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Operator: Good morning. My name is Taryn, and I will be your conference facilitator. At this time, I would like to welcome everyone to the TWO Third Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the call over to Maggie Karr. Margaret Field: Good morning, everyone, and welcome to our call to discuss TWO's third quarter 2025 financial results. With me on the call this morning are Bill Greenberg, our President and Chief Executive Officer; Nick Letica, our Chief Investment Officer; and William Dellal, our Chief Financial Officer. The earnings press release and presentation associated with today's call have been filed with the SEC and are available on the SEC's website, as well as the Investor Relations page of our website at twoinv.com. In our earnings release and presentation, we have provided reconciliation of GAAP to non-GAAP financial measures, and we urge you to review this information in conjunction with today's call. As a reminder, our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are described on Page 2 of the presentation and in our Form 10-K and subsequent reports filed with the SEC. Except as may be required by law, TWO does not update forward-looking statements and disclaims any obligation to do so. I will now turn the call over to Bill. William Greenberg: Thank you, Maggie. Good morning, everyone, and welcome to our third quarter earnings call. In August, we reached a settlement in the litigation with our former external manager arising from our internalization in 2020. In particular, we agreed to make a onetime payment of $375 million in exchange for a release of all claims, including ownership claims related to our intellectual property. The settlement payment was funded through a combination of portfolio sales, cash on hand, and available borrowing capacity. Importantly, we continue to have ample liquidity following the payments, and our risk metrics are in line with how we have managed the portfolio historically. With this matter now fully behind us, we are glad to move forward with clarity and certainty of purpose. During the quarter, we took a number of steps to adjust our portfolio, largely on a pro rata basis, to address our lower capital base and higher structural leverage. We sold some agency securities, bringing the RMBS portfolio to $10.9 billion from $11.4 billion. We also sold $19.1 billion UPB of MSR and another approximately $10 billion of UPB that will settle at the end of this month, in both cases slightly above our marks. Furthermore, these sales were done on a servicing-retained basis with a new subservicing client, establishing a significant and important relationship. These transactions validate our efforts to meaningfully grow our third-party subservicing business and confirm the thesis that we envisioned when we first acquired RoundPoint, specifically that given our history as MSR investors, we are an ideal subservicing partner for other MSR owners. With those additions, we will have roughly $40 billion of true third-party clients using RoundPoint as a subservicer. In addition, RoundPoint will soon be set up to service Ginnie Mae loans, too, allowing further growth in our subservicing business. Additionally, we intend to redeem the full $262 million UPB of our outstanding convertible notes when they mature in January 2026, which will reduce our structural leverage to be in line with historical levels. We plan to fund this redemption with cash on hand and by drawing down our MSR facilities. If we were to pay down the convertible note today, we would still have in excess of $500 million of cash on our balance sheet. Lastly, the reduction in our capital base has also had the effect of increasing our expense ratio. While we are always intently focused on improving efficiencies and lowering costs, we are acutely aware of the impact today. We have already undertaken efforts to reduce our cost structure in light of the settlement payment, and we have line of sight into significant amounts of savings already. We will have more to say about this in coming quarters. We are confident that after all of our portfolio adjustments, we will continue to be well positioned to execute on our MSR-focused investment strategy to enhance and grow our servicing and origination activities and to deliver long-term value for our stockholders. Please turn to Slide 3. For the third quarter, including the litigation settlement expense of $1.68 per share, we experienced a total economic return of negative 6.3% and a positive 7.6% without the expense. For the first 9 months of the year, this results in a total economic return on book value of negative 15.6% and positive 9.3%, excluding the expense. Please turn to Slide 4. Performance across the fixed income market was positive in the third quarter. Though inflation readings continued to run above the Fed's target and the full impact of recent increases to tariffs on forward inflation were still unclear, the Fed cut rates by 25 basis points in September, the first cut since November 2024, as Chair Powell cited emerging downside risks in the labor market. The Fed's own guidance of another 50 basis points of cuts by year end aligned with the market consensus, as you can see in the blue line in Figure 1. Net changes across the yield curve were small over the quarter, as you can see in Figure 2, with 2-year yields lower by 11 basis points to 3.61%, and 10-year yields down by 8 basis points to 4.15%. Equity markets were also buoyed by Fed cuts, with the S&P 500 up almost 8% by quarter end after setting all-time record highs early in the quarter. Please turn to Slide 5. As I mentioned earlier, in the third quarter we signed a term sheet with a new subservicing client which will bring our combined subservicing UPB to approximately $40 billion and will bring the total of our own servicing down to approximately $165 billion. We are particularly encouraged by the robust growth in our direct-to-consumer originations platform, especially since most of our portfolio is not economically incentivized to move or refinance. Our originations team recorded the most-ever locks for the month of September and in the third quarter we funded $49 million of UPB in first and second liens, and which gives us increasing confidence that our DTC efforts are working as intended and can provide a meaningful pickup in portfolio recapture and economic returns. Indeed, at quarter end, we had an additional $52 million UPB in our origination pipeline. Additionally, we brokered $60 million UPB in second liens in the quarter, a significant pickup from the $44 million we did in Q2 and also a record high for us at RoundPoint. As interest rates have trended lower post quarter end, we are very optimistic about the additional value that RoundPoint can bring to shareholders. Lastly, I want to mention again the improvements that we are making in the technology platform at RoundPoint. AI and other applications continue to allow us to improve customer and borrower experiences and quality. These efforts allow us to achieve more economies of scale and to recognize the benefits of our investments immediately, which are important components of our drive to reduce servicing and corporate costs. Looking ahead, we now have a clean slate to capitalize on opportunities in our MSR and MBS portfolio and to drive growth in servicing and originations. We believe that with our stock trading at a discount to book, it is significantly undervalued. With the uncertainty created by the litigation behind us, with the quality of assets that we hold, and with several of our peers trading at premiums to book, we see no reason why we should trade at an 11% discount to book as we were at quarter end. We still see mortgage spreads as being very attractive despite the recent tightening. However, we view the risks to MBS performance as being symmetrical and therefore very supportive of our strategy, in particular with its large allocation to hedged MSR, which is designed to have less sensitivity to fluctuations in the mortgage spreads than portfolios without MSR. We're very optimistic about the attractive investment opportunities available in the market for our strategy. And with that, I'd like to hand the call over to William to discuss our financial results. William Dellal: Thank you, Bill. Please turn to Slide 6. This quarter, in connection with the settlement agreement with our former external manager, we recorded $175.1 million litigation settlement expense, or $1.68 per weighted average common share. This expense is the difference between the $375 million cash payment made to our former external manager, less the related loss contingency accrual recorded in the second quarter of $199.9 million. You can see this reflected on this slide in the callout boxes. Including this expense, our return on book value is a negative 0.63%. Excluding this expense, our return on book value would have been a positive 7.6%. Please turn to Slide 7. Including the litigation settlement expense, the company incurred a comprehensive loss of $80.2 million, or $0.77 per share. Excluding the expense, we would have generated comprehensive income of $94.9 million, or $0.91 per share. Net interest and servicing income, which is the sum of GAAP net interest expense and net servicing income before operating costs, was slightly higher in the third quarter by $2.8 million, driven by higher float and servicing fee income and lower financing costs. This was partially offset by lower interest income on agency RMBS. Mark-to-market gains and losses were higher in the quarter by $111.3 million. As a reminder, this column represents the sum of investment securities net gains and losses and changes in OCI, net swap and other derivative gains and losses, and net servicing asset gains and losses. In the third quarter, we experienced mark-to-market gains on agency RMBS, TBAs, and swaps partially offset by mark-to-market losses on MSR and futures. You can see the individual components of net interest and servicing income and mark-to-market gains and losses on Appendix Slide 21. Please turn to Slide 8. On the left-hand side of the slide, you can see a breakdown of our balance sheet at quarter end. After the litigation settlement payment of $375 million and after the sale of $19.1 billion UPB of MSR, we ended the quarter with cash on balance sheet of $770.5 million. As Bill mentioned, we plan to redeem the full $261.9 million of our outstanding convertible notes when they mature on January 15, 2026. As a reminder, in the second quarter we defeased part of this maturing debt with the issuance of a baby bond for net proceeds of $110.6 million. Until the maturity of the convertible debt, we will use the cash on balance sheet to lower our MSR borrowings. Our MBS funding markets remained stable and available throughout the quarter with repurchase spreads at around SOFR plus 20 basis points. At quarter end, our weighted average days to maturity for agency RMBS repo was 88 days. We financed our MSR, including the MSR asset and related servicing advance obligations across 6 lenders with $1.7 billion of outstanding borrowings under bilateral facilities. We ended the quarter with a total of $939 million in unused MSR asset financing capacity. Our servicing advances are fully financed, and we have an additional $78 million in available capacity. I will now turn the call over to Nick. Nicholas Letica: Thank you, William. Please turn to Slide 9. Our portfolio at September 30 was $13.5 billion, including $9.1 billion in settled positions and $4.4 billion in TBAs. After adjusting the portfolio for our lower capital base, we slightly increased our economic debt to equity to 7.2 times. We are comfortable at this current leverage level. Though spreads have contracted, they still look attractive on a levered basis versus swaps, especially in the context of diminished interest rate and spread volatility. Furthermore, positive demand technicals such as robust flows into bond funds and buying by REITs are likely to persist as the Fed continues to cut interest rates. That said, spreads have normalized quite a bit, and while they are less volatile, we see spread changes to be more 2 sided. Consequently, by quarter end, we reduced the portfolio's sensitivity to spread changes from 4.2% to 2.3% of common book value if spreads were to tighten by 25 basis points, which you can see in Chart 3. This quarter, despite leverage increasing, we actually reduced our risk exposure. You can see more details on our risk exposures on Appendix Slide 18. Please turn to Slide 10. Given the stability of rates and broad consensus that the Fed is on a gradual path toward lowering rates further, implied volatility declined to its lowest level since mid-2022. As you can see in Figure 1, our preferred volatility gauge of 2-year options on 10-year swap rates, shown by the green line, closed the quarter at 84 basis points, down 10 basis points and back to just above its average level over the past 10 years. If you look back to 2022 when volatility was last here, spreads versus swaps were tighter. We see attractive static returns with volatility at this level between 15% and 19% for the securities portion of our portfolio, which you will see in the return potential slide shortly. RMBS performance was positive across the 30-year coupon stack, with the best performance concentrated in the belly coupons such as 4 1/2%s and 5%s. The excess return of the Bloomberg U.S. Mortgage Backed Securities Index was positive. 82 basis points, the best performance since Q4 2023. You can see spreads across the curve, both nominally and on an option-adjusted basis, in Figure 2. During the quarter, the nominal spread for current coupon RMBs tightened by 26 basis points to 145 basis points to the swap curve, while option-adjusted spreads finished 14 basis points tighter at 67 basis points. Please turn to Slide 11 to review our agency RMBS portfolio. Figure 1 shows the performance of TBAs and specified pools we owned throughout this quarter. Specified pools outperformed TBAs led by 4 1/2%s and 5%s. We rotated the portfolio down in coupon, reducing our 6% to 6 1/2% position in TBAs and specified pools by approximately $1.8 billion, and increased our 5% to 5 1/2% position by approximately $1.6 billion. We also opportunistically sold approximately $1.3 billion of specified pools versus TBAs across several coupons. You can see this detail on Appendix Slide 17. We have continued this downward rotation into this quarter as the rally in rates continues. In September, primary mortgage rates dropped to their lowest levels of 2025, finishing the quarter for a sustained period around 6.25%, aided by the drop in U.S. treasury rates as well as the strong performance of current coupon RMBS spreads and firm primary-secondary mortgage spreads. We are seeing the effects of the rate drop on refinancing activity with large month-over-month increases for refinanceable coupons' prepayment speeds as reported in early October. Thus far the pickup in speeds has followed the pattern seen in recent prepayment episodes such as when rates dropped about a year ago. With rates remaining about here, we expect to see further pickups and speeds as borrower refinance activity fully works its way through closings. Figure 2 on the bottom right shows our specified pool prepayment speeds by coupon, which despite the drop in primary rates decreased to 8.3% from 8.6% CPR. This is a result of having the majority of our pool holdings in lower coupons as well as in call-protected securities that did not experience the large increases seen for generic collateral. Please turn to Slide 12. You can see that the volume of MSR in the bulk market has remained lower than in prior years. The market continues to be well subscribed, with bank and nonbank portfolios continuing to compete for greater scale in MSRs. Figure 2 is a chart we periodically update, which shows that with mortgage rates at their current level, still only about 3% of our MSR portfolio is considered in the money. If mortgage rates were to drop to 5%, the portion of our portfolio in the money would rise to about 9%. As Bill highlighted, RoundPoint's direct-to-consumer originations platform has been growing consistent with the market opportunity to recapture loans in our portfolio that may refinance. When interest rates dropped in September, we saw the benefits of these efforts and our platform is poised and ready to do more. Please turn to Slide 13 where we will discuss our MSR portfolio. Figure 1 is an overview of our portfolio at quarter end, further details of which can be found on Appendix Slide 24. In the second quarter we settled about 700 million from flow acquisitions. As Bill said, we also committed to sell approximately $30 billion UPB of low gross WACC MSR on a servicing-retained basis as part of our portfolio reallocation. Being able to sell it retained with a large, new subservicing client benefits us not only by being able to leave those loans at RoundPoint and retain the economies of scale, but also gives us an important lever in efficiently managing our assets. Though we like our MSR portfolio, should we want to redeploy capital away from low gross WACC MSR into, say, high gross WAC MSR, selling it to a subservicing client is ideal. The price multiple of our MSR was down slightly quarter over quarter to 5.8x, in line with the drop in mortgage rates, and 60-plus day delinquencies remained low at under 1%. Figure 2 compares CPRs across implied security coupons in our portfolio of MSR versus TBAs. Quarter over quarter, our MSR portfolio experienced a de minimis pickup in prepayment rates to 6%. Importantly, prepays have remained below our projections for the majority of our portfolio, which is a positive tailwind for returns. Finally, please turn to Slide 14, our return potential and outlook slide. This is a forward-looking projection of our expected portfolio returns, which incorporates all of our recent portfolio adjustments. Please note While the $262 million convertible note is shown in the table, the projections assume that it is redeemed at its maturity in January. As you can see on this slide, the top half of the table is meant to show what returns we believe are available on the assets in our portfolio. We estimate that about 68% of our capital is allocated to servicing, with a static return projection of 11% to 14%. The remaining capital is allocated to securities with a static return estimate of 15% to 19%. With our portfolio allocation shown in the top half of the table and after expenses, the static return estimate for our portfolio would be between 9.1% to 12.6% before applying any capital structure leverage to the portfolio. After giving effect to our unsecured notes and preferred stock, we believe that the potential static return on common equity falls in the range of 9.5% to 15.2%, or a prospective quarterly static return per share of $0.26 to $0.42. With agency securities showing a higher range of prospective static returns in MSR, astute investors might ask the question as to why we don't sell more MSR and rotate into MBS. One reason is that the marginal cost of owning MSR is lower than its average cost and so lowering our exposure there would have the effect of increasing costs. Another reason is that we believe that the quality of the returns on the MSR side is higher, mostly consisting of very low rate, easy-to-hedge cash flows, with lower convexity risk than MBS. While we do think there is a lot of opportunity in MBS, especially given the level of implied volatility, we think our capital allocation is just where we want it to be. To conclude, returns remain attractive in support of our core strategy of low mortgage rate MSR paired with agency RMBS. The MSR market continues to benefit from historically high levels of interest and participation from bank and nonbank originators and investors. Though mortgage rates have dropped and prepayment rates for refinanceable coupons are on the rise, our low mortgage rate MSR portfolio remains hundreds of basis points out of the money. Thus far the exposure the portfolio has to higher rate, newer production servicing has grown very modestly. Given RoundPoint's capability to refinance and recapture these loans, we look forward to continued growth in this part of our MSR portfolio. We continue to be optimistic that our portfolio construction of MSR, paired with agency RMBS, should generate attractive risk-adjusted returns over a wide range of market scenarios. Thank you very much for joining us today and now we will be happy to take any questions you might have. Operator: [Operator Instructions] We'll take our first question from Bose George with KBW. Bose George: Actually, first, what are the key drivers of the increase in the EAD in the third quarter relative to the second quarter? And then can you just remind us what are the drivers that take you from the low end to the high end of your guided range? William Dellal: On the EAD, I think it's the -- if we look at the cost of our financing securities, that's what has come down to allow the EAD to go up. The asset yields on EAD are roughly constant, but the financing rates have come down. Of course, there's no mark-to-market. So this is just as a result of rejiggering the portfolio. Bose George: And actually just as a follow up to that. With short rates coming down as the Fed cuts, does that trend continue or just in terms of what happens to the EAD over the next, say, quarter or two? William Dellal: I don't think it's a trend that will continue. It's largely as a result of the change in the mix of the liabilities between TBAs and -- the financing on TBAs and spec pools. Bose George: And then can you give us an update on your book value quarter to date? William Greenberg: Bose, as of last Friday, our book value was up about 1%. Operator: We'll take our next question from Doug Harter with UBS. Douglas Harter: I know leverage is just one metric you look at, but can you talk about the various risk metrics as you think about the size of the portfolio following the settlement? Nicholas Letica: Doug, this is Nick. Thank you for the question. Yes, as you know, we look at a lot of risk metrics in managing the portfolio. And as I said in my prepared remarks, this quarter our economic debt-to-equity did go up while we, by quarter end, had taken down our overall spread risk. It's a slew of things that we look at when we manage a portfolio. It's clearly first and foremost the returns that are available on the asset classes that we have in the portfolio and what seems to be the ideal mix in the context of the market that we are in. All of those things come into play, whether it's the amount of leverage that's available in the market, the financing rates clearly, but just most importantly, the asset yields versus the risk that each security sector has. And each quarter and each and every day we look to maximize the return that we can generate from the portfolio versus the amount of risk that each asset has. William Greenberg: I might just add here, Doug. Nick made a comment in his prepared remarks about the difference between leverage ticking up a little bit while our mortgage spread risk went down. And that's a good example of not being too focused on one metric versus another. Both of those things are important as we look at the overall leverage, the overall liquidity, overall what I will call drawdown risk, different scenario analyses that we look at depending on volatility of interest rates, the volatility of spreads, and so forth. So all those things get mixed into our decisions about how we manage the risk of the portfolio, especially in the context of the returns available, as Nick said. Douglas Harter: And Bill, you mentioned that you were looking at -- to try to implement some cost saves on the corporate expense side. On your return potential slide, does that factor in potential cost saves, or is that where your costs are today or there's potential up...? William Greenberg: No, that's where they are today. Douglas Harter: So there would be potential upside to that number as those cost saves are