 million at the end of Q3, and this included customer relationship with NOK 83 million. Customer relationship is the intangible asset identified with the purchase price allocation for the Ipsen transaction. Noncurrent assets also include goodwill from the Ipsen transaction of NOK 144 million, a tax asset of NOK 53.7 million, and intangible and fixed assets totaling NOK 41 million. Inventory and receivables were NOK 122 million at the end of Q3 compared to NOK 131.8 million at the end of Q2 this year. Long-term liabilities of NOK 122 million include the earn-out liability related to the Ipsen transaction, totaling NOK 104 million at the end of the quarter. And finally, equity at the end of the quarter was NOK 486 million, which is 70% of total assets. And this concludes the financial section. Thank you. Dan, it's back to you. Daniel Schneider: All right. Well, thank you, Erik. Thank you very much. So as you can tell by Erik and I's tone, we're very excited about not only the quarter, but where Photocure is and how we're positioned going forward. We had 12% global product revenue year-over-year, and we continue to execute on the key initiatives. We had positive EBITDA of NOK 10.2 million, and I think adjusted EBITDA of over NOK 14 million, and that's 10 quarters in a row of positive EBITDA. And as Erik said, it's starting to translate down into the cash flow with positive cash flow. Ex-BD and milestones, it's NOK 14.1 million, but we continue to invest in key growth initiatives that we believe will make a difference. One, positioning ourselves for long-term success; two, generate future revenue growth opportunities; and three, increasing our operating leverage. In the flex and surveillance market, it's now and in the future. Richard Wolf and Photocure's joint development is on track, and we expect another 15 or so more months of development with market readiness in 2027. In the interim, we are beginning reintroducing the interim Flex by Richard Wolf. The first cases took place in the U.K. in July. They've gone quite well. The idea of this is to keep the interest and generate the data in anticipation of our launch of the high-def 4K system. In North America, the account growth was substantial with installs, upgrades, and mobile. Product revenue grew at 12%, unit sales, plus 14%. We grew our active accounts by over 23%. We had 24% growth in Q2, 17% growth in Q1, 11% in Q4. So you can see the momentum continuing to build behind it. And as I mentioned earlier, our greatest opportunity is the underpenetrated U.S. market with less than 10% share. There is such an opportunity there, and there are a lot of really good initiatives and inflection points we anticipate as we move through 2026. We continue to work with Karl Storz to grow the installed base of Blue Light scopes in the U.S. And it's a key initiative for Karl Storz as well. They have approximately 130 to 150 standard definition machines in the U.S. still deployed, and they're looking to upgrade them. And with all our upgrades, regardless of who the OEM is, they bring usually double-digit on average, double-digit growth in those accounts once they convert to the high-def systems. The ForTec national mobile rollout continues to gain traction. They added 6 more towers. Those will start having their impact in Q4 going forward. They'll continue to add more over time as demand grows, but we're really excited to now have a fleet of 24 deployed nationally in the U.S. And there's over 120 accounts and nearly 200 users now utilizing Blue Light Cystoscopy, who otherwise would not have had access to it. In Europe, the revenue grew 11% with 4% unit growth, DACH and the Nordics, and the priority growth markets kicking in. We continue to facilitate the quality image upgrades with our nearly 600 target accounts. And we believe that the Olympus Blue Light upgrade will help strengthen this initiative. There's been 49 upgrades since January. And Germany, France, and Nordics are now kicking in with strong pipelines and aligned interests with Olympus. Strong cash balance at NOK 247.8 million. And as Erik mentioned, we've added cash to the balance sheet. We continue to advance several business development initiatives in next-generation precision diagnostics, inclusive of our partnership with Intelligent Scope Corporation, or Claritas as known as a subsidiary, to develop AI software for real-time support during Blue Light Cystoscopy procedures. And let's look forward to anticipated milestones and corporate objectives. So we've narrowed the guidance, 8% to 10% from the original 7% to 11% guidance. We expect year-over-year EBITDA improvement and increased operating leverage to flow through. We also see increased Cysview and Hexvix account utilization through upgrades and installs, and the increase in development of the mobile solution in the U.S. We're going to advance the development of the next-gen state-of-the-art 4K high-def Flex systems to access and unlock the potential within the 1.2 million surveillance procedures done in the U.S. and EU5. We continue also to expedite the strategic partnership with ICS, Claritas, to develop BLC artificial intelligence, which is what we believe will be a game changer in bladder cancer precision diagnostic care. We continue to generate data and have presentations, in particular, with health economics and positioning Blue I Cystoscopy as the go-to precision diagnostic in bladder care. We want to increase BLC in the U.S. vis-à -vis the C' petition or other alternate pathways to U.S. approvals. So we're supporting the capital equipment guys coming into the U.S. and of course, supporting Asieris' progress across both Hexvix and Cevira with potential to receive significant milestones in the future. And with that, I think we can go to Q&A. Thank you. Erik Dahl: Thank you, Dan. There are usually a number of questions regarding Cevira. So we will take them into one. So could you put some more flavor about the Cevira approval process? Daniel Schneider: I mean it's a typical process in China. There's nothing unusual that's taken place to date. We cannot say any more than Asieris has said publicly. And I know many of the listeners are monitoring the Asieris public airways and the NMPA. We do the same. We get our information the same way. So at this point, they still remain very positive. And I mean very optimistic on an approval. I think they're just working through like we do in the U.S. or any other country, working through the conversation with the authorities to get themselves to where they can get their approval. So more to come. Erik Dahl: 2 new scope manufacturers looking to enter the U.S. market file their FDA submissions yet? If not, when do you expect this to happen? Daniel Schneider: They have not. Of course, no one can file anything in the U.S. right now because our government is shut down. So they're not accepting. There's always something, right? So as soon as the government reopens, I think both manufacturers will probably be in early 2026 is my anticipation, if not sooner.  Erik Dahl: The updated revenue growth guidance indicates a slower growth rate in Q4 compared to Q3. Could you elaborate on the drivers?  Daniel Schneider: I think the way to approach is to have a look at the last year, the 2024 fourth quarter revenue, which was the record year up to that time. And I want to be careful in terms of prognosis or estimating a revenue, which is above or significantly above what we had before. So it's core.  Erik Dahl: What was the growth impact of shipments to the wholesale market in Europe? And was there any stocking of kits from ForTec?  Daniel Schneider: I think we're talking about somewhere -- top of my head, somewhere between 150,000 and 200,000. Yes. And I can add ForTec. So Forteq does not buy the kits for the accounts by the kits. The way the process goes is that ForTec engages the account with us. We work through the formulary approval needed to get our products shipped in. We set up the account. ForTec sets up the procedural day, and then we ship the product directly to the account, and then the procedure goes off. So the account is the one. Generally, they don't stock a bunch of inventory. It's usually just in time or near time for the procedure.  Erik Dahl: How are Olympus new placements in Europe tracking with the targets for the year?  Daniel Schneider: Very good. Actually, extremely good. Like I said, we have 49 Visera already upgraded. They have a very healthy pipeline, double that size. I don't know that we'll get the other half of that pushed through this year, but we still see a significant upgrade coming through Q4. And if you think about it, and this is just more high-level, of the 600 or 700 accounts, if 30% or 40% of those are Olympus accounts, that's roughly 200, 240 accounts, and we've got 50 of them already upgraded, and maybe another 40 to 50 coming in the near term.  That's a healthy upgrade. And as I mentioned, every upgrade on average brings a double-digit growth to that account. So we're really excited about the development here. And again, it's all about positioning as well because the folks at Olympus have white light, they have MDI, and they have blue light. And all 3 are important in the diagnosis of a patient. So we're getting a really nice positioning of blue light, particularly for high-risk patients.  Erik Dahl: What is your view on the timeline of a potential down class?  Daniel Schneider: I don't know. And the government shutdown. Honestly, we created optionality. And I think that's the thing everyone should focus on. The system petition and going through governments, everyone is part of the government that's on this call. I think we all have sort of a general opinion that it's often difficult and bureaucratic. That hasn't stopped us. We put a tremendous amount of pressure. It's been all of Photocure's work, getting the KOLs, the capital equipment manufacturers, patients, therapeutic companies, all the right into that system petition, urging the FDA for this reclass.  