realized? William Greenberg: Yes, I think so. Operator: We'll take our next question from Rick Shane with JP Morgan. Richard Shane: In looking at Slide 17, what stands out to me is that for the third quarter in a row at least, you are tactically net short the coupon 50 basis points below the coupon where you are you have the highest concentration. Can you help us understand -- again, as an equity guy, I'm just trying to understand what's going on there, what drives that strategy. Nicholas Letica: Rick, thank you for that question. A lot of what drives that coupon exposure, and we do manage it, of course, but it is how rates move and where the current coupon sits relative to our risk exposures and our MSR and the rest of our portfolio. So as rates rally, you can see in that table we do show what we believe is the effective offset to our mortgage longs by the current coupon exposure of the MSR and other negatively derated assets in our portfolio. And as rates rally, that negative number migrates down in coupon, and we manage that through time. And as I said in my prepared remarks, we had gone down in coupon in terms of our mortgage holdings and a lot of that was just in response to the fact that rates are rallying, and we need to offset the current coupon risk in our MSR portfolio as that happens. So I will say that we don't get overly -- I think the word I typically use is -- fussed with 50 basis point coupon swap. There are times when there can be an extreme value difference in 50 basis points. But the truth of the matter is that we look at these risks a little bit on a bucketed basis, and there's not really a -- I wouldn't say that there's a strong strategic reason why that 50 basis point exposure is the way it is. It's just looking at the overall context of where spreads are and where spec pools are for those respective coupons and managing that risk on an overall basis. But we try to keep the exposure relatively tight around those current coupons because if tomorrow we walked in and rates were up 25 basis points, that exposure in our MSR would shift up in coupon and that chart would change to a reasonable degree. So we look at it in that sense of nearby coupons rather than just looking at a specific coupon, if that makes sense. Richard Shane: It totally does. And I have learned 2 new words to add to my mortgage glossary, derated and fuss. Operator: We'll take our next question from Trevor Cranston with Citizens JMP. Trevor Cranston: Can you guys give us a little bit of color in terms of what you're seeing on growth opportunities of the subservicing business? And in particular, I guess I'm curious if you think further growth in subservicing is likely to be in combination with MSR sales like we saw this quarter, or if you're seeing other opportunities beyond that. William Greenberg: Yes, thanks very much for the question. I think growing a subservicing business typically takes a long time. These are pretty sticky relationships that people have with their subservicers. And so we've been doing the hard work of maintaining and developing relationships and explaining to the world why we are an ideal partner for this sort of thing. So I think as other consolidation has occurred in the subservicing market, there are opportunities for us to pick up either some clients that are dissatisfied with their current subservicer or people who might feel that they have too much concentration risk as the number of subservicers in the world has decreased. And so we're out there trying to attract those customers with the value proposition that as investors ourselves, as MSR owners, as someone who can be more nimble with the portfolio and who knows where the money is contained in subservicing and can extract that for the benefit of owners, I think that's a story that's resonating and starting to resonate with other subservicing clients. We sold $30 billion of MSR to a client to seed a relationship like this. That was good. We sold the amount of servicing that we wanted to sell at this time. That's not to say that we wouldn't be open in the future for other sorts of opportunities to seed other subservicing relationships. One way that we can effectuate being able to modify our servicing portfolio, say, if we wanted to move up in coupon from low gross WACC to high gross WACC, one very good way to do that would be to see another subservicing relationship and then recycle that capital into new servicing that's higher WACC, that gives us different opportunities, or might be cheaper in some ways. So it's another tool in our toolbelt in order to be able to manage the portfolio and to grow the business together. Trevor Cranston: And then looking at the return estimates on Slide 14, I was just curious specifically on the securities portfolio. Looks like it went up a couple hundred basis points from last quarter, even though spreads are tighter. I was wondering if you just walk us through the math on why that went up. Nicholas Letica: Trevor, I'd be happy to do that, and that's a very good question. I just want to remind everyone that the spreads that we use in that calculation are actually on our -- it's on our actual portfolio at quarter end, as opposed to a stylized version of a levered spread that you see elsewhere in the market. And as you know, there's a wide variation of mortgage spreads available. And for mortgage-backed securities, it depends where you are on the coupon stack. Obviously, lower coupons have tighter static returns. Higher coupons have higher static returns, generally. So from quarter to quarter as the portfolio shifts around and spreads shift around, even if spreads move in one direction or another those numbers can go in opposite directions. And of course, it does include, as I said, everything we have in our portfolio. Our portfolio is predominantly mortgage-backed security pools, TBAs, things of that nature. But we do have other things in our portfolio like DUS bonds. We have derivatives like IOs or inverse IOs, for example. And that's a sector that we have added to in the last 6 months. Still a small portion of the portfolio, but have added to that. All those things mix in to generate those yields from quarter to quarter. And of course, we also have assumptions that we apply to generate those ranges. As we've said before, we have some financing assumptions up and down, we have some leverage assumptions up and down, and some prepay assumptions up and down. And all of those things go into that mix to generate that return estimate that you see on that page. Operator: We'll take our next question from Harsh Hemnani with Green Street. Unknown Analyst: Maybe on the direct-to-consumer origination platform, originations have been growing, and I think the strategic story there is, as prepayment speeds rise, the origination business could be a good hedge to MSRs. Given the cost saving strategies you've highlighted, does that impede the ability at all of the origination business to ramp up at the right time to be able to provide that hedge? William Greenberg: Harsh, thanks for the question. I have 2 thoughts about your question. The first is that we've always said that the DTC platform isn't meant to hedge the entire interest rate risk of the MSR portfolio, but only to hedge that part of it which is faster than expected speeds. And so we all know that when rates go lower, prepayments are going to go up and originations are going to go up and MSR values are going to go down. And we hedge that with financial instruments. It's only the part where speeds are faster than expected that we are expecting the DTC origination business in order to be able to add materially. Look, certainly I'm well aware that you can't cut cost -- you can't cut your way to growth. And we have to be very smart about how we're going to invest in technology and our ability to scale as mortgage rates go lower. And so that's why it's not a simple exercise of just cutting a certain amount across the board. Technology investments and improvements are going to be key to be able to maintain or retain that ability in order to get those benefits as rates fall. And so we're going to be careful about that and continue to make the investments that we need to make as well. One thing I will say about the DTC platform and the recapture rates that we've seen so far, while it is small, Nick said in his prepared remarks that only 3% of our portfolio is refinanceable from a rate and term perspective with mortgage rates here. But we've already seen recapture rates, not just record amounts in absolute levels, as I said in my prepared remarks, but also the recapture rates are higher than we have been modeling into our cash flows for these level of rates and for the portfolio composition that we have. So we're real excited and optimistic about the benefits that program is already producing. Unknown Analyst: And then maybe as I look at the coupon positioning, it seems like the higher coupons, you mentioned this in the prepared remarks, there seems to be a [ spread trade ] there where your long-specified pools and short TBAs to be able to capitalize on differences in prepay speeds there. But it seems like it's not necessarily the opposite but somewhat flipped in the intermediate coupons at the 5%s and the 5 1/2%s where exposure to TBA is higher. Can I maybe read into that, assuming that where current mortgage rates are, you feel like for the next quarter or so they hang out around [ here ]. Nicholas Letica: Harsh, no, I don't think you should read into that that conclusion. The TBAs, as I mentioned, rates have moved a reasonable amount, and we did rehedge -- with rates going down, we did migrate our exposure down along with our MSR and current coupon exposure. As far as the TBA concentration in those 5%s, 5 1/2%s, it's a mix of the fact of adjusting the portfolio a moment in time and also just how we see where specified pools are relative to TBAs at that juncture. We do employ a lot of TBAs to hedge our current coupon risk because it's easy to transact, easy and fast, and just allows us maximum flexibility with that stuff. But it's not necessarily a long-term commitment or a statement to how we feel about the specific -- the tradeoffs between spec pools and TBAs and those coupons. It's a moment in time, and as we see value in specified pools and depending on how rolls are trading, we'll make the determination as to whether we want that exposure in one or the other. But we do typically leave a fair amount of TBA exposure in those current [ coupon-esque ] type securities, so we have that flexibility. Operator: We'll take our next question from Merrill Ross with Compass Points Research. Merrill Ross: I wanted to talk about the MSR sales first. It seems like that was broken into [ $19 billion ] in the third quarter and there's a balance that will be transacted or has been transacted in the fourth quarter here. Is that right? William Greenberg: That other $10 billion is scheduling the end of this month. Merrill Ross: Okay. And then what were the characteristics of those MSRs? As I look at it, it seems like this is a financial investor, right? That makes sense. And they're looking for a very low coupon. Is that correct? William Greenberg: These were low-coupon sales, yes. Look, our entire portfolio is really centered around the low coupon. This was in that part of the portfolio for sure, yes. Merrill Ross: It just seems that the ones that you added on a flow basis can't be that low because mortgage rates are not that low anymore. So you've got a little bit of a rotation from these sales into slightly higher coupons. But it seems from what you said, you're willing to do that because the DTC is a better hedge against that decline in MSR value that you spoke about. Is that right? William Greenberg: That's correct. In fact, if you look at Slide 13, you can see the gross coupon rate of our portfolio increased from 3.53% to 3.59%. So this is a small change given that the additions that we've added weren't that big. But it also speaks a little bit to the fact that we sold generally stuff that was on average lower than the average -- at lower rate. And so that was the impact was the 6 basis point rise in the gross coupon. But given what I said about the DTC thing, this is something that we are totally comfortable with and desirous of because we think that higher coupon part of the MSR curve can be attractive to us given the recapture rates that we're seeing on the portfolio that we have. Merrill Ross: And so the sales that are going to settle will be pretty similar and have a smaller but directionally correct impact on the gross coupon, right? William Greenberg: Yes. Operator: We'll move to our next question from Eric Hagen with BTIG. Eric Hagen: Maybe following up a little bit there. How do you see MSR valuations responding to a further drop in interest rates? MSR valuations seem to be really strong right now. Do you see the same sources of demand holding up in a refi event? And how would you guys potentially respond to even higher MSR valuations at lower interest rates? William Greenberg: Yes. So, first of all, I would say that with our gross WACC of our portfolio at 3.60%, that is still almost 300 basis points out of the money. So at these level of mortgage rates, even 50 bps lower, 100 bps lower, this is still not going to have large impacts on the refinanceability of that portfolio. Certainly the way the MSR market and the mortgage market works is that when rates decline, prepayment expectations do go up, even albeit slightly given the gross WACC of the portfolio, but the MSR prices will go down. And we all know that. And it's in our models, in our estimates, it's in the way that we hedge the asset. And so, that seems to be something that I'm not worried about at the moment. If you're asking about how I think supply or demand will function in a 50 bps lower, 100 bps lower, I don't see it particularly changing given, what I said, the low gross WACC nature of it, the cash flows are still slow and stable and easy to hedge. Typically, what you see in refinance environments is that originators are able to hold their MSR as they're originating it. And the supply-demand switch really only reverses once rates start to rise after refi waves. So I think we're a long way from that. There continues to be very strong demand from various market participants for the low gross WACC MSR that we hold. Nicholas Letica: Yes, and I'll follow up with what Bill said, Eric, and that's just that if you look at the progression of technology and the ability to reach mortgage holders and be able to recapture, I think that there has been substantial improvements in that, I think, across the industry. So I think there's a greater ability by holders of servicing to recapture and retain the value of MSR compared to other points in the last 20 years of refi events. Not that it's perfect, but it is definitely better. So I completely agree with everything Bill said. I think that the hands that the MSR are in are very solid. Eric Hagen: On that point about market evolution, a question about the MSR repo financing. It feels like the MSR market has matured a lot. The size and the scale for you guys has improved considerably. Can you remind us the maturity on that MSR repo and the revolving credit facility. And do you think there's going to be any opportunities to maybe optimize the financing there next year? William Dellal: Our maturities are roughly in the range from 1 to 2 years. They do roll. When they roll closer, we do renew them. We will look for opportunities to see if we can improve the yield on the MSR, but basically it seems to be static right now. William Greenberg: Yes. To follow up on that, we continue to field incoming calls from people wanting to enter this space and provide financing on the asset. So I agree with your comment there, Eric, that the market has matured a lot since the financing on the asset really opened up in 2018-2019, and there continues to be more and more participants wanting to participate. And spreads are well supported. I wouldn't say that they're really going down a lot here, but they're well supported and stable at the levels that we're at. Operator: [Operator Instructions] We'll move to Bose George with KBW for our next question. Bose George: Just wanted to follow up on the MSR discussion. What's the valuation of the flow MSRs that you are originating versus your existing portfolio? And also can you remind us, can you reflect the value of recapture in the value of the originated MSR? And how does that differ for originated versus bulk MSR that you purchase? William Greenberg: Well, so I'm not sure I understood the second part of the question about whether we include recapture in our valuations. We mark our portfolio to the market price to where we think the thing would transact in the market. And so whether the cash flows include recapture cash flows or not is something that impacts the yield or the prospective return of the thing. It doesn't impact the price or the mark, if that makes sense. Bose George: Yes, it does. But I guess there's not a specific recapture assumption that goes in there. There's just a broader cash flow assumption that has an embedded recapture feature. Is that a way to think about it? William Greenberg: Yes, I guess. But again, I would just reiterate that that doesn't impact the mark that we value the asset at. Because if we had a different assumption, we would have other different assumptions, typically in discount rates, which would get us to the same market price estimates. Bose George: And then just in terms of the valuation, where is the originated MSR valued at now versus the lower coupon stuff? William Greenberg: Yes. If you look at the price multiple that we have on the whole portfolio, it's 5.8x on a weighted average basis for the whole portfolio. And there's a whole curve of price multiples as coupons change. So certainly, as the WACC -- as the note rate increases, that [ mult ] on those servicing levels will go down. So high WACC stuff over long periods of time, you can look at-the-money servicing typically trades on average between 4.5x and 5x [ mult ] depending on lots of things. But as a base rule of thumb, that's something where at-the-money servicing always trades, and this market is not inconsistent with that level. Operator: There are no further questions at this time. I'd like to turn the conference back over to Bill for any additional or closing remarks. William Greenberg: I'd like to thank everyone for joining us today and thank you as always for your interest in Two Harbors. Operator: This concludes today's call. Thank you again for your participation. You may now disconnect and have a great day.
Operator: Good day, and welcome to the Hope Bancorp 2025 Third Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Maxime Olivan, Strategic Finance Manager. Please go ahead. Maxime Olivan: Thank you, Billy. Good morning, everyone, and thank you for joining us for the Hope Bancorp Investor Conference Call for the Third Quarter of 2025. As usual, we will be using a slide presentation to accompany our discussion this morning, which is available in the Presentations page of our Investor Relations website. Beginning on Slide 2. Let me start with a brief statement regarding forward-looking remarks. The call today contains forward-looking projections regarding the future financial performance of the company and future events. Forward-looking statements are not guarantees of future performance. Actual outcomes and results may differ materially. Hope Bancorp assumes no obligation to revise any forward-looking projections that may be made on today's call. In addition, some of the information referenced on this call today are non-GAAP financial measures. For a more detailed description of the risk factors and a reconciliation of GAAP to non-GAAP financial measures, please refer to the company's filings with the SEC as well as the safe harbor statements in our press release issued this morning. Now we have allotted 1 hour for this call. Presenting from the management side today will be Kevin Kim, Hope Bancorp's Chairman, President and CEO; and Julianna Balicka, our Chief Financial Officer. Peter Koh, our Chief Operating Officer, is also here with us as usual and will be available for the Q&A session. With that, let me turn the call over to Kevin Kim. Kevin? Kevin Kim: Thank you, Maxime. Good morning, everyone, and thank you for joining us today. Let us begin on Slide 3 with a brief overview of the quarter. The third quarter of 2025 was a very positive one for Bank of Hope marked by continued progress across our strategic priorities to improve profitability and reflecting solid execution across the organization. Improvement in asset quality was a key highlight as was loan growth across all our major loan segments. Throughout the year, we have been making sustained investments in talent to support our growth, and I'm very pleased with the progress we have made so far. Before we dive into this quarter's results, I want to extend my deepest gratitude to all the bankers at Bank of Hope for their unwavering dedication and commitment to excellence. Their hard work is the driving force behind our success, and I'm incredibly proud of what we are building together. And now on to a discussion of our results. Net income for the third quarter of 2025 totaled $31 million, up 28% year-over-year from $24 million in the year ago quarter and up from a net loss of $28 million in the second quarter. Second quarter results were impacted by elevated notable items related to a securities portfolio repositioning, the close of the Territorial Bancorp acquisition on April 2, and impact from a California state tax law change. Excluding notable items, third quarter 2025 net income of $32 million was up 29% from net income of $24.5 million in the second quarter of 2025. In the third quarter, we saw loan growth across all our major loan portfolio segments of C&I, commercial real estate and residential mortgage. Our net interest margin expanded 20 basis points, which was our best linked quarter expansion since 2012. And importantly, our asset quality improved, led by our disciplined approach to credit management, which resulted in a 57% reduction in net charge-offs and noticeable improvement in classified and special mention loans including a 17% reduction in C&I criticized loans. Moving on to Slide 4. All our capital ratios increased quarter-over-quarter and remain well above the requirements for well-capitalized financial institutions, providing us with a healthy cushion to support growth and navigate an evolving macroeconomic environment. Our Board of Directors declared a quarterly common stock dividend of $0.14 per share payable on November 21, to stockholders of record as of November 7, 2025. Continuing to Slide 5. We continue to be focused on strengthening our deposit franchise, deepening primary banking relationships with our customers and lowering deposit costs through ongoing optimization of our deposit mix and disciplined pricing. As of September 30, 2025, deposits totaled $15.8 billion, reflecting a 1% decrease from $15.9 billion as of June 30, primarily driven by a $139.5 million reduction in broker deposits, partially offset by growth in customer deposits. Noninterest-bearing deposits totaled $3.5 billion at September 30, up 1% quarter-over-quarter. Moving on to Slide 6. At September 30, 2025, gross loans, including held for sale totaled $14.6 billion, up 1.2% quarter-over-quarter, equivalent to 5% annualized with growth across all our major loan segments. Year-over-year, production has been strengthening while maintaining disciplined underwriting and pricing standards. Loan growth this quarter also benefited from lower levels of payoffs and pay downs. Across the organization, we have been investing in talent to drive sustainable prudent growth and enhance our corporate and commercial banking capabilities. As a bank, we are focused on driving business development and deepening client relationships to expand market presence. With that, I will ask Julianna to provide additional details on our financial performance for the third quarter. Julianna? Julianna Balicka: Thank you, Kevin, and good morning, everyone. Beginning on Slide 7. Our net interest income totaled $127 million for the third quarter of 2025, an increase of 8% from the prior quarter and up 21% from the third quarter of 2024. This reflects loan growth, improved yields on earning assets and lower cost of interest-bearing deposits. Overall, our net interest margin increased 20 basis points quarter-over-quarter to 2.89% for the third quarter of 2025, up from 2.69% from the prior quarter. 