The FDA closed the system petitions public portal last December, I believe it, somewhere around then. So we know it's under consideration, but it's about initiating it and picking it up. In the meantime, I think more importantly, what we should focus on is the ultimate goal. And the ultimate goal is to get multiple capital manufacturers into the U.S. market. And as I mentioned in the question earlier, there are a couple of manufacturers, and we're working with all of them to find a pathway into the U.S. market because it is a tremendous opportunity. And we believe having more manufacturers in this marketplace, especially with hospitals that have preferred vendor relationships, will open this market up drastically.  Erik Dahl: There are several questions about ForTec, so we will cluster them into one. What does ForTec say about the utilization of the towers currently?  Daniel Schneider: They excited. This has exceeded their expectations. The way they look at it -- you've got to remember, their towers are moving from one location to the next every day of the week. So, what they try to do and they encourage it financially as well in terms of case costs is they try to stack cases at hospitals. So if you're a hospital and you want to try Blue Light Cystoscopy, they encourage the physician, we support it as well, to not just do one case because you basically bring a tower in for just one case.  They want to stack several cases. But that's always patient-dependent. And not every patient comes in on a Tuesday and has a Blue Light procedure. But they do the best they can. They want to continue to consolidate procedures into 1 day and get the most out of every tower. But their #1 objective is to treat every patient who wants Blue Light Cystoscopy and every physician who wants to use it.  Erik Dahl: The wind-down of revenue from Flex is almost complete. Growth in the Regis segment is strong in the U.S. Do you expect this strong growth rate from Regis in the U.S. to continue beyond 2025?  Daniel Schneider: I do. And I think the way to look at this is at one time, Flex was nearly 20% of our business. This is less than 2 years ago, 20% of our business, and we've turned it around, gobbled all that up, and now we're growing at 20% in the regional market. It's quite astounding. And I don't see any reason for it to slow down. I think the mobile solution has really added some jet fuel to our efforts. I think Karl Storz has a renewed focus in this area. I think the overall macro environment with these expensive therapeutics coming out has also added to the interest in Blue Light Cystoscopy.  So I don't see any slowdown here. It might fluctuate around those growth rates. Maybe it's high teens, maybe it's 20%, but I don't see a slowdown to this, and I see more and more opportunity in the U.S., especially as more OEMs come into the marketplace in hopefully 2026 sometime.  Erik Dahl: Long-term gross margin level do you currently expect?  Daniel Schneider: I expect to see better than what we see in the P&L right now because we've had some adjustments this year. So I expect the gross margin to go down to approximately the level that we've seen before.  Erik Dahl: And we have a couple of questions regarding AI. So, can you elaborate on the preliminary study in the BLC study?  Daniel Schneider: Yes. I think the way to look is if you layer AI onto white light, you get one level of artificial intelligence support. And it's really a decision as a physician support system. But what ICS/[indiscernible] is super excited about is when you look at Cysview and Hexvix, it is instilled into the bladder. It is a metabolic biological effect. What it does is it produces texture patterns and color changes that aren't visible and aren't accessible under white light. And that leads them to believe that this could go much further, typically identification.  In addition, you got white light. And if there's an AI white light, it's only going to learn from what white light sees. And we all know, everybody on this call knows that white light misses 30%, 40% of the tumors, especially CIS, flat lesions, right?  Blue light is going to see more than white light AI. And AI blue light, we believe, could lead to better segmentation, stratification, and decision-making by physicians. We think it's a game-changer. And that's the way ICS is seeing it, and they're super excited about this. When I say super excited, like they really couldn't wait to partner on this project. So we're really excited about this.  Erik Dahl: We have one more question here. Could you give us a quick recap of your tax position carry-forward loss in the U.S., both on and off balance sheet?  Daniel Schneider: I guess you're talking about the tariffs.  Erik Dahl: Your tax position.  Daniel Schneider: Loss carryforward. Yes. Well, obviously, there has been interest among the auditors about our tax loss carryforward, and in terms of the debt that the U.S. has. We're evaluating what's going to happen with that right now, but it's too early to say what the consequence will be.  Erik Dahl: Thank you so much. That concludes the questions we have received online. So, back to you, Dan.  Daniel Schneider: All right. Well, great. Well, thank you all for joining. I'm super happy with where the organization is. I think we've had a lot of challenges in the past years, but the agility and resilience have come through, a strong balance sheet, and a strong company poised to really make a difference in bladder care. When this macro environment is really emerging, we've got an opportunity to be a major player. And I think mostly, if you look at the U.S., the opportunity is immense, and we have some inflections coming in as we turn the corner into 2026. So thank you for joining us. I think we'll see you on February 18 for Q4. Until then, have a great week and great holidays.
Operator: Good afternoon, and thank you for standing by. Welcome to the MiMedx Third Quarter 2025 Operating and Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Matt Notarianni, Head of Investor Relations for MiMedx. Thank you. You may now begin. Matthew Notarianni: Thank you, operator, and good afternoon, everyone. Welcome to the MiMedx Third Quarter 2025 Operating and Financial Results Conference Call. With me on today's call are Chief Executive Officer, Joe Capper; and Chief Financial Officer, Doug Rice. As part of today's webcast, we are simultaneously displaying slides that you can follow. You can access the slides from the Investor Relations website at mimedx.com. Joe will kick us off with some opening remarks and a summary of our operating highlights as well as a discussion of our financial goals, and Doug will provide a review of our financial results for the quarter. And then Joe will conclude before we make ourselves available for your questions. Before we begin, I would like to remind you that our comments today will include forward-looking statements, including statements regarding future sales, operating results and cash balance growth, future margins and expenses, our product portfolios and expected market sizes for our products. These expectations are subject to risks and uncertainties, and actual results may differ materially from those anticipated due to many factors, including competition, access to customers, the reimbursement environment, unforeseen circumstances and delays. Additional factors that could impact outcomes and our results include those described in the Risk Factors section of our annual report on Form 10-K and our quarterly report on Form 10-Q. Also, our comments today include non-GAAP financial measures, and we provide a reconciliation to the most comparable GAAP measures in our press release, which is available on our website at mimedx.com. With that, I'm now pleased to turn the call over to Joe Capper. Joe? Joseph Capper: Thanks, Matt. Good afternoon, everyone. Thank you all for joining us for today's call. I'm very pleased to report that our third quarter performance was outstanding across the enterprise, generating strong top line growth in both our Wound and Surgical franchises. We set new company highs for quarterly revenue, adjusted EBITDA and adjusted EBITDA margin, which added $23 million of cash in the quarter. I am extremely proud of the team's focus, which drove these superior results. We continue to prove we can adjust to challenges and advance on opportunities whenever they arise. As such, we are once again raising our full year 2025 revenue growth guidance and our expectations for adjusted EBITDA margin. Our goal for the remainder of the year is to maximize near-term opportunities to ensure a strong finish and usher in the pending Medicare reimbursement reforms from a position of strength. The final rules are likely to be implemented at the start of 2026, and we are well prepared for a range of potential scenarios, especially given the dramatic financial improvements we made to the business over the last few years. I will touch on some of the highlights of the quarter and then provide an update on our strategic focus, which I'm confident will help you understand why we are so bullish about the future for MiMedx. For the third quarter, year-over-year net sales growth was an exceptional 35%, finishing at a record $114 million. Our adjusted gross profit margin was 88% in the quarter. Adjusted EBITDA was $35 million or 31% of net sales. We continue to build cash, ending Q3 with $124 million in net cash, a sequential increase of $23 million for the quarter, and we expect to end the year with a net cash balance of more than $150 million. Our Surgical business was an important contributor, growing 26% this quarter, driven by the continued growth across the portfolio. We now have over half of the target patients enrolled in our EPIEFFECT randomized controlled trial, and we have recently completed an interim analysis with favorable results. We launched a few strategic collaborations with companies offering complementary solutions in the wound care market, and we continue to evaluate additional products to expand our portfolio for both our wound and surgical businesses. In terms of our strategic focus, we continue to make excellent progress in the 3 areas we have consistently highlighted as the most important for our long-term growth. Our top strategic priority is to continue to innovate and diversify our product portfolio. As you have witnessed, one of the ways we have been able to maintain strong momentum in the business has been with the introduction of products designed to address the numerous unmet needs in both the wound care and surgical markets. In this year alone, we continued with the full market release of EPIEFFECT, licensed and introduced HELIOGEN, CELERA and EMERGE, and we have just begun the rollout of EPIXPRESS. A randomized controlled trial for EPIEFFECT continues to progress on schedule. As mentioned, we have over half of the target number of patients enrolled and randomized, which provided sufficient data for interim analysis and manuscript submission. These favorable results will be presented tomorrow at the Tissue Repair Evidence Summit. This is excellent news as we will then have completed all the necessary steps to request reimbursement coverage for EPIEFFECT as required by the pending LCDs. On our last call, I mentioned that we had received a TRG letter for EPIXPRESS, which confirmed its status as an FDA Section 361 product. EPIXPRESS is a fenestrated allograft designed to be used in post-acute cases where the flow or extraction of fluid is of critical importance to the healing process. The full market release of EPIXPRESS is now underway and the early feedback is extremely positive. CELERA and EMERGE allografts we licensed to remain competitive in the private office marketplace until Medicare reform is enacted, both performed well in the quarter, contributing to our growth in wound care. We also continued executing on the previously announced co-marketing pilot with Vaporox. As a reminder, the Vaporox system named VHT or vaporous hyperoxia therapy is a 510(k) cleared device that delivers ultrasonic mist and concentrated oxygen for the treatment of 9 types of hard-to-heal chronic wounds, including diabetic foot ulcers, venous leg ulcers and pressure ulcers. We are receiving excellent early feedback about this solution. Our second priority is to develop and deploy programs intended to expand our footprint in the surgical market. To achieve our continued success in this area, exemplified by our 26% surgical revenue growth in Q3, we have committed significant resources toward the introduction of products like our Xenograft Particulate HELIOGEN, additional commercial resources and development of robust real-world evidence demonstrating the potential clinical benefits for patients, the health care economic payoff and the immense business opportunity for MiMedx. By way of example, we've mentioned the use of our technology in anastomosis procedures a few times in the past. One of the most common complications from those procedures are leaks, which occur in upwards of 9% of patients who undergo colorectal surgery and are associated with statistically significant increases in morbidity, mortality, length of stay and rehospitalization. The cost associated with these complications is estimated to be approximately $28 million for 1,000 patients, making anastomotic leaks a nearly $14 billion challenge for the health care system. As we have demonstrated in peer-reviewed publications, the application of AMNIOFIX as a protective barrier to the surgical closure site has proven to help reduce anastomotic leaks by nearly 50% and readmissions by approximately 40%, which would provide massive savings. Given there are over 500,000 colorectal surgeries per year in the U.S., our TAM is in excess of $500 million for AMNIOFIX just in colorectal procedures. We will continue to make these critical investments and expect to generate evidence across a variety of procedures. Our third initiative is to introduce programs designed to enhance customer intimacy. As we have mentioned, we believe the way we interact with our customers and our company's comprehensive value offering will help drive engagement and retention, especially as we transition to a reimbursement environment where profit potential is no longer a primary driver in product selection. We continue to invest in ways to enhance these relationships, including increase and improved customer interaction at various levels within the company. We also continue to experience excellent adoption of MiMedx Connect, our proprietary customer portal. In the third quarter, we saw sequential sales growth of nearly 60% for orders managed within MiMedx Connect. We also recently added bill pay functionality within Connect for online payments and invoicing, and we are actively developing additional features to this system designed to improve workflow and strengthen the bond between MiMedx and our customers. We believe our commitment to this approach will lead to enhanced customer relationships, improved Net Promoter Scores, higher margins and ultimately an increase in the average lifetime value of a customer. On last quarter's call, we discussed the reforms CMS plans to implement to address the runaway fraud waste and abuse plaguing the skin substitute market. As a reminder, CMS announced the following initiatives. First, at the end of June, CMS introduced the wasteful and inappropriate service reduction or Wiser model, which is focused on leveraging artificial intelligence and machine learning in concert with human clinical review to curb broad waste abuse in health care. This voluntary model, which aims to encourage safe and evidence-supported best practices for treating Medicare beneficiaries will run from January 1, 2026, through December 31, 2031, in 5 states and will examine several product categories, including skin substitutes. Next, in July, CMS posted the proposed physician fee schedule or PFS, and the Outpatient Prospective Payment System, or OPPS, for calendar year 2026. These proposed rules move away from the ASP methodology in the private office and the bundle in wound care centers in favor of a fixed payment for skin substitutes of $125.38 per square centimeter in all outpatient sites of care, private offices and wound care centers alike. We submitted our comments to the proposed rules in September, recommending CMS consider setting a higher application fee for providers covered by the PFS, reimbursing skin substitutes as pass-through items, setting the fixed price using other reasonable inputs we highlighted, resulting in a relatively modest increase in the price per square centimeter, applying an inflationary index moving forward and phasing in the price change over time. We believe these suggestions taken together would compensate providers appropriately for the important work they do, eliminate perverse incentives to overutilize skin substitutes and ensure product developers continue to invest in cutting-edge technologies and solutions, all while saving U.S. taxpayers, the Medicare trust fund and beneficiaries billions of dollars. Final rules are expected to be published in November to take effect at the start of the new year. Lastly, the much discussed LCDs are scheduled to go into effect on January 1. It remains to be seen if they will be modified and/or delayed once again. But as I said earlier, we are well positioned for any scenario. As we stated in the past, we are extremely confident of the company's position post Medicare reimbursement reform. When product performance is once again the primary factor driving product selection, our best-in-class technology will carry the day. Let me offer 3 facts in support of this statement. First, in 2023, we grew our business by 20% with constant pricing. It was all volume-related growth driven in part by the introduction of a few new products and commercial execution. This was just about the time we started to see a rapid uptick of new high-priced skin substitutes entering the market, which subsequently caused our growth to slow. Second, in the surgical market, where profit potential does not so overwhelmingly drive product selection, we have been outperforming in the market as evidenced by our 26% growth in the third quarter. And third, we've recently introduced a few wound products that are "more competitively priced. While these products are priced below the mean of other available products on the market, they have been enough to stem the attrition of customers in search of these opportunities. These 3 points illustrate that the profit potential is not such an outsized motivator in product selection and performance and outcomes are of greater importance, MiMedx grows faster than the market. We also expect to see a number of competitors decrease in the wound care market when the reimbursement reform goes into effect as certain business models will become significantly less attractive. We, therefore, see this as an excellent opportunity to pick up market share. Before I turn the call over to Doug for a detailed financial review of the quarter, I'd like to share some of my thoughts on guidance. First, we had a great third quarter, and we expect to finish the year in a similar fashion. As such, we are increasing our full year 2025 revenue growth rate outlook from the low teens to the mid- to high teens. We also now expect our full year adjusted EBITDA margin to be at least in the mid-20s as a percentage of net sales. Second, we were no doubt trying to determine how to model the business for 2026 post the implementation of the proposed reforms. We are somewhat in