9 basis points of the linked quarter expansion came from higher earning asset yields, 6 basis points came from lower funding costs and 5 basis points came from a favorable shift in balance sheet mix. On Slide 8, we present the quarterly trends in our average loan and deposit balances and our weighted average yields and costs. The cost of average interest-bearing deposits and the cost of average total deposits for the third quarter each declined by 8 basis points from the previous quarter. The acquisition of Territorial has enhanced our deposit position and renewals of CDs at lower rates provides a tailwind for continued cost reductions. With the September Fed funds target rate cut of 25 basis points, we realized an approximate 85% spot beta and reducing money market deposit rates. On to Slide 9, where we summarize our noninterest income. I will highlight quarter-over-quarter growth in service fees on deposit accounts, international banking fees, foreign exchange and wire transfer fees. During the third quarter, we sold $48 million of SBA loans compared with $67 million in the second quarter. Accordingly, we recognized gains from sale of $3 million for the third quarter compared with $4 million for the second quarter. Moving on to noninterest expense on Slide 10. Our noninterest expense totaled $97 million in the third quarter. Excluding notable items such as merger-related costs, noninterest expense was $96 million in the third quarter compared with $92 million in the second quarter. This quarter-over-quarter increase was mainly driven by higher compensation-related costs reflecting the company's sustained investment in talent to support growth. Importantly, revenue growth outpaced expense growth in the third quarter, generating positive operating leverage. For the third quarter of 2025, our efficiency ratio, excluding notable items, improved to 67.5% compared with 69.1% for the second quarter of 2025. Next, on to Slide 11. I will review our asset quality, the improvement in which was a highlight this quarter. Criticized loans declined $42 million or 10% quarter-over-quarter to $373 million at September 30, with decreases in both special mention and classified loans, and including a 17% linked quarter decrease in C&I criticized loans. The criticized loan ratio improved to 2.56% of total loans at September 30, down from 2.87% at June 30. Net charge-offs totaled $5 million for the third quarter or annualized 14 basis points of average loans, down 57% from $12 million or 33 basis points annualized in the second quarter. The quarter-over-quarter drop in net charge-offs reflected lower charge-offs in C&I loans. The third quarter 2025 provision for credit losses was $9 million. This compares favorably with a provision of poor credit losses of $15 million for the second quarter of 2025, which included $4.5 million of merger-related provision expenses that the company considered a notable item. Excluding notable items, the quarter-over-quarter decrease in the provision for credit losses, largely reflected lower net charge-offs. Finally, allowance for credit losses totaled $152.5 million at September 30 compared with 159 -- excuse me, compared with $149.5 million at June 30. The allowance coverage ratio was 1.05% of loans receivable at September 30 compared with 1.04% at June 30. With that, let me turn the call back to Kevin. Kevin Kim: Thank you, Julianna. Moving on to the outlook on Slide 12. Our outlook for the full year 2025 is updated as follows: We remain on track to achieve high single-digit loan growth in 2025, continuing to build on the growth momentum from the third quarter. We expect net interest income growth of approximately 10% for 2025. For 2025, we expect noninterest income growth of approximately 30%, excluding the second quarter loss on the securities repositioning, reflecting the year-to-date momentum across various business lines. We expect noninterest expenses, excluding notable items, to be up approximately 15% in 2025, reflecting the addition of Territorial's operations to our run rate and our investment in talent to enhance our production capabilities. Throughout the year, we have been adding experienced bankers to our Corporate and Commercial Banking teams. In particular, in the third quarter, we hired a seasoned commercial banking team, which accelerated some of our hiring plans. A leading institution recently exited one of our core markets, and we had the opportunity to bring this group of professionals to Bank of Hope to support our continued expansion. Our hiring is driving improved revenue growth and we expect to see sequential positive operating leverage in the fourth quarter with an improvement to our efficiency ratio. Lastly, we anticipate the fourth quarter 2025 effective tax rate to be approximately 14%, excluding the impact of notable items. With the improvement of our financial performance and strengthening of our balance sheet in the third quarter, along with the strategic additions to our banking teams, we believe we are well positioned to drive profitable growth and create long-term value for our stockholders. With that, operator, please open up the call for questions. Operator: [Operator Instructions] Our first question comes from Matthew Clark with Piper Sandler. Matthew Clark: Just on the margin, do you have the spot rate on deposits, I didn't see in the deck at the end of September and maybe the average margin in the month of September? Julianna Balicka: One second. On the spot rate of deposits at the end of September, it was 2.82% for total deposits and 3.62% for interest-bearing costs. And the average of deposits you see in our earnings tables in the NIM table, yes. Matthew Clark: The average margin for the month of September? Julianna Balicka: The average margin for the month of September, one second. The margin for the month of September was 2.96%. Matthew Clark: Okay. Great. And then just on Territorial. Any update there on how things are progressing? Cost saves you may have extracted so far from that deal? Julianna Balicka: We are continuing to focus on stabilizing and expanding operations there. As we mentioned last quarter, following the acquisition, there's been some homework in terms of staffing up branches and just making sure that our products are rolled out to that platform. So we're continuing to incrementally see cost savings as we kind of align the operations there, but nothing headline grabbing to report this quarter. Operator: Our next question comes from Gary Tenner with D.A. Davidson. Gary Tenner: I wanted to ask, Julianna, if you could give us the purchase accounting impact this quarter. I think last quarter maybe in the deck, but I didn't see it. So the loan discount accretion and then kind of the net purchase accounting benefit as well. Julianna Balicka: So yes, last quarter was the acquisition quarter. So we had the accretion number last quarter. So last quarter, the accretion was $4 million. And this quarter, the accretion was $5 million. Gary Tenner: It was -- I'm sorry, how much? Julianna Balicka: $5 million. Gary Tenner: $5 million was the loan accretion or the net benefit, overall? Julianna Balicka: The loan accretion. All other items were minimal. If you look at the table from last quarter, I mean, pretty much it was de minimis on each of those line items. Gary Tenner: Yes, they were canceled out, I think, last quarter. Okay. And then in terms of the CD maturities in the fourth quarter, can you give us the amount of maturing CDs and the rate they're rolling off at? Julianna Balicka: One second, let me grab that. Our CDs that are maturing in the fourth quarter, we've got $2.3 billion of maturity and an average rate of 4.08%. Gary Tenner: Okay. I'm sorry, you're fading out. $2.2 billion, you said? Julianna Balicka: $2.3 billion at a rate of 4.08%. Operator: [Operator Instructions] Our next question comes from Kelly Motta with KBW. Kelly Motta: I would like to circle back to the expense side of things. You guys mentioned in your prepared remarks that you've made a number of frontline hires that increased the expense run rate. Can you remind us kind of where you are in the process? It seems like some of the better revenue growth is helping to offset some of these investments you're making. So what -- two-part question, where are you adding? And where do you stand in this process? Kevin Kim: Well, Kelly, we have been adding new team members throughout the year. And the additions will strengthen our presence in strategic segments like lower middle markets, project finance, structured finance, entertainment, et cetera, as well as treasury management spread products and so on. Our focus remains on strengthening existing capabilities. And we are somewhat optimistic about the growth prospects with the addition of all these new people. Julianna Balicka: I would say, if you think about it, in the beginning, you hire leadership and more senior positions and then you're kind of filling more mid-level after that. So we -- we've filled in all the key leadership positions, and we've made a number of senior RM hires than the team that we referenced. But I mean, in the fourth quarter, we have more hiring plans and in 2026, obviously, because we're in a great position to be in to expand our organic presence and growth. Operator: [Operator Instructions] Our next question comes from Tim Coffey with Janney. Timothy Coffey: Question, with the government shutdown, does that make it hard to predict revenue from the SBA loan on sale business line? Kevin Kim: Yes. Well, first of all, outside of SBA, we do not really foresee any material impact to -- from the recent government shutdown. As to the SBA, as you may know, the U.S. Small Business Administration has suspended acceptance of new SBA loan applications and additionally, the secondary market for new SBA 7(a) loan sales has been halted. But -- from our side internally, there is no impact to the loans that have already received an SBA approval number. So in the meantime, while the government shutdown continues, we will continue to proceed business as usual for new applications so that these loans are fully prepared to submission to the U.S. SBA once operations resume. So hopefully, the government shutdown ends in a new future. But no matter what happens, I think we are in a good position in terms of our noninterest income in the fourth quarter and throughout 2025. Timothy Coffey: Okay. Great. That's excellent color. And then the other question I had was on the nonaccrual loans. Commercial real estate, I think about half of them right now. And in relation to the totality of the portfolio, it's a relatively small percentage, but they are up quarter or year-to-date rather. Can you kind of describe some of the challenges some of those loans are experiencing? Peter Koh: Yes, this is Peter. I think our NPLs have been relatively flat this quarter. Some of the CRE loans and actually for all the loans in that category, sometimes it just takes time to work out. And we feel good. I think there's a level of problem credits there that we are honed in on. And I think it's just a matter of time before we're able to come to resolutions there. Operator: Our next question comes from Kelly Motta with KBW. Kelly Motta: I just wanted to ask a bit broader about kind of the loan growth ahead. I think you mentioned that growth this quarter was positively benefited by lower payoffs and paydowns. Just given the potential for rates to decrease here. Wondering how you guys are thinking through that impact and your ability to offset that with the pipeline ahead, both next quarter and beyond, if possible? Kevin Kim: Yes. As to our current pipeline, we have a strong pipeline going into the fourth quarter. And we expect our strong pipeline will support our loan growth outlook for the rest of the year. And our fourth quarter loan pipeline is pretty comparable to what we had at the beginning of the third quarter. And we continue to see improvements in our C&I driven by recent frontline additions, as you said. And our CRE pipeline remains pretty, pretty stable. Although we -- in the past, we typically experienced some seasonal slowdown towards the year-end. We expect that our loan growth guideline for the entire 2025 will be a good number for us to share. Kelly Motta: Got it. And I appreciate the color around both the deposit spot rates as well as the spot rate beta on the money market where it seems like you're being successful there. Just wondering, in terms of the competitive environment for deposits, it seems like you're having success on the money market. Can you remind us where new CDs are coming on? And the beta was relatively high on the way up, how you guys are thinking about balancing beta with the outlook for a need for funding ahead? Julianna Balicka: Yes. So we reduced our CD pricing with the last Fed funds cut, right? And new CDs most recently have been coming on closer to 4% for the exceptions and below 4% for the non-exceptions. And so we're kind of continuing to think of deposit pricing as moving with Fed funds market pricing. And with the additional Territorial, we have been in a good position to where we can afford to be more price sensitive, if you will. And the beta was high on the way up because the balance sheet dynamics were different at that point in time. And I'll remind the analyst community that on the way down, right now, our loan-to-deposit ratio is in the low 90%, which is a much different starting point. And I'll also remind the analyst community that on the way up, we had a much higher percentage of broker deposits in our deposit mix. And today, we're sub-5%, around 5% kind of numbers that we shared with you previously. So we're in a much different position today than we were on the way up. So I am optimistic about our ability to have good deposit cost results. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Kevin Kim: Thank you. Once again, thank you all for joining us today, and we look forward to speaking with you again in 3 months. So long, everyone. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, ladies and gentlemen, and welcome to the MSCI Third Quarter 2025 Earnings Conference Call. As a reminder, this call is being recorded. [Operator Instructions] I would like now to turn the call over to Jeremy Ulan, Head of Investor Relations and Treasurer. You may begin. Jeremy Ulan: Thank you. Good day, and welcome to the MSCI Third Quarter 2025 Earnings Conference Call. Earlier this morning, we issued a press release announcing our results for the third quarter of 2025. This press release, along with an earnings presentation and brief quarterly update are available on our website, msci.com, under the Investor Relations tab. Let me remind you that this call contains forward-looking statements, which are governed by the language on the second slide of today's presentation. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made, are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from the results anticipated in these forward-looking statements. For a discussion of additional risks and uncertainties, please see the risk factors and forward-looking statements disclaimer in our most recent Form 10-K and in our other SEC filings. During today's call, in addition to results presented on the basis of U.S. GAAP, we also refer to non-GAAP measures. You'll find a reconciliation of our non-GAAP measures to the equivalent GAAP measures in the appendix of the earnings presentation. We will also discuss operating metrics such as run rate and retention rate. Important information regarding our use of operating metrics such as run rate and retention rate are available in the earnings presentation. On the call today are Henry Fernandez, President and CEO; Baer Pettit, our President and COO; and Andy Wiechmann, our Chief Financial Officer. [Operator Instructions] With that, let me now turn the call over to Henry Fernandez. Henry? Henry Fernandez: Thank you, Jeremy. Good day, everyone, and thank you all for joining us. In the third quarter, MSCI delivered strong financial and sales performance that highlighted many of our underlying competitive advantages. We had organic revenue growth of 9%, adjusted EBITDA growth of 10% and adjusted earnings per share growth of over 15%. Since the beginning of the third quarter, we repurchased $1.25 billion worth of MSCI shares. This brings our year-to-date share repurchases to over $1.5 billion, which demonstrates very strong conviction in the value of our franchise. Moreover, MSCI's Board of Directors has authorized $3 billion worth in additional share repurchases for the next few years. Our third quarter operating metrics included total run rate growth of over 10%, which includes asset-based fee run rate growth of 17%. Our asset-based fee performance was driven by record AUM levels in both ETF and non-ETF products linked to MSCI indices. In my remarks today, I will discuss a few of the biggest themes from our third quarter results, starting with our Index franchise. Q3 underscore the depth and versatility of our Index franchise. MSCI achieved recurring net new subscription sales growth of 27% in Index, including 43% growth in the Americas. Total AUM in investment products linked to MSCI indexes reached $6.4 trillion globally, including $2.2 trillion in ETF products and $4.2 trillion in non-ETF products. There are now 4 ETF products linked to MSCI indices that have more than $100 billion in AUM. This helped our ABF run rate hit a new record high of nearly $800 million. The ongoing adoption of MSCI indices showcases the investment community's confidence in using our indices as a foundational element of their portfolios and to help them attract capital. In Analytics, MSCI delivered recurring net new sales growth of 16%, driven by strong adoption of our risk tools and equity models by multi-strategy hedge funds. Our growth in Analytics increasingly supports our growth in Private Assets and vice versa. Last month, for example, MSCI launched a private credit factor model, powered by data from more than 1,500 private credit funds in our proprietary database. This factor model will provide investors with improved transparency and a consistent, integrated view of market risk for a fast-growing asset class. Elsewhere in private assets, we recently launched a new global taxonomy, known as MSCI PACS, the private asset classification standard. This proprietary asset classification framework aims to bring consistent comparable standards to private markets. Powered by artificial intelligence, this new taxonomy covers a wide range of private assets, including private companies, real estate and infrastructure. The new framework builds on MSCI's long history as a standard setter in public equities. And investors can use it to benchmark, analyze and communicate portfolio strategies and performance. As the last example illustrates, MSCI's innovation teams are rapidly leveraging AI models, especially on our large proprietary databases, to enhance existing products and develop new capabilities. AI is allowing us to unlock significant value for clients, which will also lead to meaningful value creation for our shareholders. In addition to rapid expansion in new products, MSCI is significantly expanding our presence with newer client segments, while deepening our penetration of more established segments, which Baer will discuss. And with that, let me turn things over to Baer. C. Pettit: Thank you, Henry, and greetings, everyone. As you are aware, over the past year or so, I have framed my remarks on these calls through the lens of MSCI's main client segments, and I will continue to do so as we grow our footprint with newer segments and deepen our penetration of existing ones. With that in mind, as you saw in our earnings materials, MSCI recently enhanced our client segmentation strategy. Details and comparison points are available in our Q3 earnings presentation. Starting with hedge funds, MSCI delivered 21% recurring net new subscription sales growth. This was our highest Q3 ever for new recurring sales to hedge funds, with notable strength in Analytics. In particular, we see ongoing strong demand from hedge funds for MSCI's equity factor and enterprise risk and performance solutions, which have become deeply embedded in many clients' investment workflows. For example, MSCI closed a 7-figure renewal deal with one of the world's largest hedge funds in which our contribution to their alpha generation and risk management is central. We also completed a global deal with a large U.S.-based hedge fund that will expand its use of our enterprise risk and performance tools. Our analytics solutions are now fully integrated into every aspect of this client's risk management process, including its capital allocation framework for individual portfolio management teams. The common theme here is that amid elevated levels of market volatility and uncertainty, hedge funds want deeper, faster insights into key sources of investment risk and return. MSCI is fortifying our position as a trusted partner. Turning to wealth managers. We achieved nearly 11% subscription run rate growth, driven by a balanced mix of contributions from across product lines. Recently, a large independent wealth manager in the U.S. licensed our private capital fund transparency data to enhance client reporting on private funds. This shows how MSCI is enabling both scaled data gathering and the standardization of private asset data to provide the enhanced portfolio insights client need. Indeed, wealth managers' growing demand for tools and standards in private markets creates a great opportunity for us. We also have a growing list of clients licensing MSCI Wealth Manager, which has allowed us to deliver unified solutions for the home office with advanced tools spanning personalized client portfolios and proposal generation, along with regulatory workflow support. Shifting to asset owners, we posted 9% subscription run rate growth, driven by Analytics, Private Capital Solutions and Index. In one of our biggest deals in the quarter, MSCI renewed our relationship with a major Canadian pension fund across our equity models and risk tools. We also expanded our Private Capital Solutions relationship with a U.S.