the same boat. However, it would not be prudent to project the base case from the proposed numbers and current volumes given the other factors which will no doubt benefit our business. Until we have clarity on the CMS final rules for the PFS and OPPS, which have yet to be published, we do not want to overspeculate. At a higher level, we do expect some choppiness in the early part of the year as the industry navigates the changes. Still, we welcome these reforms and expect the change will bring much needed stability and predictability to the market. We firmly believe that the change is an opportunity for MiMedx to pick up share due to our numerous competitive advantages. We have a fully vertically integrated business from product development to manufacturing to commercialization, including donor recovery. We have an excellent, robust and defensible intellectual property portfolio. We have arguably the most comprehensive and effective commercial organization in this space. And over the past 2.5 years, we have dramatically improved our financial position to include an anticipated net cash balance of more than $150 million by year-end. I've been running med tech companies for decades, and I can tell you that these types of events have a way of shaking out the marginal players. Our fundamentals are solid, and we are going to leverage our competitive advantages to ensure continued success in this new area. That is why I am incredibly bullish regarding the prospects for MiMedx. Now let me turn the call over to Doug for a more detailed review of our financial results. Doug? Douglas Rice: Thank you, Joe, and good afternoon to everyone on today's call. I'm pleased to review our results with you all today. As a quick reminder, as Matt mentioned at the top, many of the financial measures covered in today's call are on a non-GAAP basis, so please refer to our earnings release for further information regarding our non-GAAP reconciliations and disclosures. Moving on to the results. Our third quarter 2025 net sales of $114 million represented 35% growth compared to the prior year period. By product category, third quarter wound sales of $77 million increased 40% versus the prior year period, while surgical sales of $37 million were up 26%, reflecting strong results across both of our franchises. We saw significant contributions across our business in the third quarter. In Wound, our third quarter performance was driven by new product sales of CELERA and EMERGE. In our Surgical franchise, AMNIOFIX and AMNIOEFFECT once again delivered strong double-digit year-over-year increases in sales, and our particulate products also demonstrated strong growth on a year-over-year and sequential basis. Our third quarter 2025 GAAP gross profit was about $95 million, a 38% increase compared to the prior year period. Our GAAP gross margin was 84% in the third quarter 2025 compared to 82% last year. Excluding the incremental acquisition-related amortization expense in the quarter, our non-GAAP adjusted gross margin was 88%, up about 540 basis points compared to the third quarter of 2024. This increase was primarily a result of product mix as well as the timing of positive production variances. In light of the strong year-to-date results, we now expect our full year non-GAAP gross margin to be around 85%. Turning to our operating expenses. GAAP sales and marketing expenses were $54 million or 47% of net sales in the third quarter compared to $42 million or 50% of net sales in the prior year period. The dollar increase was due to a combination of increased sales costs, including higher commissions associated with both higher sales as well as the changes we made to our sales commission plans in the middle of 2024. As a result of our year-to-date results, we now expect full year 2025 sales and marketing expenses to be between 49% and 50% of net sales, which would be a modest improvement on a percentage of sales basis compared to 2024, albeit up in absolute dollars. GAAP general and administrative expenses, or G&A, were $15 million or 13% of net sales in the third quarter compared to $12 million or 14% of net sales in the prior year period. The dollar increase was driven by incremental spend from legal and regulatory disputes in the current period, including our ongoing litigation with certain competitors and former employees. As with other OpEx lines, we expect GAAP G&A to grow in absolute dollars for the full year 2025 and to be about 14% to 15% of net sales. Our third quarter R&D expenses of $4 million or 3% of net sales was up $800,000 compared to the prior year period. Our R&D expenses are primarily comprised of the costs associated with our EPIEFFECT RCT as well as additional spend related to the development of future products in our pipeline. As Joe mentioned, we have prepared an interim analysis of the EPIEFFECT RCT and have submitted it for publication and presentation later this year in support of any potential Medicare coverage requirements. As we think about the full year, we expect R&D expenses to be about 3% of net sales. GAAP income tax expense for Q3 2025 was around $6 million, reflecting an effective GAAP tax rate of 27%. We continue to expect our long-term non-GAAP effective tax rate to be 25%. Our third quarter GAAP net income was $17 million or $0.11 per share on a diluted basis compared to GAAP net income of $8 million or $0.05 per share in the prior year period. Adjusted net income for the third quarter was $23 million or $0.15 per share compared to $10 million or $0.07 per share in the prior year period. Third quarter adjusted EBITDA was $35 million or 31% of net sales compared to $18 million or 22% of net sales in the prior year period. Sequentially, our third quarter adjusted EBITDA grew by nearly $11 million as we focus on expense management that enables our sales increases to drop to the bottom line. Turning to our liquidity. We continue to bolster our balance sheet and position the company to make growth investments. In the third quarter, the business generated $29 million in free cash flow, a record for the company, and our net cash position rose to $124 million. The steady improvement in our balance sheet provides us with the ability to evaluate a range of organic and inorganic investments, and we believe we have a healthy amount of combined firepower between cash on hand and borrowing capacity to help continue to grow and diversify our business. I will now turn the call back to Joe. Joe? Joseph Capper: Thanks, Doug. As you just heard, we had an outstanding quarter and expect a strong finish to the year. We set record highs for revenue and adjusted EBITDA with strong growth in both the Wound Care and Surgical businesses. We continue to generate excellent cash flow. We launched EPIXPRESS. We advanced a few pilot programs to co-market complementary solutions in the wound care market, and we increased our 2025 guidance meaningfully to reflect our strong momentum. As far as the upcoming wound care reimbursement reform is concerned, it is a matter of when, not if this is going to happen. The current trends are not sustainable. We hope these much-needed reforms incorporate our recommendations. We believe they would be beneficial to all stakeholders. And as I said, we are confident in our ability to excel when the industry resets to the proposed guidelines. In closing, I would like to once again thank the MiMedx team for a tremendous quarterly performance and for your unwavering commitment to our mission and the many individuals we have the good fortune to serve. Let's now shift to Q&A and open the call to questions. Operator, we are ready for our first question. Please proceed. Operator: [Operator Instructions] Our first question comes from the line of Frank Takkinen with Lake Street Capital Markets. Frank Takkinen: Congrats on a really nice quarter. I was hoping to start with the guide for the rest of the year. How should we be thinking about kind of contribution from wound versus surgical? Obviously, we still have the wound policy in place through year-end, and that might change at the beginning or likely will change at the beginning. But should we continue to expect that, that grows really heavily? And then should we continue to expect that surgical business too as well? Just trying to kind of get a little bit more of the variables behind the Q4 guide. Douglas Rice: Thanks, Frank. This is Doug. Good question. We're obviously super happy with record revenue for the quarter, led by 40% growth in our wound franchise and 26% in Surgical with regards to the guide and how that looks going forward, I would -- we continue to expect strong uptake in the surgical suite. And so I would think that, that momentum continues into Q4 and the wound business and franchise is certainly going to continue to grow at a healthy clip. So 40% is -- you have to also recall that Q3 last year was sort of the nadir of our impact from the sales turnover that we experienced in Q2. And so the comps are going to get a little tougher there in Q4. I'll leave it there. Joseph Capper: The only caveat to Q4 as Doug mentioned, it's going to be a tougher comp in Q3. And as the rules on the rules and adjustments start to take place, there's probably some folks that will make those adjustments a little bit earlier. So back of December will be a little bit more difficult to predict. But we've got great momentum. Obviously, the first month is in good shape. Frank Takkinen: Got it. That's helpful. And then maybe just thinking a little bit about kind of post January 1. I know you mentioned you're doing a number of things to prepare for that. Maybe you call out some of those things that you're doing today to prepare for different reform options and maybe if you can extend to what you feel like would be the best outcome for your company? Is it kind of how your comments were structured and proposed? Or is there anything else you think would be kind of the best outcome for MiMedx? Joseph Capper: Yes. I think our comments were structured and proposed would be the best outcome for the industry and for MiMedx. But we have been advocating for some time is level the playing field and take this price variability out of the equation. I think it's we don't need to revisit that. It looks like that is going to happen. So we clearly welcome the reform. And given our experience in competing on a level playing field, we're really comfortable that we're going to outperform the market. I don't want to go into details in terms of like what types of scenario planning we have done. But again, you can imagine an environment that's less attractive from a profitability perspective, some participants are not going to be in the market, but probably not going to find this as attractive as it did over the last couple of years. So I think there's going to be ample opportunity for market share growth in a number of different ways. And look, we have plenty of evidence to that, right? We've done it in the past. We see it today in our surgical market, how we're growing there. It's much more of a level playing field. Last thing I would leave you with is we have a great balance sheet. So if there's opportunities to do things to kind of get a share -- a little bit of share that way, we'll look at those opportunities. Frank Takkinen: Got it. And then maybe if I can squeeze one more quick one in. Cash ending at $142 million. I know you guided to greater than $150 million of cash. That obviously leaves the door open above $150 million. But how should we maybe think about cash generation if you just put up $20 million this quarter and that $150 million is out there? Joseph Capper: Yes. We probably confused people because sometimes we talk gross cash and net cash. We still have about $18 million drawn on our line. So when we say $150 million by year-end, think of that as net. So you're probably in the high 160s from a gross standpoint. And the question is why haven't paid that line down. And it's just Doug jells at me every quarter. That's because we've -- frankly, we've been looking at so many different opportunities that we thought it made sense to do it all at the same time. Operator: Our next question is from the line of Chase Knickerbocker with Craig-Hallum. Chase Knickerbocker: On the quarter. Maybe just first, Joe, I was hoping you'd be willing to share in your wound business on a overall square centimeters basis, what volume growth was either sequentially or year-over-year. I respect your comments on the uncertainty as it relates to '26, but just trying to get some sort of kind of guidepost for us as we think about Q4 and then 2026 as it relates to volumes. Joseph Capper: Yes. As you know, we have not been public about that because there's puts and takes and ups and downs. And when you launch new products, some products need less tissue. And so your cost -- your volume per square centimeter may go down, may go up. So there's so many factors that go into that. We tend to stay away from that. We certainly stay away from it by segment. I think the way I answered the previous question, we feel very comfortable about pending changes. We feel that we're in great -- we're in a pole position to pick up share, depending on what the ultimate price is. And the other thing, too, is depending on what other factors are associated with the new rules, is there pass-through pricing? Is there opportunity to continue to discount? How much discounting is going to be permitted. There's several other kind of like mechanics, I would say, about how these rules are going to go into effect that could affect the way people market products. So it's just too soon. We'll know the final rules in a couple of weeks. I'd say we always want the answer today, so do we, but it's right around the corner. And I have to stress, I don't see another company that is in a better position than us to compete once these rules are in effect. Chase Knickerbocker: Understood. Maybe just on that, have you had a chance to get any feedback on the Hill or from any sort of constituents on some of those suggestions that you made, I think, particularly around kind of the potential pass-through mechanism or like a CPI adjustment, for example, instead of a recalculation annually. I mean, have you gotten any feedback from that? Joseph Capper: Nothing that we could publicly comment on. We work through third-party advisers who communicate directly with as much as possible. Obviously, we're in a shutdown, but as much as possible directly with CMS and the MACs and we try to put together as much information on it as we can. But there's nothing that we can share publicly that we can stand behind 100% at this point today. Chase Knickerbocker: And then just last, maybe just on the LCDs. That submission as far as the -- when the clinical data was -- is supposed to be submitted, it's obviously coming up here very quickly. Have you heard from the MACs as far as get your data in as in LCDs could likely be moving forward? And then on that front, I know you mentioned that the presentation tomorrow. But just kind of can you speak any more additional detail to that data or I guess, your confidence that it will be sufficient to support inclusion on the LCD as it relates to EPIEFFECT? Joseph Capper: So I'm going to frustrate you for the third time, case, I apologize. There's really not a whole lot more I can offer in terms of LCD, go/no-go, whether they're going to be implemented, whether they're going to be modified. And all that's kind of rumor in the industry. Everybody's got their opinion. The second part of your question of whether or not we feel that we've got sufficient evidence relative to EPIEFFECT to justify reimbursement. The answer to that is yes. The analysis was very strong. And then there are steps we have to go through either has to be a presentation and there has to be a manuscript submission and then you can apply for reimbursement. And we have those steps completed as of tomorrow. So we feel comfortable that our submission is in good shape. Whether or not they stick to that protocol is yet to be seen or I would say, requirement is yet to be seen. That will tie back to whether or not the LCDs are once again postponed and/or modified. But we're in pretty good shape with that product. Operator: Our next question is from the line of Carl Byrnes with Northland Capital. Carl Byrnes: Congratulations on the quarter. Considering the foreseeable shakeup, obviously rising from reimbursement changes, which are longer and your cash buildup, I mean are you seeing any compelling low-hanging fruit with respect to M&A prospects or business development opportunities that would fit nicely? Joseph Capper: Yes. I would -- the answer is yes. There are compelling assets. We have leaned a little bit more into the surgical side of our business in terms of scouring the landscape for opportunities to license and/or acquire technologies or products or companies. That does not mean that we're dismissive of the wound care business, just that if assets have any exposure to pending changes are much more difficult to value at this juncture. But I think there's ample opportunity to kind of leverage or use our balance sheet to accelerate the strategic growth plan. So we're not -- we've said this in the past, we're not buying for the sake of buying. But if it fits our strategic plan, if it augments our current product portfolio in the wound care business, if it adds assets that are strategic fit for us in the surgical business, they're kind of the types of assets that we're looking at. Operator: Our next question is coming from the line of Ross Osborn with Cantor Fitzgerald. Ross Osborn: Congrats on a strong quarter. So starting off, would you walk through where you're seeing adoption of HELIOGEN and where you stand on evidence generation there? Joseph Capper: We haven't put out a number on that, but... Douglas Rice: It's increasing quarter-to-quarter sequentially. Joseph Capper: It's increasing month-to-month, quarter-to-quarter. But it takes a while, right? So you have to get the product on contract, you have to get it through bid or value analysis committees, I should say. And then you have to prove efficacy at the surgical level. Feedback is great. We are building evidence around it in various cases. So I would expect it to be -- I don't -- we haven't put out a growth number on that. But let's just say it's becoming a meaningful contributor to our surgical business. And I can't stress enough how important it is for us to point out the fact that the surgical business continues to grow well. When we decided to shut down the KOA business about 2 years ago, we did that with the intention of pivoting more and focusing more on the surgical business, and we've done that. We've added human resources to that group. We've added products, as you know, launched a few new products, including HELIOGEN, which we just started talking about, and we spent a lot of time on the evidence. I walked through one example of that in our comments. That's about 1/3 of our business today. So the surgical business is about 1/3 of our total business. You can do the math on that, and it's growing at 15%, 20-plus percent all year long. If that was a stand-alone surgical company with that kind of growth rate, it would be -- I think we would all agree that it would be trading at a much higher multiple than MiMedx is trading at today. So we're super excited about continuing to invest in that business. Ross Osborn: Great. And then turning to AXIOFILL, what's the path forward there following the September court ruling? Joseph Capper: We have to kind of resubmit our arguments and likely have another hearing with the judge. So we're sort of back to the beginning. which is -- in the meantime, AXIOFILL continues