-based asset owner as we support this client's increasing demands for total portfolio solutions and performance measurement and transparency as they grow their private market allocations. In addition, a rising number of LPs are using MSCI private capital indexes and our newly launched frozen indexes as their policy or performance benchmark, reflecting a shift away from public proxies and return targets and have increased alignment with MSCI standards. We are, therefore, confident that our investments in private capital indexes will help create significant value both for clients and for MSCI. Moving on to banks and broker-dealers. MSCI delivered 9% subscription run rate growth, including a record level of Q3 recurring sales. This was driven primarily by Index, which also posted its highest Q3 ever for new recurring sales. Our most notable Q3 business win was a global index renewal deal with one of the largest banks in Europe that highlighted the mission-critical role of MSCI Index data sets in their trading, index rebalancing research and product creation capabilities. Turning finally to asset managers. We achieved subscription run rate growth of just over 6%. MSCI is working intensely to increase our growth trajectory with this segment, and our efforts had a meaningful impact in Q3. In fact, we delivered our highest Q3 on record for new recurring sales to asset managers in Index, which helped drive 11% overall new recurring sales growth with asset managers across MSCI product lines. For example, we landed a 7-figure deal with one of the world's largest asset managers in support of their wealth management strategy. MSCI is providing financial advisers with ever more sophisticated analytics tools such as stress testing, which helps them grow their business and support their own clients. We also completed a large deal with a top European asset manager to help them develop a centralized program for their risk, performance factor and sustainability analytics across investment teams in different global locations. This was another great example of our ability to expand and deepen existing client relationships using our One MSCI integrated solutions. Looking ahead, we are encouraged by MSCI's long-term opportunities and our ability to drive growth from recent areas of innovation and investments, all of which should help us remain the mission-critical provider of choice for clients across the capital markets. And with that, let me turn things over to Andy. Andy? Andrew Wiechmann: Thanks, Baer, and hi, everyone. Our third quarter results highlight the momentum we are building across product lines, a dimension on which I will provide some additional color. Within Index, where asset-based fee run rate growth was 17%, equity ETFs linked to our indexes captured $46 billion of inflows during the third quarter. We continue to see strong demand for ETFs linked to MSCI developed markets ex U.S. indexes and MSCI emerging markets indexes. And index subscription run rate growth was 9%, including nearly 8% growth with asset managers, an area where we saw some strength in the Americas. We recorded our best third quarter ever for Index recurring net new subscription sales, aided by our DM and EM modules and solid subscription run rate growth in the nonmarket cap category. We've been encouraged to see that new Index products launched since the beginning of 2023 generated about $16 million of new recurring subscription sales over the last 12 months. And the Index retention rate remained durable at nearly 96%. In Analytics, we had subscription run rate growth of 7%, driven by our highest Q3 ever for recurring net new sales. Recurring sales in Analytics benefited from 29% growth in Equity Solutions, with strength among hedge funds in the Americas and APAC. Additionally, we saw strong sales of our multi-asset class analytics, most notably with hedge funds as well. In Sustainability and Climate, we saw 8% subscription run rate growth for the reportable segment, with roughly 6% subscription run rate growth from Sustainability Solutions and 16% subscription run rate growth from Climate Solutions. The Sustainability and Climate retention rate was almost 94%, slightly higher than last year's level of 93% and reflecting the must-have nature of our tools. Additionally, we are seeing solid demand for new solutions such as our geospatial offering, which is seeing traction across client segments, including in particular with banks. In Private Capital Solutions, we closed about $6 million of new recurring subscription sales in the quarter, with success across client segments including established segments such as endowments and foundations as well as newer areas for us such as wealth and GPs. Additionally, we continue to see strong momentum with our total plan offering. In Real Assets, recurring net new sales improved, aided by stabilizing retention trends. We're also driving sales from newly introduced product areas, including our data center offering, which has gained traction with GP investors. Across PCS and real assets, the retention rate improved slightly to 93.3%. Finally, turning to our full year guidance as we close out 2025. The increase in the low end of our expense guidance range is consistent with our past comments and driven by the strong growth in AUM levels linked to our indexes. As a reminder, interest expense guidance reflects the previous notes issuance during the third quarter, and the increase in free cash flow guidance reflects business growth and the impact of tax benefits. In summary, MSCI's strong Q3 results are reflective of our mission-critical, durable solutions and our accelerating pace of innovation. We are seeing solid momentum in delivering new products, capabilities and enhanced go-to-market efforts, and these are translating through to tangible results. We look forward to keeping you posted on our progress. And with that, operator, please open the line for questions. Operator: [Operator Instructions] And our first question will come from Manav Patnaik with Barclays. Manav Patnaik: Henry, I just wanted to ask kind of a bigger picture question on your strategy around private credit. There's clearly a scarcity of data assets out there, which is why some of the multiples these assets trading at seems to be very high. But just curious from your perspective, where do you feel like you have the missing white spaces or whatever you feel like you need to fill in? And how integral is the Moody's partnership to your strategy there? Henry Fernandez: Thank you for that, Manav. We are very bullish in our work on private credit. If you step back a little bit, the new banks in America and parts of the world are the private credit funds, the provision of private credit is moving, in addition to banks, to private credit funds. That is a secular trend. There may be some ups and downs, but that's a secular trend. It's structural. And those banks -- I mean, those private credit funds need to attract investors to fund the provision of credit. There is not enough institutional capital in the world to fuel the funds that are needed, the assets that are needed in this private credit funds. So they need to attract, in addition to institutions, large parts of the wealth management industry, the retail industry and now the 401(k) industry. In order for that to be viable and achievable in a sustainable and responsible way, they need the tools for these funds to demonstrate what's inside the fund, what's the credit worthiness of it, what's the market risk of it, what is the valuation of them, and so what are the terms and conditions on the underlying loans, et cetera, et cetera. So in the last 9 months, we've been very feverishly innovating on this. The first one was we created terms and conditions on -- we looked at our database, proprietary private credit database. We found 2,800 funds, private credit funds, that are not asset-backed. And we developed terms and conditions on 80,000 loans that are -- represent 14,000 borrowers, in these 2,800 funds. Then we moved on to create credit assessments of these funds with the Moody's. We licensed the Moody's credit risk models. We applied it to the MSCI database and we have launched the credit assessments of a lot of these funds, which are highly needed in this volatile environment in credit that we've been listening to in the media recently. Then we created a taxonomy of private credit in order to develop market risk measurements of these private credit funds, and we launched the factor risk models on them. So that's been another innovation. And now we're looking into how we develop evaluated prices in private credit in order to provide an independent, trusted source of valuation that can be basis of liquidity. So none of those things are yet translated meaningfully into high revenue, high sales, but they will. And we are incredibly needed in this space as the trusted source of information about the benchmarks. I forgot to mention that we launched, I don't know, 60, 80 different private credit indices as well in the last few months to basically make people understand the private credit fund relative to a market benchmark. So that's another innovation that we did. So we are very bullish in this space and we intend to be the leading provider of all these transparency tools. Operator: And our next question will come from Alex Kramm with UBS. Alex Kramm: So last quarter, one of the messages was really that you're going to start leaning in more into these other new client segments outside of the traditional asset managers. Obviously, Baer gave a lot of color already in terms of the growth rate there. But can you just talk about in the last 3 months like what you've been doing in terms of new products, but also I think you're kind of doubling down on marketing and sales? So any new things that we should be excited about? And when do you actually see this can make a material impact to you on results? Henry Fernandez: Thanks for that question, Alex. The strategy is really two-pronged. We believe strongly that the active asset management industry needs us in this difficult time. But it needs us not as a cost center to them and put more pressure on their financials. They need us as a company that can help them create new products. So we're very focused on creating that, especially in the active ETF space, so we can help clients do that. You saw the recent launch with Goldman Sachs Asset Management of the Private Equity Tracker Fund, which is a very innovative approach to look at the -- at our database of private equity, to understand the returns and the risk of all of that, and then replicate that through public equities in a way that provides liquidity. So that's an example of something that can generate revenues for the active asset management industry. So -- and we saw early signs of that recovery for us. The industry continues to be challenged. But if we can help them develop products and generate revenues, we're going to do very well with them. The second part, Alex, as you know, is the expansion into other client segments. And that's the reason we presented in these slides -- at the end of the slides, the 2 pages of the redefinition -- not the redefinition, but the breakdown of the client segments at MSCI on the subscription part. And you can see that we can benefit significantly by helping the asset management industry because we have 46% of our subscription run rate on that and we can benefit if we make it grow. Hedge funds are a very significant spot for us and other parts of what we call the fast money, which is market makers and broker dealers and all of that. We've done very well there. And one of the reasons is not only the risk tools that we sell, but what we have begun to realize is MSCI has a huge ecosystem of trading around its indices. It's $18 trillion benchmark to MSCI, of which $6.5 trillion or $6.4 trillion is passive. And that has a huge ecosystem that needs liquidity. So we're developing data sets and products for all these market makers and broker dealers to help fuel that liquidity. So we believe that we have a lot of opportunities with that segment, more than we even estimated in the past. So that's an area that we're focused on. Obviously, asset owners, it's always been our sweet spot in Index and Analytics, and now very intensely in what we call PCS, Private Client Solutions, because these are big investors in private assets, and they need more and more transparency, understanding of performance and risk and pacing models and all of that. So we're stepping up significantly our PCS efforts. And we believe that we've seen some softness in PCS. We are going to turn the corner, particularly with the institutional asset owner space. And then there's wealth management. The wealth management part, as I said before, needs us very significantly because a big part of the allocations into wealth management is into private assets, particularly in private credit, but they need to do it in a way that is responsible and compliant. And they don't run afoul of selling products that the individual investors don't understand. So we are gearing up significantly for a major expansion in private assets and wealth management, in addition to helping them build portfolios through what we call MSCI Wealth Manager. So that's a little bit of a rundown of where we are. So we're very optimistic that with the significant revving up and ramping up of the new product machine at MSCI in the last 9 months that this -- the softness that we highlighted in the prior quarter, last quarter, is beginning to turn, not necessarily because the investment industry is extremely bullish, the markets are bullish, but the budgets are -- may not be as bullish, but it's because we can create a lot of new solutions that are going to help these people solve a lot of problems. And that's the strategy: deepening and helping become a revenue center for the active asset management industry and obviously sell a lot of the things into the other client segments. Operator: And the next question will come from Toni Kaplan with Morgan Stanley. Toni Kaplan: Henry, you touched on in the prepared remarks that your teams are leveraging AI models, AI to help develop new products. And I was hoping you could give us an update on where you see the greatest opportunities to leverage AI, both on the revenue as well as on the cost side. And any quantification would be great, but also just what those products look like and what the cost savings opportunities are. Henry Fernandez: Thank you for that question, Toni. And let me start by saying that we in the past hasn't really talked a lot about AI because our style at MSCI is not to talk about intentions but to talk about actions and real tangible things. So that's one of the reasons you haven't heard us talk a lot about AI. But since ChatGPT was launched 3 years ago, we've been feverishly looking into and permeating every aspect of MSCI with AI. And the punch line is, AI is a godsend to us. Let me repeat that, AI is a godsend to us. Because what MSCI is, it's a company that collects large amounts of data, proprietary, unique data. AI is going to help us scale up dramatically, 1,000x more in the next 5, 7 years in data sets. Secondly, we then build a proprietary and unique investment and risk models to apply to that proprietary data. You can only imagine how much AI is going to help us do that. And then three, we're going to deliver all of that content to our clients in a way that they can consume in any way they want. So MSCI has never been a workflow software solution vendor. A lot of our proprietary sort of workflow systems like Risk Manager, BarraOne and all that, they're there to sell the content that we got. And it's almost like a necessary evil, right? So if we get the world to create every way, every type of access into our content by themselves, we don't have to spend any time on that or any money on that, and that's going to propel those to much higher levels. So we've been very busy in permeating every part of what we do. So if you start with the whole employee base, 6,250 people, almost 100% uses AI every single day. I actually made it a year ago a condition of employment that everyone needs to use AI tools every single day like using a phone, using word processing or Excels and things like that. So we're very proud of that. Then, we have permeated AI into all of our operations, especially data capture. We have basically saved hundreds and hundreds of employees -- new hires of employees by using AI in private assets, for example, in Private Capital Solutions, in Sustainability, in Climate. For example, this geospatial product that we have is all based on AI and the like. We are -- so that has created incredible efficiency for us, tens of millions of dollars, that are not yet -- that are just the beginning of what we can do. And then lastly and most importantly is that we have used AI to build products. So a lot of our custom index factory is built by AI-driven methodologies, that is not a human in research with -- as an artisan trying to build an index and it takes 6 months and all of that. No, we want to do this instantaneously using AI. So a lot of what we're launching in custom indices is AI-powered. As an example, the geospatial data sets that are being popular now that were built -- that we're selling, it's all AI-driven. And of course, a lot of the data that comes out of private assets and sustainability is AI-driven. So again, we haven't really talked a lot about this. We did -- we answer questions, but since you asked and there is so much focus on this, we might as well tell you exactly what we're doing. And in terms of products, I think there's somewhere between $15 million, $20 million of products that were sold this year out of 25 new products, that are all AI-powered. So that's the way where we are. So if anybody -- this is going to be a godsend to us. Now I cannot tell you enough that the biggest problem MSCI has is that we've got so many opportunities and so little investment money and we want to keep the profitability of the company the same. So that's not an easy thing to square. But if we apply AI dramatically and we can lower our operating run-the-business expenses by 5%, 10%, 15%, all of that money can go into investing into the change in the business, and that will create an incredible upsurge in product development for us. That's a goal that we have for '26. Operator: And the next question is going to come from Ashish Sabadra with RBC Capital Markets. Ashish Sabadra: So in the quarter, we saw really strong momentum in the Index and Analytics net new subscription sales. There, obviously, you talked about some big deals there also with the asset manager and one of the largest banks in Europe. My question was much more focused on the pipeline. As we get into the fourth quarter, any comment on the pipeline as well as the sales cycle as we get into one of the highest -- seasonally highest bookings quarter? Andrew Wiechmann: Sure. Ashish, it's Andy. So definitely, as you alluded to, encouraged by the results in the third quarter. They've been fueled by the product innovation, the accelerating pace of product development that you've heard us talking about here. And so that's encouraging. In terms of the overall environment and market backdrop, I would say it's relatively stable. We've seen fairly consistent dynamics to what we've seen in the past. On the margin, the sustained favorable market momentum is constructive. And we have seen pretty good results in the Americas, most notably in Index and Analytics as we talked about. And so we are generally encouraged by the healthy product pipeline and acceleration in product development that is supporting a strong client engagement, as Henry alluded to, both across asset managers as well as the broader range of client segments that we're targeting. And so we are seeing a relatively stable dynamic across the business. I would highlight that we do expect the dynamics we've been seeing in sustainability to continue in the near term. So similar to what we've talked about in the past, those dynamics that we've been seeing there, the pressures we've been seeing there, we expect to continue in the coming quarters. But overall, I'd say dynamics across the business are fairly consistent and the performance is really being fueled by and driven by our product innovation. Operator: The next question is going to come from Alexander Hess with JPMorgan. Alexander Eduard Hess. Alexander EM Hess: I just want to touch briefly on the non-ETF and the fixed income businesses. On the non-ETF side, there's been pretty rapid growth in the ETF revenues, I think, about 19% year-to-date. And the non-ETF is tracking a good deal behind that. Was there any prior year sort of hurdles that are pushing down the non-ETF revenue growth? And then on fixed income, can you remind us what the AUM is there as of 3Q, and if there was any reason why, if my math is right, there was a little bit of a quarterly dip in the run rate for that business? I just wanted to sort of unpack that a little bit. So I know that it's a lot to ask you, but hopefully, we can... Andrew Wiechmann: Yes. Alex, it's Andy here. So on the non-ETF passive front, we -- to your point, we can have impacts from true-ups and true-downs which can skew the period-to-period comparability. And so as you know, there can be some lumpiness in any given period. We can also, at times, see some modest fee adjustments on the client funds, and that can lead to some lumpiness in revenue and revenue recognition as well as run rate. And so I wouldn't read too much into lumpiness in the growth rate there on the revenue side. This does continue to be a very important growth area for us. We've seen some very nice new fund creation on the custom side. This is an area where a lot of the efforts that we've made on our custom index capabilities and the growing focus on customization and customized outcomes manifest itself, and we're in a unique position to help these organizations that are really anchored to our frameworks and looking to achieve objectives around our frameworks. And so wouldn't dig in too much to the revenue growth on that front. On the fixed income side, the AUM and ETFs linked to fixed income indexes or fixed income indexes and partnership indexes is around $90 billion. And so it's been a nice growth area for us that's continued to grow. Similarly, I wouldn't read too much into revenue growth in any one period on that category. We are heavily focused on continuing to drive adoption, new innovation there and fueling the overall AUM growth across the fixed income category and continues to be an important area for us. Henry Fernandez: What I would add is that, obviously, we see the challenges in Sustainability and Climate -- in the segment of Sustainability and Climate at MSCI, as you see it. But a meaningful part of the monetization of all of that is happening in equity and fixed income indices. And it's in both, but in fixed income indices, the percentage is even more as a total. So we've been very successful in -- especially in Europe, in having clients come to us, and we've helped them design climate -- lower climate risk, fixed income indices that they can use as a portfolio either to give it to an institutional index manager or to turn it into an ETF. And we see that continuing. And a lot of our investment in climate is not only climate in its own, in order to sell it directly, physical risk, transition of energy and transition risk and all of that. But it's because we believe there would be a large monetization of a lot of this climate IP in the form of indices and index investing. So yes, when you look at the totality of Sustainability and Climate, it's a little challenged. But you also have to look at the One MSCI Sustainability and Climate franchise and see where the monetization is happening. Andrew Wiechmann: Just to put a finer point on that, I think Henry hit a critical item here. That $90 billion of fixed income ETF AUM, the large majority of that is Sustainability and Climate related. If you look at equity ETFs linked to our Sustainability and Climate indexes, it's about $360 billion. And within that, about $135 billion or so is climate-specific indexes. On the non-ETF front, relating to your question, where we are seeing incredible focus by institutions and asset owners to develop specific climate outcomes, the non-ETF climate AUM is about $316 billion. So these are big, becoming meaningful contributors in helping to fuel the growth of the business. Operator: And the next question will come from Kelsey Zhu with Autonomous. Kelsey Zhu: On active ETFs, could you just talk a little bit more about the economics of the products and services you provide in that area as well as your competitive advantages? Also, if the overall AUM continues to shift from active mutual funds to active ETFs, is that a net positive or net negative for MSCI? C. Pettit: Sure. So active ETFs are a quite distributed category with things which are really just quite literally putting an ETF wrapper on a purely active fund, through to things which are very rules-based and which are much more like an index or which are an indexed version of an active strategy. So the good news is that we are able to monetize across a lot of that spectrum, not merely in the Index business, but a fair amount of it also in Analytics with portfolio construction, et cetera. So in terms of the more specifically Index-linked component, we're now up to almost $30 billion of assets