to do well in the marketplace. As you remember, when we brought HELIOGEN into the portfolio, that was -- part of that was mitigation in the event that AXIOFILL went away. So we have not overtly tried to change out that product. And it has stabilized and even in some cases, grown. So we looked at our particulate business, which would be AXIOFILL and HELIOGEN together, that's a really strong business. It continues to grow. So we'll see. We'll get through that. But we have some mitigation plans in place, including AXIOFILL for some reason, that does not go away. But we think our case is really strong. Arguments are really, really strong. And I wouldn't read anything into that delay other than it was a little bit long in the tooth from a scheduling standpoint, and that may have motivated the judge to kind of do a reset. Operator: The next question is from the line of Anthony Petrone with Mizuho Group. Anthony Petrone: Congrats on a great quarter, very, very bullish results all around. Maybe on the 40% wound growth in the quarter, and obviously, you mentioned the final CMS LCD outcome here coming in November. Do you think there was pull forward of demand in the physician channel specifically just ahead of that ruling? Did you notice any of that taking place? And then just when you think of underlying volumes on the surgical side, we've heard from others in the medical device space that there's some pull forward of just surgeries generally on the notion that potentially ACA policies may not renew just with the government shutdown happening here. Did you notice any pull-through on the surgical side from any Medicaid or ACA dynamics? And I'll have one quick follow-up. Joseph Capper: We didn't notice pull-through on either side of the business. We certainly didn't notice pull forward, I should say, on the surgical side of the business. Frankly, I wouldn't expect it in the types of procedures where our product is being utilized. These are not elective surgeries. So I doubt we would be impacted by that. You might see it more in the orthopedic space or something like that, but you're not going to see it really where our products being used for the most part. Anthony Petrone: Okay. Great. And then just a follow-up again on looking at the final rule here, and I know there's just a debate out there on potentially how skin substitute products could settle on a per centimeter square basis, but also on the allotment for how many applications could be decided on in the LCD. So is there any way to just set expectations on what the range of scenarios could be on a per centimeter squared basis, but as well as a total application basis? Joseph Capper: Yes. I think it's a good point you bring up, not limitations because there are things that we still need clarity on, which is one of the reasons why I'm staying away from speculating. And I'm going to frustrate you as much as I frustrated Chase. I just can't give you that range right now. I certainly am not going to speculate on what the final price is going to be because there's all kinds of rumors running around in the marketplace, and they are just that. We're really close to this thing being public. If I were a betting person, I'd say we're going to see it sooner in November rather than later in November. So we're going to know real soon, Anthony. And then we'll be able to kind of plug these inputs into the way we've been modeling potential scenarios, and we'll have more clarity. But again, I have to stress that regardless of the rules, the industry will be more stable. It will be more predictable. If it resets somewhat, that's okay because this company will outperform the market as it has done in the past when the playing field is even. When everybody is playing by the same rules, especially relative to price and profitability, we will outperform the market. So we welcome it. Operator: At this time, this concludes our question-and-answer session. I'll hand the floor back to Joe Capper for closing comments. Joseph Capper: Thanks, operator, and we appreciate you guys being on the call today and the interest in the company. That concludes today's call, and we will speak to you after our next quarter. Thanks, everybody. Operator: Thank you. Today's conference has concluded. You may now disconnect your lines at this time, and have a wonderful day.
Operator: Good day, and thank you for standing by. Welcome to Cohu's Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Jeff Jones, Chief Financial Officer. Please go ahead. Jeffrey Jones: Good afternoon, and welcome to our conference call discussing Cohu's third quarter 2025 financial results and our outlook for the fourth quarter of 2025. I'm joined today by Luis Müller, Cohu's President and CEO. If you need a copy of our earnings release, it can be found on our website at cohu.com or by contacting Cohu Investor Relations. A slide presentation accompanying today's call is also available in the Investor Relations section of the website. Replays of this call will be accessible via the same page after the conclusion of the call. During this call, we will be making forward-looking statements that reflect management's current expectations concerning Cohu's future business. These statements are based on the information available to us at this time, but they are subject to rapid and even abrupt changes. We encourage everyone to review the forward-looking statements section of our slide presentation and the earnings release as well as Cohu's filings with the SEC, including the most recently filed Form 10-K and Form 10-Q. Our comments are current as of today, October 29, 2025, and Cohu does not assume any obligation to update these statements for events occurring after this call. Additionally, we will discuss certain non-GAAP financial measures during this call. Please refer to our earnings release and slide presentation for reconciliations to the most comparable GAAP measures. Now I'd like to turn the call over to Luis Müller, Cohu's President and CEO. Luis? Luis Müller: Good day, everyone. Thank you for joining our Q3 2025 earnings call. I'm pleased to share our latest results and provide guidance for Q4. First off, let's talk about some highlights. Recurring revenue continued to grow for the third consecutive quarter, driven by strength in interface solutions and test handler spares. Systems revenue improved sequentially for the fourth quarter in a row though it remains below normalized levels. We had several notable events in the third quarter. We announced an offering of convertible notes on favorable terms, which closed just after the quarter end and will support future growth and strategic initiatives. Jeff will discuss this in more detail later. We welcomed Matthew Hutton, our new Vice President of Strategy focused on advancing our growth initiatives, including mergers, acquisitions and partnerships. Prior to joining Cohu, Matt was Head of Corporate Development at AspenTech. We communicated repeat orders for Neon HBM inspection tools, raising this year's revenue forecast for these systems to between $10 million and $11 million. These systems are used for inspection in metrology of high-bandwidth memory devices, which are critical components in high-performance computing and generative artificial intelligence applications. We shipped our first system configured for HBM4 inspection, reinforcing our optimism for future market prospects and high-bandwidth memory. Our Eclipse handler equipped with proprietary active thermal control was selected for production test of next-generation AI processor devices by a leading U.S.-based semiconductor manufacturer. The Eclipse platform is designed to scale seamlessly across diverse power applications, providing the flexibility and operational efficiency required to support our customers' evolving high-performance processor road maps. This adaptability ensures that as processor technologies advance, our solution remains a reliable foundation for next-generation computing needs. Our current thermal solution ensures optimal device temperature control and test repeatability up to 3,000 watts power dissipation with ultrafast temperature ramp rates and tight thermal guard band, supporting demanding semiconductor test requirements. Now let's dive into the detailed results. Consolidated revenue reached $126 million with both systems and recurring revenue improving quarter-over-quarter. Revenue was split 45% systems and 55% recurring. Non-GAAP gross margin of 44.1% reflects the value differentiation of our products and the resilience of our recurring business model. Estimated test cell utilization remained stable quarter-over-quarter ending September at 74.5%. While systems orders moderated last quarter, growth in recurring revenue and new wins position us well for Q4 and beyond. We secured new business wins, including orders for our automated test equipment and automated optical inspection for high-growth markets. During the quarter, we secured roughly $1.7 million in new business, highlighted by our first Diamondx order from a long-standing Cohu handler customer. This order will support the testing of application-specific analog power integrated circuits, serving key automotive and industrial market segments. This customer win marks the continuation of Cohu's growth in the mixed signal test market with Diamondx as we push to diversify our test platform beyond RF and display driver IC test. We secured a new order of our Krypton system with a European customer, enabling advanced optical inspection of devices used by a prominent U.S. mobile phone brand. We booked a $2.3 million order for precision analog test contactors at a U.S. IDM and continue to diversify our test platform portfolio with this customer. We anticipate a seasonal slowdown in Q4, partially offset by ongoing market recovery and remain optimistic about long-term prospects, especially in computing and high-bandwidth memory inspection. As tariffs returned to the spotlight in recent news, I want to reassure everyone that Cohu's current exposure to China remains very limited. Revenue from customers based in China accounts for only a low single-digit percentage of our total consolidated results. Additionally, a substantial share of our business is generated outside of the U.S. further diversifying our global footprint. Thank you for your attention and continued support. I'll now turn it over to Jeff for a deeper dive into our financial results and Q4 guidance. Jeff? Jeffrey Jones: Thank you, Luis. Before reviewing the third quarter results and providing fourth quarter guidance, please note that my comments refer to non-GAAP figures. Details about non-GAAP financial measures, including GAAP to non-GAAP reconciliations and other disclosures are included in the earnings release and investor presentation on our website. For Q3 2025, revenue exceeded guidance and reached $126.2 million. Recurring revenue, which is primarily driven by consumables and is more stable than systems revenue accounted for 55% of total revenue for the quarter. During the third quarter, 3 customers, 1 in the mobile segment and 2 in the automotive segment, each represented more than 10% of our sales. The Q3 gross margin was in line with guidance at 44.1%. Operating expenses for the quarter were $48 million, which is $2 million lower than guidance. This reduction was mainly due to the timing of R&D material now scheduled for receipt in Q4. Net interest income after accounting for interest expense and a small foreign currency loss was approximately $1.1 million for Q3. The tax provision came in about $3.5 million lower than forecast at $11.7 million, resulting from the reversal of tax reserves following the completion of a jurisdictional tax authority audit. Moving to the balance sheet. Cash and investments decreased by $11.2 million during Q3. This was primarily due to cash used in operations to support a 17% growth in sales quarter-over-quarter and to fund a $33 million increase in accounts receivable. No stock repurchases were completed during Q3. Since the inception of our share repurchase plan, we have repurchased around 4 million shares for approximately $117 million, leaving about $23 million available for additional future repurchases. Total debt stands at $18 million, unchanged from the previous quarter. Q3 capital expenditures were $4 million, mainly for facility improvements. We're maintaining our 2025 capital expenditure target of approximately $20 million, which includes the $9 million Melaka facility purchase completed in Q1. In late Q3, we announced a strategic convertible notes offering. In early Q4, we completed the upsized offering, raising gross proceeds of $287.5 million at attractive rates, including 1.5% interest rate, 32.5% conversion premium and a 5-year term. We purchased a 100% capped call to limit shareholder dilution until the stock price doubles and exceeds $41 per share. The repayment structure of the notes is net share settlement, meaning Cohu will repay the principal of $287.5 million in cash and has the option to settle any in-the-money amounts in cash, shares or a combination of both. This structure, combined with the up 100% capped call limits shareholder dilution. The net proceeds will provide additional liquidity to strengthen our balance sheet and support strategic initiatives. Looking ahead to Q4, as Luis noted, we anticipate a seasonal slowdown for systems, which is partially offset by a continued market recovery. Overall, we expect Q4 revenue to be about $4 million or 3.5% lower than Q3, driven by systems revenue. Our resilient recurring revenue is forecasted to increase for the fourth straight quarter and should represent about 60% of total Q4 revenue. Our guidance for Q4 revenue was approximately $122 million, plus or minus $7 million. The gross margin for Q4 is projected at approximately 45%. Operating expenses are expected to be about $50 million, including around $2 million for variable R&D product development prototype materials. Total operating expenses are consistent with the restructuring plan targets implemented in late Q1 of this year. Once the full impact of the restructuring plan is realized at the beginning of 2026, we anticipate quarterly operating expenses to be approximately $49 million when revenue is around $130 million per quarter. Q4 interest income, net of interest expense and foreign currency impacts is projected to be approximately $1.7 million at current interest rates. The Q4 tax provision is expected to be about $4 million, and the diluted share count for Q4 is projected to be about 47.1 million shares. That concludes our prepared remarks, and now we'll open the call to questions. Operator: [Operator Instructions] Our first question comes from Brian Chin with Stifel. Brian Chin: So I guess, first question, nice to see the improved system revenue momentum, particularly from the mobile segment these past few quarters. Based on the customer broadening metric you shared and the uptick in utilization, is that the main area of improved near-term revenue visibility for the company? And how much confidence does this give you on sustaining some top line momentum kind of moving beyond the seasonal period into the first half next year? Luis Müller: Brian, yes, you're correct. I mean, a lot of the momentum here in the third quarter was associated with a customer buying the Eclipse handler, but also HBM with the Neon system, I think those are sort of the 2 main highlights of the quarter. We have the Eclipse though qualified at another computing customer. I think we press released that already in the third quarter, just ahead of SEMICON West. And then we also have a few other customers that are evaluating the system, one going into a GPU application, sort of a new product version of a GPU for 2026. And then 2 others that are associated with data center network communication and an ASIC accelerator. So I think it moves -- talking about confidence going into '26, I think we're more confident is that the HBM business is continuing to progress. We have had now since the start of the fourth quarter, a couple of repeat orders for HBM. We have an engagement forming with a second customer where we're looking at what are the requirements and how we're going to address requirements to get another qualification going for one of our inspection tools. And like I said, we got several customers here in different stages of evaluating the Eclipse for applications in the data center. So I think it's going to continue to move around. We just saw a recent announcement from another one of our customers for their wins in the data center market, where they're going after an inference data center device partnership, and we are playing a record with Eclipse for that application as well. So I think we're confident that we're broadening our business beyond the traditional auto, mobile, consumer, industrial, more towards the AI use applications, whether it's the GPU or the network processing, and we should start seeing some fruits of that in 2026 with the Eclipse in our inspection systems. Brian Chin: Got it. Maybe just a key on the points you made about the Eclipse handler with the active thermal T-Core subsystem. Kind of what's -- can you help us understand sort of what's driving that win? Is it the higher wattage now for some of the newer AI processors that's coming out? And does your platform continue to scale? It sounds like with every single kind of every year cadence here now in terms of more advanced and hotter chips kind of coming into introduction? And are you supplanting existing incumbents with that tool? Luis Müller: Yes. Yes, you basically hit the nail on the head. We talked here about 3,000 watts of power dissipation. I mentioned that in my prepared remarks, but that's sort of the current state of what would be shipping for production needs in 2026. With that said, the requirements continue to go up, and we're already working on the next-generation thermals that will support 2027 and different sets of applications coming up later next year as well. So your question is pretty much the answer to it. It's all about the thermal power dissipation and power densities. We never talk about power densities, but power density per square inch of silicon as well, the size of the dies, how delicate and the amount of force you have to apply. So it's all related to that complexity of dynamically controlling heat dissipation on very complex semiconductors actually doing tests. Brian Chin: Maybe just one last quick follow-up. In terms of revenue contribution, is that sort of first half next year? And just compute, I think, has not historically been in recent years, like a double-digit exposure segment, but do you feel pretty comfortable thinking that could be double digits next year for the year? Luis Müller: Double digit, you mean double-digit growth, double-digit from a revenue contribution. If you look from a revenue contribution, I would say, I would expect computing to be sort of in the low teens. We always talk about systems and recurring, so not counting recurring in the mix here. I'm thinking it would be sort of the low teens percentage contribution of revenue going into 2026. Operator: Our next question comes from David Duley with Steelhead Securities. David Duley: To follow up on Brian's question. I guess, it sounds like based on your Eclipse win at a major AI processing company, and I think you've press released another win or tool of record with the CPU company. Is it a fair assumption that basically any of these APUs, CPUs, XPUs, GPUs, whatever the term is for networking processors that they're all going to have to be thermally controlled and tested. So that -- is it fair to assume that the TAM of this market is quite large, given that