in that category, and the AUM was up 10% quarter-on-quarter, not year-on-year, quarter-on-quarter. So we think this is an extremely attractive category. We're very engaged in it. I think it's difficult to say exactly how that will play out over time in terms of the economics and the scale, but it's growing dramatically and it's certainly not cannibalizing at all anything we do today. It is literally new revenue, new money, new opportunity. So I think we're very excited about it, both, as I said, from selling of tools, selling of data and information and also from an index construction and licensing point of view. And we believe that we're going to see those numbers become more important in the future. Henry Fernandez: Yes. And as I said prior, I just want to emphasize this point, which is over the last year or so, we've been seriously analyzing the active asset management industry and how do we help the industry recover? How do we help the industry build competitive advantage and add value? And how do we benefit from that in increasing our growth? And therefore, one of the components, not the only one, but one important component of that is helping that industry go from mutual funds and other forms of investment vehicles to active ETFs. And we play a large role in there, as Baer indicated. So this will be one of the things we'll talk some more about in the future, which is how do we regain significant growth by MSCI in the active asset management industry? This is one of the components. Not the only one, but one of the components. Operator: The next question is going to come from Owen Lau with Clear Street. Owen Lau: I do have another question on AI. And Henry, I really appreciate your response to the previous AI questions. But I do want to ask this question from a different angle because there has been quite a lot of conversation about how AI has negatively impacted the whole sector. One concern is AI investment could compress margin if that investment couldn't bring in enough revenue. How do you get the confidence that you invest in, I think you called about 15 or 20 AI projects, but that can maintain or accelerate your revenue growth, but at the same time, you can still drive margin expansion? Henry Fernandez: The punch line, believe it or not, is that AI will dramatically increase our margins, really dramatically, because we'll be able to create a lot of new products, scale them faster to a lot of various participants and the various client segments, and it will significantly reduce costs to us as we use AI agents rather than humans to run. A lot of what we do at MSCI is systematic, and therefore, you can systematize that with an AI agent, in terms of methodologies, capturing data, running performance, running risk in our clients' portfolios, building models, building software. So it's literally going to chop off a lot of our operating expenses. The question is, how do we get there? And the benefit that we have is that we don't need to build large language models. We need to buy them and train them to apply to our data. So we don't have that cost. Secondly, we don't need massive data centers or any data centers. We have our own -- our clients are the ones that are running a lot of this. So we don't have to invest in chips or in data centers or in electricity, power and all of that. So we are going to be a major beneficiary of what is called apply AI to an industry, and our industry is made up of data, investment models, investment and risk models, and technology. And therefore, AI for us is we can build a lot more data, we can build a lot more models, and we can use a lot more technology and distribute it. So that's very important. And therefore, the investments required for us to achieve that are not significant. Let me repeat that. The investments for us to achieve that are not very significant. It's a question of retooling what you do to be AI compliant so that you can put a large language models on a data set that is already AI-friendly, so to speak. We need to hire AI people, AI experts that can help us. We just hired 2 managing directors in our research operation that are AI experts in helping us build AI agentic models, investment risk and performance models and all of that. So I do not see a reduction in margins in order to accommodate the investment that we need to make in AI. But having said that, I don't want you all to bank the increased margins that we're going to use, that we're going to gather in AI, because we want to put them back into investments in the company to grow faster. So that's the punch line, right? Operator: And our next question will come from Scott Wurtzel with Wolfe Research. Scott Wurtzel: I just wanted to go back to the asset manager end market. It sounded like it would be 11% sales growth, you're seeing some momentum there. But just wondering if you can maybe characterize if this sales momentum is around kind of incremental demand from asset managers or maybe more of a kind of release of pent-up demand in the pipeline. Andrew Wiechmann: Yes. I would say, going back to my comments earlier, the environment has been relatively stable, consistent with what we've seen in past quarters. And so the strength that we saw in the quarter, as we mentioned, was most notable in Index. We also had solid recurring net new within Analytics. This was particularly the case in the Americas. And a lot of this has been fueled by us selling more to our existing clients. So we've had success upselling additional content and services, particularly within Index, which has definitely been encouraging for us to see, and a lot of that's been enhanced by our product development pipeline. I would say performance with asset managers can be a bit lumpy. But generally, overall, we're seeing quite stable results, and we are also pretty encouraged by the solid retention rate with asset managers, which is about 97% across the company in the third quarter. And so I wouldn't call it a trend, but there are definitely encouraging results that we're seeing with asset managers and saw a solid quarter. Operator: And the next question will come from Craig Huber with Huber Research. Craig Huber: Henry or Baer, I want to ask you, a lot of school of thought out there with investors here in the last year plus that AI will be a net negative for your company and peers out there, other information service companies, in that it will allow new entrants to come into the marketplace and take significant share over time. I hear what you're saying about what you guys can do with AI, but I'd like you if you could just touch on more about the competitive moat you have, why others will not be able to come in here and take significant share across any of your major verticals, business lines at MSCI. Henry Fernandez: No. Thank you for that, Craig. I think, look, the -- one way to look at it is to split it into the 3 kind of processes, right? The first process is capturing data. The second one is applying investment and risk models on that data. And the third process is distributing the content to clients. So let's start with the last one. We are not a traditional sort of workflow software solution provider company. If anything, we've been criticized in the past that our workflow, the front end that we have is not as cutting-edge, not as advanced in BarraOne and Risk Manager and ESG Manager and all of that. And we've been hesitant to put a lot of money into that because we see that the industry is creating different ways of accessing the data like Databricks and Snowflake and people like that. So we let them invest the money in that, and then we provide the content to them and then the content -- or let the client develop their own workflow internally, which a lot of wealth management do, and we sell them the content. So that's that part. So we're not going to be disrupted there because we're not -- that's not where we are. On the contrary, to the extent that there are more ways that AI can help somebody access content, we are going to be there, right? So that's that part. At the other end of the spectrum is the capturing of the data. Remember, a lot of the data we capture is proprietary. It's -- and it has to be accurate, and it has to be trusted, and it has to be branded and the like. So it starts with client data. So today -- just to give you 2 examples, today, clients with over $50 trillion of assets use our MSCI analytics platform to run the risk and performance, right? So that is data that is sitting in our servers, that is data that we can access. There are not going to be too many firms that are going to be able to have that because these people are not going to put their portfolios everywhere. They have to put them in a trusted place that they believe it's secure, that they can do their computations safely and all of that. That's one example. Another example is our clients have given us $15 trillion of their portfolios in private assets. That's sitting in our servers. We have access to that to put models on top of that. Now we cannot disclose client A has the following portfolio, but we can use it to create products and we can use it to anonymize it and all of that, just like we can use the other one, the other -- the clients that have $50 trillion in assets. So that is proprietary data. Now that's in the back end. In the middle is the investment and risk models that we need to put on top of that data and then deliver that content. Yes, you could use ChatGPT to go look at something, and maybe the answer is right, maybe the answer is not as right. At the end of the day, we're not in the gathering information in order to have a political opinion, for example. We are -- our clients are in the business of getting accurate data, accurate models, accurate performance and all of that. They're not simply going to trust anybody. They're not simply going to get a large language model sitting on the side and go do that. They need a thorough, trusted, reliable branded product that puts its name and reputation behind it. That will be huge barriers to entry to a lot of people. So those are examples that I will give you, right? Operator: And the next question will come from Faiza Alwy with Deutsche Bank. Faiza Alwy: I just wanted to go back to the performance of net new sales in the quarter. I know, obviously, there can be a lot of lumpiness. And you highlighted strength in Americas and Index. Just curious what you're seeing in EMEA in particular because it sounded like net new sales declined. So I was just curious if there's -- if maybe some of the new product innovations that you highlighted is more catered to Americas? Or if there's something specific, maybe it's ESG related? So just some additional color there would be helpful. Andrew Wiechmann: Sure. Yes. So I would say similar to the comments I gave overall, we see relatively consistent dynamics. I've mentioned in the past that we've seen a bit of sluggishness with asset managers in EMEA. We continue to see a bit of that. I think they've been a little bit slower moving on the rebound of the market here. And so our results have been a little bit softer in the EMEA region. Our product development efforts are global in nature. And so a lot of the enhancements that we're making for not only asset managers, but all client segments are targeting tremendous opportunities within the European region. We actually, on the Index side, see a growing ecosystem around our indexes within the ETF community. And so we've seen tremendous growth in assets under management and ETFs linked to our indexes in Europe, particularly around the World Index, where we are becoming a standout in terms of largest ETFs, and that's perpetuating through to a whole host of additional opportunities. And so yes, we see some sluggishness from clients, some pressure -- outsized pressure relative to the Americas, but our position there is very strong and a lot of the innovations that we have across product lines are positioning us to continue to drive growth. And as I alluded to, that's not only on the Index side, but in areas like PCS. Many of the innovations you heard Henry talk about and Baer talk about it in the prepared remarks are positioning us well to unlock big pools of capital focused on the private asset market in Europe. And we continue to enhance our go-to-market effort across many of these additional client segments in Europe. So continue to believe it's an attractive opportunity, but we are seeing in the near term a continuation of some of the sluggishness that I've mentioned in the past. Operator: And our next question will come from Patrick O'Shaughnessy with Raymond James. Patrick O'Shaughnessy: How are you thinking about the expected time line to utilize the $3 billion repurchase authorization? And to what extent would you plan to fund that with free cash flow versus incremental debt? Henry Fernandez: Thanks, Patrick. First of all, we love MSCI, and we love it even more when it's undervalued franchise. Clearly, we hit some soft spots in the last couple of years and the undervaluation of the company has increased. And therefore, we've been pretty active in buying the stock, $1.5 billion year-to-date. And we got the Board, obviously, to authorize another $3 billion to do that. We would like to be as aggressive as we can if the company continues to have undervaluation in the franchise and take advantage of that. And we are a strong believer in the medium -- in the short, but more importantly, medium and long-term prospects of the company. I, for one, have done the same, not just with the assets of the company, but personally. In the last 18 months, I bought $20 million worth of MSCI shares for me and my family. It's not because of pride of authorship. These are rational decisions that, given our opportunities, given the new product development machine this company can create, we will remember this period as a period of undervaluation that is a good opportunity to load up. So we're going to do the same with the assets of the company. Now I think that in terms of the split, yes, in order to do the $3 billion over some reasonable period, we'll have to do both, free cash flows and continue to lever up to 3.5x or close to 3.5x. That will provide us hopefully over $1 billion a year or something like that, and then we'll be opportunistic like we have always been. If the stock runs up way too much, we'll set it out, not because we don't believe it's attractive, but it's because, tactically, we can buy it cheaper. So that's our plan. Andrew Wiechmann: And just to be clear, no change to our approach to capital allocation, no change to our leverage targets. What Henry described as more of the approach that we've consistently taken, and so it's a continuation of what we've been doing. Operator: And the next question will come from George Tong with Goldman Sachs. Keen Fai Tong: Can you talk about how much pricing contributed to net new bookings growth this quarter, and what your strategy overall is around pricing? Andrew Wiechmann: Yes. So I would say across the company, the contribution of price increases to new recurring sales is roughly in line with what we've seen in recent quarters. So no major shift in the approach. It does vary a bit across product lines and client segments. In terms of that approach that we've taken, we're generally trying to align price increases with the value that we are delivering. So many of the enhancements and improvements that we make and innovations that we've talked about here, we will be monetizing through price increase. And so that's a key component to enable us to continue to drive price increase. But we also factor in the overall pricing environment. We do look at client health. Our approach can vary product segment to product segment, even client segment to client segment. But importantly, we are really focused on being a strong long-term partner to our clients, and we are focused on building that relationship. And so we want to be constructive around price increases and very mindful that we need to continue to deliver value to be able to support price increases over time. But across the organization, no major change on the contribution. Operator: And the next question comes from Jason Haas with Wells Fargo. Jason Haas: You've talked a bunch on the call about some of the improvements that you've been making to your offering. And I'm curious if you could talk about just the time line for when we should see that show up. I know it takes time to hit revenue. But maybe in terms of the net new sales, to what extent have you been benefiting from those introductions, and it sounds like there's more coming through? So over what time frame, even high level, should we think about those improvements coming through? And if I could slip in a second one, just on the AI benefits that you talked about and the efficiencies that you can gain. I'm also trying to think about the time line there in terms of when we might see that start to show up in improved margins from here. So if you could talk about the time, that would be very helpful. Andrew Wiechmann: Yes. I would say, overall, as you know, our financial model moves very smoothly. We -- I touched a little bit on this in my prepared remarks, but there is strong momentum in releasing new products, and that is starting to impact sales. We've seen roughly $25 million of sales year-to-date from recently released new products. I mentioned the $16 million on the Index side in my prepared remarks. And so we are starting to see these benefits and that pace of acceleration in product development is definitely additive and something that helps us across many parts of the company here and allows us to continue to drive growth across not only the asset manager client segment, but all of our client segments. And so it's one that we do believe is going to be an important driver of growth moving forward here. And it's something that you started to see, but hopefully continues to be a big contributor to our success in the future. Just on the impact on the financial model of AI. Henry touched on this, but I would say, overall, AI is enhancing to our financial profile. As you know, our business has tremendous operating leverage with high incremental margins. We are selling IP-based solutions that we produce once and sell to many users for many use cases, and that enables us to both invest in growth and drive attractive profitability growth on an ongoing basis. And so as Henry alluded to, AI enhances both of those dynamics even more. So we're creating even more scale, enhanced productivity, enabling us to invest even more in the business, enhance our solutions and drive attractive top line growth as well as profitability growth. And as Henry alluded to, we are not going to take the margin down with some massive elevated AI spend, but it's something that will be a key ingredient to continuing to fuel that dual mandate that we have with our shareholders, which is continue to invest in the business to drive long-term growth and continue to drive attractive period-to-period profitability and free cash flow growth. And so it's something that will be a smooth impact on the overall financial model here. Henry Fernandez: Let me just add that the virtuous circle that we will -- that we're trying to achieve over time is one in which we push higher and higher the operating leverage of the company to free up resources -- let me say, push higher and higher the operating leverage of the company, maintain the profit margins, and therefore, free up significant resources to invest back into the business. We have enormous opportunities in private assets, in index investing and in physical risk and climate, in wealth management, in GPs, in the faster money segments, hedge funds, broker-dealers, data sets, investing and creating new data sets and all of that. We do not want to make those investments by taking the profit margins down. But we need investment dollars. And the bigger the investment dollars, the more we can achieve higher growth in the company. So that's going to come from AI. That's what we're looking for. Operator: And the next question will come from Russell Quelch with Rothschild & Company. Russell Quelch: Just wanted to circle back to the discussion on active ETFs. I think, Baer, you said you've seen an impressive 10% quarter-on-quarter growth there. I think it would be helpful to unpack your response to Kelsey's question and maybe give a bit more detail on exactly why growth in active ETFs does not cannibalize your revenue growth with active asset managers. And also, I wonder if you could confirm the other part of the question, which was the difference between the economics between the active asset management benchmarks and the active ETF benchmarks, that would be helpful. C. Pettit: Sure. So I'm not being cute, but it's genuinely unintuitive to me why it would cannibalize it, right? So you think there's -- so there's an active fund. It's benchmarked. And it's previously likely wrapped in a mutual fund or perhaps some other type in some other way. So then that same active fund, let's say, holding everything else constant, it doesn't change its investment strategy, it stays the same, goes into an ETF wrapper. It's fundamentally pretty much neutral for us, right? But in fact, generally what occurs is the following things. One, in transferring into an ETF wrapper, it typically has a more rules-based approach, wants to be more transparent. It doesn't just want to move the fund into it. So there are many occasions. I'm not saying it doesn't happen. There are a lot of funds that go straight in ETF wrapper. But in many instances, the investment strategy is somewhat adjusted or you could say, quantified, quantification of the strategy, and we have a role to play there with our tools, factor models, et cetera. Then in turn, it may go a further step and it may be turned into an index. Maybe then those rules become more strict and hence, the strategy becomes an index. And in turn, many such strategies are being built from scratch today, and so we play the part in it. So I would say that -- and in turn, the people who are doing this are generally or not in the index or the passive as people say, we don't like to term that much, but the index business, they're not the traditionally -- there are some major index players doing in the active space, but many of these are purely traditional active managers putting an ETF wrapper on a fund. So honestly, it's just not a -- it's not a threat to the existing business and there's a lot of upside for us in the future. Henry Fernandez: Yes. And to add to the financial model is, in addition to the subscription fees, when that product is systematized, we charge assets under management fees on top of the data fees. So that's where the incremental revenue comes in. Operator: And our last question will come from Gregory Simpson with BNP. Gregory Simpson: I wondered if you could share more on MSCI's product offering, revenue and strategy with the GP client base given alternatives now make up over half of the revenue pool in asset management. I also wanted to ask this in the context of the 5.5% run rate growth in the private asset segment and the opportunity and time line to get this growth rate up. Henry Fernandez: So private assets, as you know, we have it classified at MSCI between real assets, real estate and infrastructure and what we call Private Capital Solutions, which has some real estate component on it -- in it, but it's -- a lot of it is private equity and private debt. So within Private Capital Solutions, which is the former Burgiss company that we acquired 3 years ago, a lot of the business there has been built in creating tools and transparency for the institutional LP market. So the model is that an institutional LP gets presented with a proposal by a GP to invest, they invest and they invest in hundreds of these things. And then they turn to us and say, "Can you help me understand all of this?" So we go to the GP and tell them that we're representing the LP. The GP gives us all their data, every single data that they give the LP. And therefore, we aggregate that data. And then