there's lots of large customers that you aren't serving yet? Luis Müller: Yes. Yes. That's absolutely correct, Dave. I mean we have -- the power dissipation levels vary quite a bit. I mean we have some inference processors here that the talk right now is on the order of 600 watts of power dissipation. We have high-end GPU, as I said, it's approaching 3,000 watts just under that. We have some network processors that we are qualifying right now on the 1,200 to 1,400 watts. So it's a range of power dissipation levels, but they're really on the hundreds of to a couple of thousand watts in rising. The road map really shows that going up. David Duley: So the higher the wattage, the higher the heat, and so that becomes a more and more important. And so I guess it's a fair assumption that going forward, you might have a little bit more exposure on the GPU side with this product, and networking the hyperscaler custom ASIC customers? Luis Müller: That's correct. That's correct. The higher the waters, the more complex these things are getting, the more it lends itself to expertise that we have at Cohu. We're being asked by quite a few customers now to address some of their requirements. They're very difficult. I mean, as you can imagine, when you're approaching 3,000, 4,000 watts of power dissipation, this is fairly complex. There aren't that many people out there that have the engineering and the technology to do this. So we're working pretty heavily on it. Needless to say, we're pivoting the business more towards AI applications. David Duley: Okay. And then when you think about overall AI exposure in 2025, could you just help us with -- you add up this HBM inspection product and the Eclipse and a few other things. What do you think your revenue stream is that's kind of dedicated to AI in 2025? And I basically assume it was almost next to nothing in 2024? Luis Müller: Yes. I would say it's pretty close to 0 in 2024. The AI -- I mean, the AI here, you got to be a little careful, right, to talk about AI, everybody tends to think of data centers. But there is actually sort of a blend here of processors that are already running some level of language model in them. And I think if I look at 2025, a little tally here would tally up maybe sort of in the order of $40 million -- approximately $40 million of system revenue this year on things that I could associate with edge AI or data center-related AI, and we expect that to be growing going into 2026. Operator: Our next question comes from Robert Mertens with TD Cowen. Robert Mertens: This is Robert on behalf of Krish Sankar. I guess just the first one, with the recent convertible raise, how are you thinking about the best use of cash between developing some of the new areas of expansion, be it investment in the software business or high bandwidth memory versus historically completing a number of smaller tuck-in M&A deals to bolster the technology portfolio. And then maybe I'll just add in your views on using cash for share repurchases and I know that been on pause for the last few quarters? Jeffrey Jones: Yes. Good question. And really the answer is we want to pursue both paths. And in order to pursue acquisitions of any meaningful size, we needed to go to the financing market, we needed capital, which basically drove our decision on the convert, strengthen the balance sheet and have more flexibility when it came to growing through acquisition. And so we're going to continue to focus on organic development in the areas that Luis has been talking about. But clearly, we want to be opportunistic as well when it comes to M&A. And of course, with the recent hire of Matt, it's a priority for us. And so, that's really the main driver for the convert. Now with respect to buyback, that's a sort of a Board decision. And yes, we're on pause for now. Should the stock valuation go to point where we -- is more compelling, I think we would, again, get back into the game. But the objective for 2025 on the share repurchase was to offset dilution from our equity compensation plan. And so we've essentially did that in Q1. I suspect it will be similar for next year. Robert Mertens: Got it. And then thanks for the color on the latest Eclipse system. Maybe just going back to that, in terms of the areas where that's focused, is that sort of more of a broad-based system or any sort of end market and you're just seeing more traction on the compute side, the power and the heat requirements and just end demand in that end market today versus sort of your traditional auto and industrial? Or is that something that auto and industrial customers could start to look into more once their end demand picks back up? Luis Müller: Yes, Robert, the Eclipse is not really a traditional product for industrial applications or other applications. So you could say we can use it for consumer products. We can use it for RFIC test. We can use it for general mobile applications. But we've been really being more selective here with our engineering resources and putting them more around these complex thermal requirements that we see in general AI processor needs. I think they've shared a collection of letters here that people using AI today, right from XPU, TPU, NPU, APU, GPU. And so we are really focused on that. We're really focused on, look, if it is AI related, whether it's training or inference mode or network mode, backbone network connectivity, that's interesting because it applies or it lends itself well to our thermal technology. It lends itself to where we can differentiate. It lends itself where we can bring value to the table. So we're being quite selective on where we are deploying the Eclipse right now and the bandwidth that we're deploying against customers that have those challenges. So the product could be used for a variety of other things, not traditionally, not your traditional industrial auto use in this case. And so we're being more focused on AI end use cases. Operator: Our next question comes from Denis Pyatchanin with Needham & Company. Denis Pyatchanin: So even with the recent uptick in Q3, mobile system orders year-to-date versus year-to-date last year seemed to be lagging somewhat behind other segments kind of even in light of utilization recovery there. Why have system purchase in the segment lag up somewhat? And are you perhaps expecting strength in mobile into next quarter even with systems have guided down? Luis Müller: No, not exactly, Denis. I mean we had a -- I mean, if you look at our Q3 revenue, mobile, I think, was actually our largest segment, right, sort of tied hand-in-hand with automotive. I think the mobile-related shipments, we largely completed here in the third quarter. Going into fourth quarter, we should see more shipments into the auto and computing space. And then I think mobile goes into -- well, sorry, I'm thinking more in terms of our test handlers. We will see some mobile demand in RF test hit in the fourth quarter. So there's going to be a little bit of revenue there on that front. But by and large, I think -- I don't think mobile is going to be our largest segment in the fourth quarter. I don't expect that to be the case again. Denis Pyatchanin: Great. So one more, so for automotive and industrial, the cyclical recovery continues to be kind of somewhat muted. What are you seeing in these markets in terms of recovery? So I think you're saying there's going to be some strength into Q4, but is there any visibility beyond that? Luis Müller: Yes, there's some puts and takes. You're right. This has been sort of an elusive recovery both in auto and industrial. I think we have had a quarter where we had some green shoots in auto in Q2 I want to say, and then it had some green shoots in industrial. We're having now is more talks from customers that are saying that they are back to the mode of needing initial capacity in the auto and industrial segment, talking about some initial demand in Q1 of next year, into Q2 of next year. Nothing dramatic yet, but it's -- the talks are starting to improve. We're also seeing an increase in spare sales to our handlers in the auto and industrial segment, basically supporting the fact that they're taking systems that have been put aside, so under utilized segment for test and bringing those systems back online. I think, like I said, we had 3 consecutive quarters now of recurring business improving and continue to project the fourth quarter recurring business to improve again sequentially. This applies both to, like I said, spares for our test handler systems, which is a very good indicator as well as improvement in our test interface business. Denis Pyatchanin: Great. And then briefly, could you discuss the gross margin strength sequentially into Q4, even with revenue being done a little bit? What's driving that? Jeffrey Jones: There's a mix component to it, DeNIS. And as Luis just mentioned, we've got increasing recurring revenue, which has gross margins in the mid-50s. And so we're expecting the recurring revenue to be about 60% of the total revenue, it was 55% in Q3. I think that's the main driver of that increase in gross margin quarter-over-quarter. Operator: That concludes today's question-and-answer session. I'd like to turn the call back to Jeff Jones for closing remarks. Jeffrey Jones: Thank you. And before we sign off, I'd just like to note that Cohu will be attending several investor conferences over the next 3 months, The Stifel Midwest Conference on November 6 in Chicago. The New York City CEO Summit Conference on December 16 and the Needham Virtual Conference on January 15 of next year. If you plan to attend any of these conferences, please reach out to your conference contacts or contact us directly to arrange a one-on-one meeting. Thank you for joining today's call, and we look forward to speaking with you again soon. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.