we look at the funds, we tell the institutional investor, what's in the fund, what is the benchmark, how are they doing relative to the benchmark, how is the performance, how is the risk, when will the capital be called, when will the capital be returned, and all of that. So in that model, we get paid by the LP, and that's largely the business model today. So what we're doing is 2 things is we are we're creating the product line that is similar to the institutional LP so it can be used by the wealth LP, which is not a big transformation. It's just reprogramming the tools of transparency, of understanding, the benchmark, the performance, the risk and all of that in the portfolio, the credit-worthiness, the market risk and all of that, that I talked about like in private credit. And then serve it up to the wealth management organization so they have the same level of transparency and understanding what they invested in as still limited partners, because they are, instead of being an institutional limited partner, is now an individual limited partner or a pool of limited partners. So that's one part of the growth. The second part of the growth is to then, which we're doing right now, is to create products for the GPs because we are in the ecosystem. We're talking to GPs every day because of the role that we play for their -- with their investors. So we go into the GPs, and we launch a few products. Recently, we launched one, it's called Asset and Deal Information in private equities as to looking at every deal, at every asset based on our database, and provide that as a reference for the GPs to see who is doing what around the industry. So right now, our revenues coming from GPs directly on private assets and private capital solutions is minimal. A lot of the revenues that are coming from the GPs right now are in Analytics. We help them risk-manage their assets. We help them with certain -- with indices in certain parts of the business. We help them with Sustainability and Climate, but our revenues coming from PC -- from private assets of these GPs is minimal. I don't know, $5 million, $10 million, some number like that. That is a massive opportunity for us. So those are the 3 -- the 3 strategies are deepen our penetration on the institutional LP, expand to the wealth or individual LPs through the wealth management sector, and build products for the GP in which we have all the underlying information and the data and everything. It's just a question of building products. Operator: This does conclude today's question-and-answer session. I would now like to turn the call back over to Henry for closing remarks. Henry Fernandez: So thank you very much for attending. Obviously, a different tone from last quarter. I normally say to people, it's darkest before it's dawn. And we feel that the dawn has arrived and we're turning the corner here. It's not going to be a straight line. It's going to be lumpy. We're not in the kind of business that flares up and flares down. It's a consistent buildup and it could be a little lumpy, but we're very optimistic about our prospects now. So thank you, everyone, for joining. As you can see, we have an all-weather franchise, delivering significant performance and attractive margins. We're a mission-critical tool. Our footprint has largely been product-driven. And now we are very expanding more strategically in a lot of different client segments to link the ecosystem and benefit from that. So -- and that will bear value creation over time. We're a long-term compounder. We're not a flare-up, flare-down company. So our goal is to continue to build higher growth, higher profitability on a year in, year out basis, year in, year out basis to be a long-term compounder of EPS and growth. Thank you very much, everyone. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Welcome to the Five Star Bancorp Third Quarter Earnings Webcast. Please note, this is a closed conference call, and you are encouraged to listen via the webcast. [Operator Instructions] Before we get started, we would like to remind you that today's meeting will include some forward-looking statements within the meaning of applicable securities laws. These forward-looking statements relate to, among other things, current plans, expectations, events and industry trends that may affect the company's future operating results and financial position. Such statements involve risks and uncertainties and future activities and results may differ materially from these expectations. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from the company's forward-looking statements, please see the company's annual report on Form 10-K for the year ended December 31, 2024, and quarterly reports on Form 10-Q for the 3 months ended March 31, 2025, and June 30, 2025, and in particular, the information set forth in Item 1A, Risk Factors in those reports. Please refer to Slide 2 of the presentation, which includes disclaimers regarding forward-looking statements, industry data, unaudited financial data and non-GAAP financial information included in this presentation. Reconciliations of non-GAAP financial measures to their most directly comparable GAAP figures are included in the appendix to the presentation. The presentation will be referenced during this call, but not followed exactly and is available for close reviewing on the company's website under the Investor Relations tab. Please note, this event is being recorded. I would now like to turn the presentation over to James Beckwith, Five Star Bancorp President and CEO. Please go ahead. James Beckwith: Thank you for joining us to review Five Star Bancorp's financial results for the third quarter of 2025, which were released yesterday. The release is available on our website at fivestarbank.com under the Investor Relations tab. Joining me today is Heather Luck, Executive Vice President and Chief Financial Officer. Our third quarter results include outstanding growth in loans and core deposits attributable to our differentiated client experience and organic growth strategy. We maintain our unwavering commitment to clients and community partners throughout Northern California. Financial highlights during the third quarter include $16.3 million of net income, earnings per share of $0.77, return on average assets of 1.44% and return on average equity of 15.35%. Our net interest margin expanded 3 basis points to 3.56% and our cost of total deposits declined by 2 basis points to 2.44%. Our efficiency ratio was 40.13% for the third quarter. During the third quarter, we saw continued balance sheet growth as loans held for investment grew by $129.2 million or 14% on an annualized basis. Total deposits increased by approximately $208.8 million or 21% on an annualized basis. During the quarter, non-wholesale deposits increased by $359 million or 11%, while wholesale deposits decreased by $150.2 million or 23%. Our asset quality remains strong with nonperforming loans representing only 5 basis points of total loans held for investment. We continue to be well capitalized, with all capital ratios well above regulatory thresholds for the quarter. On October 16, our board declared a cash dividend of $0.20 per share on the company's common stock, expected to be paid in November. We continue to deliver value to our shareholders. Our total assets increased during the third quarter by $228.3 million, largely driven by loan growth within the commercial real estate portfolio, which grew by $77.7 million. Our loan pipeline remains strong. The credit quality of loans remained strong due to our conservative underwriting practices, robust monitoring throughout the life of a loan and our relationship-based approach to lending. As a result, we have a very low volume of nonperforming loans, which declined by $149,000 during the third quarter. We recorded a $2.5 million provision for credit losses during the quarter, primarily due to loan growth. The increase of our total liabilities during the third quarter was a result of growth in interest-bearing and noninterest-bearing deposits related to new accounts. The new interest-bearing deposit accounts contributed to $171.6 million of overall growth. New noninterest-bearing deposits contributed to $28.8 million of overall growth. Noninterest-bearing deposits remained consistent at 26% of total deposits as of September 30, 2025. Approximately 60% of our deposit relationships totaled more than $5 million. These deposits have a long tenure with the bank with an average age of 8 years. We believe our deposit portfolio to be stable funding base for our future growth. And now I will hand it over to Heather to present the results of operations. Heather? Heather Luck: Thank you, James, and hello, everyone. Net interest income increased $2.8 million from the previous quarter, primarily due to a $4.3 million increase in interest income, driven by new loan production at higher rates, contributing to overall improvement in the average yield on loans. This was partially offset by a $1.4 million increase in interest expense related to core deposit growth during the quarter of $359 million, which exceeded the $150.2 million of higher-cost wholesale deposits maturing during the quarter. Noninterest income increased to $2 million in the third quarter from $1.8 million in the previous quarter primarily due to an increase in swap referral fees recognized during the 3 months ended September 30, 2025, and partially offset by no gain on sale of loans recognized during the quarter in connection with our strategic shift to reduce wholesale SBA loan production and sales. Noninterest expense grew by $900,000 in the 3 months ended September 30, 2025. This is primarily due to an increase in salaries and employee benefits related to increased head count to support customer-facing and back-office operations. We continue to invest in our Bay Area expansion, evidenced by the opening of our newest full-service office in Walnut Creek, contributing to a slight increase in occupancy and equipment. And now I'll hand it back to James for closing remarks. James? James Beckwith: Thank you, Heather. During the quarter, we opened our ninth full-service office in Walnut Creek in response to the demand for our services in the San Francisco Bay Area. Our presence in the San Francisco Bay Area continues to grow with 36 employees and $548.9 million in deposits as of September 30, 2025. In addition to the new Walnut Creek office, we are pleased with the growth of our previously announced food agribusiness and diversified industry business, where clients benefit from our global trade services and exceptional treasury management tools. Five Star Bank success serves a strong testimony to clients who value our team of committed professionals who provide authentic relationship-based service. We continue to ensure our technology stack, operating efficiencies, conservative underwriting practices, exceptional credit quality and a prudent approach to portfolio management will benefit our customers, employees, community and shareholders. As we look to the fourth quarter of 2025, we thank our employees for their outstanding commitment to ensuring Five Star Bank remains a safe, trusted and steadfast banking partner. We are confident in the company's resilience and demonstrated ability to adapt to changing economic conditions while remaining focused on the future and execution of our long-term strategy. The beneficiaries of our focused business approach are our clients, employees and community. We believe that if we support these constituents well, our shareholders will realize the benefits. We appreciate your time today. This concludes today's presentation. Now we will be happy to take questions you might have. Operator: [Operator Instructions] Our first question today is from David Feaster with Raymond James. David Feaster: I wanted to start on the deposit front. I mean, perhaps in my mind, perhaps the core deposit growth that you saw was one of the most impressive parts about the quarter. You decreased wholesale funding. Just kind of curious where you're having the most success driving core deposit growth and how you think about that opportunity to continue to optimize the funding base a bit as you do that? James Beckwith: Well, certainly, third quarter, David, was exceptional. And it was -- a lot of things went our way in terms of new clients which we're very excited about. And we saw growth across our platforms in all of our geographies. So that was very exciting. I think that to replicate that type of quarter, again, David, it's going to be pretty difficult when we say that. But we were pretty happy about where we ended up. Now our deposit pipeline, just like our loan pipeline, remains strong across all of our platforms and geographies. And so we don't anticipate that type of growth on a go-forward basis. We're looking for deposit growth on an absolute basis, not annualized between -- probably anywhere between 1% to 2% in the fourth quarter. So I think the third quarter was very strong. And I say that because we're still trying to deal with our broker deposits that we have. We have a long-term desire to eliminate those, and we're making progress. We made very substantial progress in the third quarter, and we'll just have to see how the fourth quarter goes. So that probably will have an impact in terms of limiting overall deposit growth to the extent that we pay any of those off and don't renew. But we are anticipating some growth but not to the same extent that we saw in the third quarter on the deposit side. David Feaster: Okay. But -- and the reason for that is just the continued optimization of the deposit base. Because you're still going to be driving core deposits. I just want to make sure that I'm understanding that right, still driving core deposit growth, but using that to paydown broker? James Beckwith: Yes. [indiscernible]. Go ahead. David Feaster: Yes. Perfect. And then maybe switching gears to the loan side. I mean originations were strong, the pipeline is still robust. But payoffs and paydowns are still a pretty material headwind. I think it's the second highest level that -- as far as I can see back over the past several years. I guess I wanted to first get a sense of what's driving these payoffs and paydowns? How much is it losing deals to competitors through refis or whatever asset sales or just deleveraging? And then how do you think about payoff and paydown activity going forward as rates continue to decline? Is that going to remain a pretty material headwind? James Beckwith: Well, in part, it's our business model with respect to our MHC and RV business, David. We anticipated being in these deals 3 to 4 years before our clients will either sell the properties or take their long-term financing to agency. And we saw a lot of that in the third quarter, and we expect that will continue to happen. Having said that, we also retained a lot of these notes that were maturing -- not necessarily maturing, but having their rates reset because we're typically -- we lend on a 5-year fixed rate basis, and it will adjust after this -- the rate -- the yield will adjust after the 60th month. And so a lot of that is starting to come through on those originations were done particularly in '20, and we'll see some more of that in '21 -- '26 and '27 for originations in '21 and '22. So it's just really the nature of our business. There's nothing that we think is unusual about it. We recognize that we have to stay ahead of it. We've got the horses to do that. So that's why those -- we will continue to build our balances. So we're not necessarily losing deals to anybody. We like to think that we're the quickest know in town. If somebody else wants to do a deal, that's fine. But we're -- we like the model. The model is working exactly as like -- as we thought it was going to work. It's just David, fundamentally, the nature of our business and the types of credits that we make. David Feaster: And that makes sense. And so with that, I mean, you talked about having the team and the horsepower to continue to outpace payoffs and paydowns. You've been really active hiring. You recently hired the Ag team. I guess, first, I wanted to just get an update on -- as you think about growth, where are you seeing the growth opportunities today? Kind of an update on the ag team, what they're seeing? And are there any other segments like that, that you might be interested in expanding into organically and hire or lift out a team? Just kind of curious what you're seeing on that front? James Beckwith: Yes. Let's just talk about the ag team. We booked some good credits. We're anticipating booking some very large credits in the fourth quarter, very active in the market. We're excited where that business is going. The credits and the relationships are quite substantial. To call them granular would be a complete misnomer. And when we -- when we board them, they do move the needle because they're larger deals, both on the deposit side and on the loan side. But we like where we're doing that. We're making some penetration in markets. People know -- are beginning to know that we're serious and we're excited about where we stand in that. And the sales cycle in that business is, it can't be long sometimes over 2 years, 2 or 3 seasons. So we're very committed to it, number one. We continue to see growth in our MHC and RV business. And where we continue to add core clients in the space. And our clients are still -- our existing clients are still buying parks and so we're excited about where that business is going. And our storage business seems to be very strong also. RV, MHC storage is really a national platform and we're doing business across the United States. In fact, Heather, we filed what tax returns in 27 different states? Heather Luck: We do. That's correct. James Beckwith: So we have nexus in all these states. So it's truly geographically diversified. So David, we expect to see continued growth in that particular segment. From a geographic perspective, our Bay Area loan pipeline remains very strong, and that's made up of C&I and also CRE lending. We've done a lot of student housing deals in the Berkeley area, and we will continue to look for opportunities there. So that's strong. Our Construction Industries group continues to perform well and that's primarily a deposit play. So we're excited where that business is going. Our faith-based business is having a good year, a very good year. We expect that to continue to grow. Our nonprofit business is very robust, particularly in the Bay Area. So we like where that's going. And then, of course, our government book and which, David, we focus on small districts -- small special districts, if you will. And we've seen a lot of success in that space. And again, that's primarily deposit driven. So across the platform, we seem to be -- and geographies, our verticals and our geographies seem to be performing very well and their prospects are strong. Operator: The next question is from Woody Lay with KBW. Wood Lay: Wanted to start -- I wanted to start on the net interest margin outlook. If I just look at your balance sheet, it would seem that you are set up pretty well for a down rate environment. So how should we think -- based on the most recent cut and the expectation for additional cuts from here, how should we think about the earnings power there? James Beckwith: Well, we think it's pretty good. We recognize we have a near-term liability sensitive, and that could -- 125 basis point cut, Heather, over a quarter would mean what? Heather Luck: About $850,000 of improvement. James Beckwith: So we see some expansion in our margin that's potential in the fourth quarter, 1 to 3 basis points, pretty consistent with what we've seen in the second or the third quarter. Maybe we can do a little bit better than that, but that's kind of what our sense of it is right now. We continue to see loan repricing in our loan portfolio. Sooner or later, we're going to run out of that as those -- all those loans reset. But near term, it looks pretty decent for us. So we see continued margin expansion with these rate cuts. You could tell, Woody, that our cost of funds is noticeably higher than our peers, and that's because we do pay up for deposits. In a downgrade environment, that's going to be our benefit -- to our benefit, not only in our money market book, but also in our government book and some extent in our wholesale CD book. So we like the way that our balance sheet is constructed in a slight down rate environment. Wood Lay: Yes. Yes, it definitely seems like a benefit. To the extent we get these additional rate cuts, get the NIM benefit, do you think it drives positive operating leverage? Or does it give an opportunity to keep reinvesting in some of the -- in the Bay Area expansion market in some of these new business lines? How do you think about the toggle there? James Beckwith: Well, we've been pretty active in terms of bringing on very talented yet high-priced bankers. And we -- our plans on a go-forward basis -- right now, we're -- Heather, we've got 41 biz dev people right now? Heather Luck: Yes. James Beckwith: We're going to have a new one join us next week. So we're going to continue to look for opportunities to get talent. Because it's out there, it's still out there, maybe not out there to the same extent as it was 2 years or even a year ago. But we like to think we've got this balance between earnings growth and reinvesting back into our business. It's -- the toggle is not one way or the other. We like to think we can do both. We recognize that if we didn't continue to invest, our earnings would probably be bigger, larger, but we're playing the long game here in terms of growing the growing the franchise and taking advantage of opportunities as we see them when they come up. We've always been opportunistic, and I don't see us changing that way of doing business. Wood Lay: No, that's really helpful. And then just last for me. Can you just remind me longer term how you think about the loan-to-deposit ratio? I mean, it's down from 104% last year. There's some broker deposit remix opportunities. So could you just remind us sort of where you aim to target that longer term? James Beckwith: Well, I think that we're comfortable at 95%. That's kind of a line that we all look at every month with our Board. And that's a good target for us. Sometimes it might be higher, sometimes might be less. I don't know how far less. But if there is a bias, it'd probably be higher. But we do target 95%, is something where we're comfortable at. Running -- you can run hot at 100 -- north of 100. But that's nothing that we think that we'd want to do year in and year out. Wood Lay: Congrats on the good quarter. Operator: The next question is from Andrew Terrell with Stephens. Andrew Terrell: Maybe, Heather, I wanted to go back to some of the margin really quick. I think -- did you say $850,000 positive pickup for each 25 basis point cut, was that right? Heather Luck: Yes. For the full quarter, though, because it will take some time for our wholesale book to reprice. So it will take a full quarter to see full effect, yes. Andrew Terrell: [indiscernible] Heather Luck: 200 for immediate repricing net. Andrew Terrell: Yes. I guess I'm just trying to think through the -- you mentioned margin of 1% to 3% in the fourth quarter, 850,000 is 7, 8 basis points of margin. We'll get the full quarter of the September cut in the fourth quarter and then it looks like in October and maybe a December cut as well that -- I feel like the margin should be up more than 1 to 3 basis points. So I guess I'm trying to ask what are maybe some of the puts and takes to the margin in the fourth quarter that could limit what it feels like it should be a decent bias higher? James Beckwith: So I'm going to weigh in on that, so you don't mind, Heather. So Andrew, in our government deposit book, it's driven by LAIF, local area investment fund rates, and those change every month. So you really don't see an impact of a Fed move until 90 days. You probably get the whole impact at the end of the -- that quarter or those 90 days. On our -- so that's a lagging index, okay? This is why we came up with what our sense of the margin improvement might be. Then on our wholesale CD book, which is around $0.5 billion, those usually are 90-day resets. So you're not going to see the impact of that -- until the full impact, but quarterly impact, if you will, for 90 days. But they're all kind of -- they're not all maturing at the same time. So that impact kind of rolls in during the quarter. So the number -- or the guidance that we gave you -- that Heather gave you is really like a clean, okay, what happens at this cut, maybe a quarter down the road, what's the impact going to be. Does that make sense? Andrew Terrell: Yes, I understand. So just -- it's based on the maturity of the deposits and once you kind of fully get those through, that would get to the $850,000. James Beckwith: Correct. Yes, sir. Wood Lay: Got it. Do you have, [indiscernible], just the spot interest-bearing deposit costs at [ $930 millon ]? Heather Luck: Yes. That was [ $240 million ]. Andrew Terrell: Okay, $240 million total. Got you. And then -- on the Page 22 disclosure around the adjustable rate repricing, I appreciate you guys adding that in there. Just the $363 million of adjustables that come up in 2026, they're at a 4.35% rate today. If those were to reprice in today's rate environment, where would the new yields be at? I'm just trying to gauge that repricing benefit to the margin, James, that we've talked about? It seems like it'd be a pretty decent tailwind. James Beckwith: Yes. It's probably around $180 to $200 over that. So it's really -- our spreads are usually $2.75 to $3.25 in the quarter. So you look at the 5-year today, it's 3 and -- what was it $350? Heather Luck: $361. James Beckwith: $361 and add that on top of it. That's kind of where I think it would end up. There's a pretty decent pickup -- pretty decent pickup. Andrew Terrell: Okay. And then last one for me. James, we're seeing quite an acceleration in M&A, maybe not as much in California as in other geographies. But you've got -- it's a pretty strong currency now with the stock prices trading. Just talk about your views on M&A. And I know you've obviously got a very healthy organic growth engine, probably not press for M&A, but just talk about your views on the landscape right now. James Beckwith: Well, it was a pretty active Monday, I'll say that much, with first foundation trading. They have some operations up and around us. And then the big deal when Cadence sold out. So those are -- I go to these conferences, Andrew, and I know these CEOs, and so they're -- they made a decision to sell. So from an M&A perspective, where we sit, we've grown, I don't know, $600 million so far this year, Andrew. That used to be a size of a bank in California. And I think the average size in California is probably $1 billion now, right? But so we've been pretty -- we don't need to buy anybody per se. And there are -- there could be opportunities that are out there, and we always want to be able to take advantage of something that comes up. And is it -- we lean organic, most definitely. We lean organic. And as we continue to grow and develop, we become especially where our valuation is right now, the more fit, more able acquirer. So there's nothing on the horizon for us right now. We're going into our planning session here in November. And certainly, this is always a topic of conversation. So where we sit on it is that we could be -- we could do something, but it have to be just a great deal for us and very opportunistic and deal with something that we feel like we need maybe to a little help on. And if we need a little help with anything, it's probably on our -- the granularity on our deposit side. But -- and then a lower cost of funds, if you will, somebody who's got a lot of noninterest-bearing deposits. But we're doing fine there. We're seeing very solid growth in that particular line item in our liabilities. So I'm all over the map on this response, but we're really driving what we're doing right now organically. But like you never -- and none of our Board wants to roll out an M&A deal. But that's kind of where we -- that's where we sit. Andrew Terrell: Yes. Great. I appreciate the color. And high bar, growing $600 million this year. Great work. Operator: [Operator Instructions] The next question is from Gary Tenner with D.A. Davidson. Gary Tenner: I had another question just on the -- as you were going through some of the deposit buckets and so forth. Just on the money market book, what type of beta were you able to push through when we had the September cut? And what are your expectations, I guess, for cut this week? Heather Luck: Yes. When we did that, we were about 30% beta. James Beckwith: Overall. Heather Luck: Yes, overall. And then 25% [indiscernible]. James Beckwith: So we'll tell you, Gary, so we're going to take any deposit relationship that's -- that is outside of our CD book that's priced 225 basis points and higher, we're going to take -- on that day, we're going to take 100% cut on those deposits. And that equates to around... Heather Luck: $1.4 billion. James Beckwith: $1.4 billion. Certain type of accounts like high-yield money market accounts are going to have 100% beta. But overall, it's... Heather Luck: About 30%. James Beckwith: About 30%. Gary Tenner: Okay. But like, for instance, in that money market book then about 75% beta, I guess, effectively. Because most of that $1.4 billion of higher non-CDs would be in that book, right? James Beckwith: Yes, sir. Gary Tenner: Okay. Okay. Great. And then just on the topic of expansion and hiring, are you seeing it becoming more competitive and more challenging to recruit? Are there more banks in your footprint following that playbook now? I mean we're seeing it in other regions of the country where like every bank in the Southeast is on these massive recruiting strategies. Are you seeing that pick up and become more competitive for you? James Beckwith: Yes, we are. And so it all depends on what -- whose platform is out there recruiting. A lot of the folks that we compete against don't have our performance don't have our reputation in the marketplace. So we think we've got a competitive edge there when we do go up against people and folks and for bringing on experienced bankers. So we think if we really want somebody, we'll be able to get them, but it is more competitive, most certainly. There are options. And if people are looking to grow, and if they can pick up a team, it seems like more folks are doing it. Now having said that, these bankers, and this is a phenomenon that is not unique to California are very expensive. And especially with folks that have been through a process for the last 2, 3 years that have banks that either have been taken over -- excuse me, failed or taken over or just struggling in terms of trying to rationalize the investments they're making in these folks here in California. And so we see some opportunity coming out of that space. But what's happened is that these bankers have been bid up. So you have to be very careful of how much you want to pay, and you have to rationalize what are they going to be able to do for you? And so those are the equations or the economics that we go through when we're thinking about picking up a team. But to answer your basic question, the answer is yes. It is more competitive. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. James Beckwith: Thank you. It is with deep appreciation and gratitude that we have advocated for our clients and champion the communities we serve. We always will. As our expansion in the San Francisco Bay Area continues and as we build upon a legacy of superior community banking in the capital region and North State, we answer the call of businesses and organizations who desire a time-honored banking partner. Five Star Bancorp is here to stay. We are proud to have experienced another quarter of significant organic growth built upon a sturdy foundation of client service, expanded relationships and products and the loyalty of our exceptional clients. We will always remember that we exist because of our clients trust us and we believe in them. It is our privilege to continue as a driving force of economic development, a trusted resource for our clients and a committed advocate for our communities. We look forward to speaking with you again in January to discuss earnings for the fourth quarter of 2025. Have a great day, and thank you for listening. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings. Welcome to Grupo Traxion Third Quarter 2025 Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Aby Lijtszain, Executive President. Thank you. You may begin. Aby Lijtszain Chernizky: Thank you. Good morning, everyone. Thanks for joining us again for this quarterly earnings call. Let me start with the good news. As you know, we executed the integration of Solistica early in the quarter, and it has concluded successfully. It is the most relevant merger in the logistics industry in Mexico and a very strategic move on our side as it is transformational for Traxion. There are many synergies that we have captured so far. Among the most relevant are the transfer of the shared services center together with all their logistics back office to the Traxion platform and have executed several procurement efficiencies that have improved the bottom line. Traxion invested around MXN 1.6 billion in the acquisition and prepared the company to properly cope with the integration, which is expected to bring at least MXN 8 billion of additional revenue. Because of that, management decided to slow down organic growth to focus more on the successful merger of both operations. Most notably, Traxion significantly reduced its organic CapEx for 2025 to accommodate the acquisition of Solistica, which basically implies the same investment levels as in previous years, but with Solistica up and running in our platform. After the acquisition, the company remains with virtually the same level of leverage and interest expense, which is tremendously accretive. In summary, Traxion will post revenue growth with Solistica but will not change its leverage profile or interest expense at the end of the year which is very similar to having grown organically. Moving on, we experienced a downturn in both cargo and logistics operations. Even though export levels were in line with the same period of last year, there were some sectors affected by the tariff uncertainty in which many of our clients face challenges regarding their production and export operations, mainly the automotive and the online steel industries and some in the consumer and e-commerce sectors as well. There is a clear area of opportunity for us there as we have been shifting our capacity to other sectors of the economy with less volatility. Having said that, we are confident that our year-end top line figure will grow in the mid-teens and will be within the range of the guidance we released in our previous call. Thanks for your attention. I will now hand over the others for a deeper dive into details. Rodolfo Mercado Franco: Thank you, Aby. Welcome, everyone. This quarter continued to be marked by a high level of complexity, driven by uncertainty surrounding tariff-related developments between the United States and Mexico and other countries as well. I will now walk you through the most relevant operating highlights. First, I'm very pleased to share with you that the Solistica integration was implemented successfully and that our 100-day plan concluded favorably according to our expectations, thus ensuring operating and financial progression and the retention of both talent and key clients. We designed an integrated structure aimed at collaboration, efficiency and value creation which in the case of Solistica has an even more enhanced effect as this company came from a very institutional enterprise. Moving on, synergies are coming in as planned. And we have seen some effects in margin that will become more tangible in the next quarters. Among the most relevant synergies achieved so far are corporate reductions and adjustments, the shutdown of Solistica's shared services center and 3PL back office with the procurement side reporting the most relevant efficiency so far. In terms of mobility of cargo, severe disruptions continued during the third quarter, mainly in cross-border circuits on both northbound and southbound that have resulted in prices dropping as demand became more intermittent, especially with clients of the automotive industry and those related to the steel and iron sector. Furthermore, the Mexican peso continue to strengthen, which, as you know, affects the U.S. dollar-denominated portion of the cross-border revenue. However, we are seeing signals of recovery in the retail sector in Mexico and enhancement in general terms in the American side. There are no signals of structural changes in the fundamentals of our industry. So we think that this adversity is temporary. We have also achieved some cost efficiencies related mainly to fuel that have helped to improve cost per kilometer, among other smaller enhancements. Now in the logistics business, we continue to face challenges across the board that are explained basically by a downturn in cargo and some disruptions with our e-commerce clients, which typically import merchandise from the United States to Mexico. However, we expect the situation to normalize towards the end of the year. Finally, in mobility of people, we reported a slight increase in revenue, but a better performance moving to the bottom line. We were able to successfully close our commercial pipeline of the quarter, mainly combining capital expenditure with churning out fleet from older non-efficient clients and allocating those units to new clients at more competitive prices, such effects will become more visible in the coming quarters as those new accounts start contributing revenue and fleet productivity. As you can see, it was a very busy quarter with several highlights in many fronts. Thanks for your attention. With this, I end my remarks. Please, Wolf, go ahead. Wolf Silverstein: Thank you. Welcome, everyone. There are many financial highlights. First of all, there was margin stability in our three business divisions, including Solistica, cargo improved 430 basis points compared to the second quarter of this year. However, with the Solistica integration, Traxion has a much larger component of asset-light business lines which was 45% in terms of revenues this quarter and thus consolidated margin is lower compared to the same period of last year. As this business division continues to gain more relevance, the estimate consolidated margin for the company should be around 16%. Moving on, it is very important to note that the net debt to EBITDA ratio was 2.35x compared to 2.22x reported in the second quarter, just before the Solistica acquisition was finalized. This is very noteworthy as the ratio did not increase substantially and that we expect to end the year at similar levels. That translates into an increased profitability for the company. In this line, there's even another important aspect to highlight, which is that the interest expense remained virtually the same but with the acquisition of Solistica already in place. This basically means that we grew 14.5% our revenue base with virtually the same financial cost. This is indeed very good news and prove that this acquisition was exceptionally accretive and will continue to bring value over time as the integration is fully reflected in our P&L moving forward. Also, as Aby mentioned, we reduced significantly our CapEx for this year to accommodate the Solistica acquisition and still be within similar investment levels as in the past few years. In terms of financial results, aside from the interest expense that I just discussed, this quarter, the company did not have the foreign exchange benefit that contributed to net income in the third quarter of last year. Having said all that, Net income grew over 17%, more than revenues and EBITDA, which is a great highlight to mention this quarter. With this, I conclude my remarks and hand over to Tonio, Thanks. Antonio Obregón: Thank you, Wolf. I will now walk you through some relevant ESG milestones and other tech-related developments. Perhaps the most important sustainability milestone is that this period we incorporated data regarding renewable electricity generation from solar panels installed in our facilities. This is indeed very good news and a tremendous step in terms of emissions reduction and energy efficiency as we continue to expand our logistics footprint and presence. Moreover, we released our 2024 integrated report in line with the most important ESG standards, mainly TCFD and GRI, which are the reflection of our strong commitment to governance, transparency, people and planet. During this period, Traxion obtained the ISO certifications regarding anticorruption and compliance management matters, thus reinforcing the company's integrity standards and corporate observance. Moving on. As you very well know, digitalization has transformed many of our business lines. For some years now, we have paid special attention to tech-driven ecosystems and have conducted many upgrades that are now deeply embedded in our business model that have enabled Traxion to be one step ahead of clients' needs and beyond competition. So in terms of tech advancements and digital strategy, Traxion successfully implemented an in-house developed artificial intelligence program to help our commercial force predict and optimize opportunities, enhancing the decision-making process and boosting talent across the company. This milestone consolidates even more of the company's digital transformation that has been its leadership trademark while strengthening the Intelligent Mobility Solutions platform. Thanks again for your attention. With this, I end management's remarks, and we'll open the floor to Q&A. Operator: [Operator Instructions] And your first question comes from Anton Mortenkotter with GBM. Unknown Analyst: I have two quick ones. One is, we've seen that the cargo truck utilization has been dropping in the last quarters. I was wondering when do you expect this to normalize? Or what kind of levels do you expect to see or should be sustainable in the long term? And also thinking about the industrial trends for the next year, the USMCA renegotiation, how are you positioning for that? And then what are your expectations [ ago ]? Antonio Obregón: Anton, this is Tonio, thanks for your question. I'm going to answer the second question first. As many of you know, one of the biggest plans for Traxion is to expand into the United States because we think that is the natural geographic expansion for us, for the company. The cross-border market between Mexico and the U.S. is the fastest-growing market in transportation and logistics in the world currently. And we want to position ourselves in that market and into the United States. So I think that would be the best way to approach positive USMCA renegotiation, and all the benefits that it's going to bring to the table. Aby Lijtszain Chernizky: Anton, regarding to -- this is Aby, regarding to the first question. So what we're doing is getting clients from different industries. We are now giving a lot of services to the car industry. So we are diversifying the industries from Traxion. So with that, we expect to be as good as it was before, maybe in the middle of the next year, first or second quarter of the next year. Operator: And your next question comes from Edson Murguia with Seneca. Edson Murguia: I have two of them, the first one is related to the personal mobility segment, you have a growth of 4.2%. And you mentioned in the earnings release that we execute some efficiencies. So I was relieved if you can give us or you could elaborate more about your type of efficiencies? Did you perform during the quarter? And my second question is about the fleet reduction. Looking ahead, can we expect the same trend of reduction of the fleet? Antonio Obregón: Edson, this is Tonio. Regarding your second question in terms of fleet reduction, yes, you're right. If you see, we had fleet reductions -- slight fleet reductions in both segments. One has to do in mobility of people, the fleet reduction has to do with the profitability program, which is basically churning out buses from older, not that efficient clients into new clients that are willing to pay more market prices. So when you do that, you need to take out the operation, the bus and prepare it for the next one. So that bus is not operating for some time, perhaps two or three weeks and that reduces the average fleet on the quarter. It's not that we are reducing the fleet by design. It's just some metric that got caught up in the middle of the quarter. And regarding the reduction in the fleet -- in the cargo fleet, it's a normal thing. We are conducting a regular renovation program, which is not linear if we're going to renovate 400 trucks in a year. For example, it's not linear, that is perhaps not 100 trucks every quarter is different. So that's basically the reason. We are not reducing the fleet, quite the contrary. We want to keep it as it is. And regarding your first question, Edson, could you please repeat it? Edson Murguia: Yes, what type of efficiency did you perform in the personal segment to achieve 4.2% growth? Antonio Obregón: Sorry Edson, can you please repeat it again? We are not hearing it clearly. Edson Murguia: Perhaps -- Yes, sorry, probably it's my phone. But what type of efficiency did you perform in the personal segment to grow 4.2% during the quarter? Wolf Silverstein: This is Wolf. So let me try to be as clear I think it was the question. So in the mobility of people, as we mentioned, particularly for this 2025, we run this program that is a profitability program client that we are basically, as Tonio mentioned at the beginning, shuffling the clients that pay less for clients that can pay more, considering the opportunity that we saw in the market to raise some of the prices. So this, combined with the renewal program and obviously, let's say, the overhaul of the units that we need to put in place so we can allocate the buses to the new clients. This is basically what we're doing, in particular this year instead of just growing as it was similar in the past. So it's basically the most different problem that will run this particular year. So this is what you are seeing that the margins in that business are growing even though maybe the -- let's say, the revenues are similar than the inflation. Operator: Your next question comes from Felix Garcia with [indiscernible] Research. Unknown Analyst: Felix Garcia from [indiscernible] Research. First, congratulations on the successful integration of Solistica. Could you share which operational or client synergies have already started to materialize? And whether the 100-day plan help identify additional efficiency opportunities? Secondly, we understand the freight division faced a temporary slowdown in cross-border operations. Have you started to see any signs of recovery in demand or contract reactivation, particularly within the automotive sector? Antonio Obregón: Felix, I'm Tonio, I'm going to answer your first question. There are many synergies, but perhaps the most relevant one is that we basically unplugged the shared services center of Solistica and all the 3PL back-office operation and plugged it into the Traxion platform, which brought many costs and expenses savings in overhead, in corporate, in facilities and other tech-related things. But perhaps the most significant synergies we have identified so far and the most that have materialized in the first quarter, the faster ones, perhaps are in procurement, which as you know, we have a huge procurement platform. We do strategic negotiation and other things. And those are the main efficiencies. Effectively in the first 100 days of operation, we identified -- obviously, as you can imagine, we had identified some synergies that were more visible than evident. But once you have the company in your platform, there are others that are not that visible that are also achievable. So we have been with the company for three months. We think that there are going to be other synergies as time goes by. And I think for -- I think that the next year, you're going to be able to see some other efficiencies and synergies more tangible and more evidently in margin mostly. Rodolfo Mercado Franco: Felix, this is Rodolfo. So regarding your second question about the cross-border business or industry and the automotive, as you're saying, we -- the automotive has been hit in this growth business services. And we haven't seen very much of recuperation in this month. That's why Aby just said it in the before question is we're looking for other industries to switch our equipment and our trucks, so we can avoid the uncertainty that we have the automotive industry right now. Operator: Your next question comes from Martin Lara with Miranda Global Research. Martín Lara: Thank you for the call. Your leverage remains at very low levels. How do you see it going forward? Do you think it would reach 2x by the end of 2026? Wolf Silverstein: This is Wolf. So as we mentioned before, let's say, in the previous calls, even though after the Solistica acquisition, we are remaining at similar levels that we were before the acquisition. So that's very good news for the company and for the leverage of the company. Let's say that, as you know, the CapEx plan in an organic way for 2025, it was lower than the previous years. So we are expecting to deleverage the company in a couple of, let's say, quarters. And I think that's also good news regarding all the synergies that we're planning with Solistica on the Traxion platform plus the reducing CapEx and the generation of the cash flow. Martín Lara: Okay. And how do you see the margin -- the EBITDA margins in logistics and technology? Wolf Silverstein: You saw this quarter, it was something around, let's say, even though 9%. As we mentioned before, Solistica basically comes at the beginning with a similar levels of around 5% margin. Inside of Traxion, we think that this particular acquisition could boost 100 and 200 basis points more inside of Traxion. So at the end, let's say, this particular division at the end could be something between 8% to 9.5% margin in the division. Operator: And your next question comes from Fernanda Recchia with BTG. Fernanda Recchia: Two from our side as well. So the first on the top line growth that you provided for the year in last quarter, you mentioned an expectation of reaching between 14% to 16% of top line growth. But when we look at the nine months, you are -- was 6%, just wondering if you expect, still, to reach the guidance or maybe it could be a little bit lower because of the softer demand that we are seeing? And second, maybe if you could comment on the cash flow generation for next year. Antonio Obregón: Fernanda, this is Tonio. Thanks for your question. Yes, regarding the first question is we are very confident that our year-end figures are going to be within the range of guidance that we provided in the previous call. So we are -- we're confident that we're going to achieve it. Wolf Silverstein: Thank you, Fernanda. This is Wolf again. So regarding your second question regarding the cash flow generation for 2026. As you know, and we mentioned since 2024, the company was able basically to, let's say, to stabilize the operating cash flow neutral the previous year. So after, obviously, the Solistica acquisition, we're planning to have a positive cash flow generation for 2026. Operator: And your next question comes from Jorge [indiscernible]. Unknown Analyst: You mentioned you see expansion into the U.S. as one of the best ways to capture next years trends. If you could delve further into that, how would you prefer getting involved? Would it be via M&A on an existing competitor? Or would it be through fleet expansion? Antonio Obregón: Jorge, this is Tonio. Thanks for your question. Yes, we think that the best approach to tackle the opportunities in the cross-border market for us, would be via an M&A transaction. We think it's faster and more efficient than establishing an organic growth operation. It's going to take more time. And I mean if you take a look at the multiples and the valuations of the cargo companies in the U.S., it's a very attractive entry point. And we also think that the USMCA negotiations are going to be carried out positively. And when this [indiscernible] comes due next year. So yes, the answer to your question is M&A. Operator: [Operator Instructions] Now we'll pause for a couple of moments to see if there are any final questions. Thank you. This now concludes our question-and-answer session. I would like to turn the floor back to Aby Lijtszain, Executive President, for closing comments. Aby Lijtszain Chernizky: Our long-term view has not changed. We are confident that this downturn is temporary and that things are going to get back to normal as talks regarding USMCA evolves and the tariff uncertainty dissipates. We are confident that the North American trade will continue. It is the fastest-growing trade market in the world despite the noise and short-term disruptions. Traxion will continue to seize the opportunities, grow and improve it logistic solutions umbrella as we have always done in the past. Thanks for your attention, and have an excellent day. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines, and have a wonderful day.
Operator: Good morning. Thank you for joining The Sherwin-Williams Company's review of the third quarter 2025 results and our outlook for the full year of 2025. With us on today's call are Heidi Petz, President and CEO; Allen Mistysyn, Chief Financial Officer; Paul Lang, Chief Accounting Officer; and Jim Jaye, Senior Vice President, Investor Relations and Communications. This conference call is being webcast simultaneously in listen-only mode by ACCESS Newswire via the Internet at www.sherwin.com. An archived replay of this webcast will be available at www.sherwin.com beginning approximately 2 hours after this conference call concludes. This conference call will include certain forward-looking statements as defined under the U.S. Federal Securities laws with respect to sales, earnings and other matters. Any forward-looking statement speaks only as of the date on which such statement is made, and the company undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. A full declaration regarding forward-looking statements is provided in the company's earnings release transmitted earlier this morning. After the company's prepared remarks, we will open the session to questions. I will now turn the call over to Jim Jaye. James Jaye: Thank you, and good morning to everyone. Sherwin-Williams delivered solid third quarter results as we continue to execute our strategy in a demand environment that remains softer for longer, as we have previously described. Throughout the quarter, we continue to serve our customers, invest f success, control our costs, take advantage of a unique competitive environment and execute on our enterprise priorities. On a year-over-year basis, consolidated sales increased at the high end of our guided range. Paint Stores Group and Consumer Brands Group exceeded expectations and Performance Coatings Group was in line. Gross margin and gross profit dollars expanded. SG&A growth in the quarter moderated to the low single-digit percentage level we expected, driven by ongoing control of general and administrative expenses and inclusive of restructuring costs and new building costs. We remain on track for our original guidance of a low single-digit percentage increase in SG&A for the full year, including our targeted growth investments. Adjusted EBITDA margin expanded 60 basis points to 21.4%, and adjusted diluted earnings per share grew by 6.5%. We also returned $864 million to shareholders through share repurchases and dividends. Let me now turn it over to Heidi, who will provide some additional color on the third quarter before moving on to our outlook and your questions. Heidi Petz: Thank you, Jim, and good morning to everyone. Let me begin by thanking our employees for delivering a solid quarter as we continue to navigate a very choppy demand environment across every one of our end markets. Our strategy continues to resonate with professional painting contractors and manufacturers who now more than ever are looking for partners that can provide them with predictability and reliability. Sherwin-Williams provides customers with differentiated solutions that makes them more productive and profitable. This is even more valuable at a time when competitive offerings are inconsistent. We know what works, and we're investing in it while continuing to assess, adapt and control what we can control. We remain confident our approach is the right one to continue winning near term and it leaves us well positioned for when the demand cycle eventually turns. Let me now provide some color on our third quarter segment performance. Sales in Paint Stores Group increased by a mid-single-digit percentage, with price mix up at the high end of low single digits and volume up low single digits. This solid top line performance is not due to any market improvement in demand, but rather clear evidence that our growth investments are delivering a return. Given the market data we track, we believe we outperformed the market in all segments that we serve. Protective and marine increased by low double digits. This was the fifth straight quarter we have delivered high single-digit growth or better in this end market. In residential repaint, sales again grew by mid-single digits. We have grown this business by at least this level in every quarter since the start of 2022, a period during which existing home sales have been negative almost every month. We also outperformed in Commercial, where sales were up mid-single digits in a quarter where multifamily completions were down double digits for the 2 months of available data. Our systematic approach to capturing new opportunities in this segment, created by recent competitive actions is working. In new residential, sales increased by low single digits in a quarter when single-family completions were down slightly for the 2 months of available data. Property maintenance and DIY sales both increased by low single-digit percentages. Exterior sales were slightly better than interior sales, and both were up mid-single digits. We opened 23 net new stores in the quarter and 61 year-to-date, which is ahead of last year's pace. We've also added a commensurate number of sales reps to serve new accounts and customers through these stores. Even as we continue to make these growth investments, we continued to drive profitability. Segment profit in the quarter grew by a mid-single-digit percentage and segment margin increased by 40 basis points. With segment gross margin being flattish, this increase reflects leverage on SG&A, with over 30% incremental margin on low single-digit volume growth. Moving on to Consumer Brands Group. Sales beat our expectations with price/mix up low single digits, volume down mid-single digits and FX, a slight headwind. Sales reflect continued softness in North America DIY and unfavorable FX in Latin America, partially offset by growth in Europe. Adjusted segment margin increased primarily due to a favorable product mix shift and good cost control, partially offset by supply chain inefficiencies from lower production volumes. Severance and other restructuring expenses also reduced segment margin by 85 basis points. We're also very pleased to have closed on Suvinil acquisition earlier this month, and I want to take this opportunity to officially welcome this highly talented team to Sherwin-Williams. This business is an outstanding addition to the Consumer Brands Group Latin America portfolio, and we're excited by the many profitable growth opportunities ahead for our combined offerings. Additionally, we continued our channel optimization efforts in this region during the quarter, closing 8 net Sherwin-Williams stores and shifting that volume into selected qualified dealers. In Performance Coatings Group, sales were in line with expectations. Volume, acquisitions and FX all increased by low single-digit percentages but were partially offset by unfavorable price/mix. Regionally, segment growth in Europe and North America was partially offset by decreases in Latin America and Asia. From a division perspective, packaging remained our strongest performer with double-digit growth, inclusive of an acquisition. We're also pleased with mid-single-digit growth in Auto Refinish, inclusive of high single-digit growth in North America. This growth was driven by share gains that more than offset continued lower insurance claims. Sales in Coil, Industrial Wood and General Industrial all decreased by low single-digit percentages. PCG segment profit and margin decreased due to lower gross margin, primarily from unfavorable product and region sales mix and higher costs to support sales. Severance and other restructuring expenses also reduced segment margin by 30 basis points. I would also like to note the continued good work in our administrative function to control costs. Excluding the corporate portion of restructuring costs and the new building costs, administrative SG&A was down by a low double-digit percentage in the quarter. Before moving on to our outlook, I want to address the topic that some of you have asked about, and that was our very difficult decision to temporarily pause the company matching contributions to our 401(k) benefit plan effective October 1. I want to be very clear, this is not a decision made lightly, nor was it made without deep appreciation for its impact on our people. It was a decision made after implementing a number of cost-saving initiatives, and completing significant restructuring actions, all at a time when we have and continue to face a period of prolonged demand and macroeconomic uncertainty. Our goal was to preserve as many jobs as possible in the near term, while also protecting the company with targeted customer-facing investments at a time of unprecedented competitive opportunity. Our goal is to reinstate the match as soon as possible, just as we have done successfully in the past. We are focused on delivering the performance that enables us to do so while also building long-term value for all of our stakeholders. With that, let me move on to our outlook for the remainder of this year, along with some initial considerations related to 2026. The slide deck issued with this morning's press release provide specific sales guidance for the fourth quarter, which reflects our normal seasonality. This sales guidance includes the Suvinil acquisition, which we expect will increase the company's consolidated sales by a low single-digit percentage in the quarter, with an immaterial negative impact to diluted earnings per share, given transaction closing costs and purchase accounting items. Given our third quarter sales performance and the addition of Suvinil, we are updating our full year 2025 sales guidance to be up by a low single-digit percentage versus 2024. Our second half EPS is in line with what we were expecting in July, excluding the immaterial headwind of Suvinil. We are narrowing our earnings outlook and now expect adjusted diluted net income per share to be in the range of $11.25 to $11.45 per share with a prior midpoint of $11.35 remaining unchanged. Additionally, we remain on track to open 80 to 100 North America Paint Stores for the year. We will also continue to manage production and inventory closely over the rest of the year, on pace with customer demand. We remain laser-focused on our strategy of driving our customers' success. As far as 2026, our teams have begun working through our annual operating plan process. We'll provide you with a more definitive outlook in January as we typically do. But at this time, we can provide some initial expectations that may be helpful. From a demand perspective, it appears that a very challenging environment will persist through the first half of the year and most likely beyond that. In other words, softer for longer and continued choppiness across most end markets. The leading indicators we track point to minimal positive catalysts at this time. We will continue to focus on our new account and share of wallet initiatives and driving continued returns on the growth investments we have made. Our initial view of raw material costs is that they will be up low single digits, inclusive of tariffs with varying costs for individual commodities. We also expect other parts of the cost basket to inflate, particularly health care, which will increase by a low double-digit percentage in wages, which we expect to increase by a low single-digit percentage. We also expect to continue investing in growth initiatives, including stores and reps to win new business and support existing customers and strategic retail partners as the competitive environment continues to inflect in our favor. We will continue to counter cost headwinds through efficiency and simplification initiatives, and disciplined pricing actions. Specifically, we have announced a 7% price increase in Paint Stores Group effective January 1, along with targeted increases in our other segments. Effectiveness in Paint Stores should be in our typical historical range, but likely will be tempered by market dynamics and segment mix. We will continue to be very aggressive in growing the business, and in controlling general and administrative expenses, so we do not see a reason to be heroic in our initial guidance. We expect interest expense will be higher given our new headquarters financing arrangement and refinancing of debt at higher rates earlier this year. We remain on track with the restructuring initiatives we've previously called out, and we expect a total benefit in 2025 of approximately $40 million in savings. We expect our actions to result in savings of approximately $80 million on a full year basis going forward. On a very exciting note, we've begun the move into our new headquarters and R&D center in Cleveland, and we expect the process to be completed in the spring. As a result, we anticipate our CapEx returning to a more typical range of around 2% of sales next year. These new world-class facilities are investments in our people and our customers that we are certain will deliver strong returns and there will be multiple chances for you to come visit in the coming year. All in, including our new and current buildings, we would expect a modest cost headwind next year. We will provide more details on our January call. 2025 is not over, and we know we still have work to do. You should expect us to continue acting with discipline and urgency during the remainder of the year. Beyond that, we expect the demand environment to remain soft well into 2026. We are not immune from these persistent challenging market conditions, which leads us to focus even more intensely on differentiated solutions that help our customers become more productive and profitable. With our success by design mindset and a deeply experienced team, we see this as a great time to continue demonstrating what makes Sherwin-Williams so unique and outperform the market, and that's exactly what we plan to do. This concludes our prepared remarks. And with that, I'd like to thank you all for joining us this morning, and we'll be happy to take your questions. Operator: [Operator Instructions] Your first question is coming from Ghansham Panjabi from Baird. Ghansham Panjabi: Heidi, could you just give us a bit more color on the 7% price increase for Paint Stores Group? How did you come about that number? I mean raw materials looks like they're going to be flat this year, up low single digits next year. I know you have wage increases, et cetera, but the demand environment seems pretty tepid. So how do we get to the 7%, which is, I think, the highest since the COVID inflation spike? Heidi Petz: Ghansham, I'm going to hand it to Al here in a moment, but let me start with -- this is more about our pricing philosophy in general, you and I've had this discussion when we need to go to the market, our customers understand that we need to go to the market. And so we work the entire year before that to make sure that we're demonstrating value and earning the right to do that so we can continue to make the investments that I referred to in my earlier remarks. But I'll let Al give you a little bit of color on why the 7%. Allen Mistysyn: Ghansham, this is Allen Mistysyn. The -- how we got to the 7% is it's really driving it because of higher year-over-year increases. You talk about our initial view of raw material costs being up low single digits as compared to being flattish in the current year. And the other basket -- cost basket increases. But I think what I would like to also add to that is Heidi mentioned in her opening remarks about being -- the effectiveness being in our typical range but being tempered by market dynamics and segment mix. As you said, we're going to -- in this environment, a slow growth, choppy demand environment, we're going to be very aggressive in growing the business with new account growth and share of wallet. And why is that important to us is because when we look -- as I talked about a year ago on this similar call, we look at price mix as 1 bucket and we report on that metric quarterly. And we've got a number of pro-architectural segments that perform at varying levels. And as an example, in our third quarter, we saw commercial property maintenance, new residential improve and perform better. They have similar operating margins, but they do dilute the price/mix realization. And if you look at our third quarter price/mix realization, it was up at the upper end of the low single digits, which was compared to a mid-single-digit percentage in the second quarter. And I've said before, we're focused on growing operating margin. In the third quarter -- our net sales and volume growth was better in the third quarter than we expected. So even though we have flattish gross margin, we experienced SG&A leverage. We grew our operating margin and saw strong incremental margins of 30-plus percent on that low individual -- low single-digit volume gain. So my point here is it's a balance. We are going to go strong after volume. We're going to come out of the other end of the price increase with our customers, but we're going to balance both. Operator: Your next question is coming from Jeff Zekauskas from JPMorgan. Jeffrey Zekauskas: 30-year mortgage rates have come down. I think they're about 6.4% now. Where do you think those rates need to go to really catalyze demand in the Paint Stores Group? Allen Mistysyn: Yes, Jeff, I think I can go back [ because it sticks out ] in my head where mortgage rates dipped to around 6% in October of last year. We saw a nice bump in applications. So I think when you look at the pent-up demand and depending on what number you look at and how long it's been with existing home turnover being flat or down and now it's starting to turn, there's a lot of pent-up demand. So when we get towards 6% and certainly, we've seen the 10-year dip below 4% for a day, which was exciting. But I think that around 6% or a little bit below should drive stronger existing home turnover since the homebuilders have been paying down the rate to get more people and more traffic into their homes already. Heidi Petz: Jeff, 1 piece, I think I would add to that too, 6% seems to be the magic number, but we spent a lot of time with our national and regional homebuilders. And not a surprise, I think everybody is squarely focused on affordability. And while they're trying to reduce upfront construction costs, redesigning floor plans, even looking at lot sizes and the actual product, the biggest impact is obviously affordability. Rates will certainly have an impact. So we are all hoping that the Fed makes some shifts here in the future. Operator: Your next question is coming from Vincent Andrews from Morgan Stanley. Vincent Andrews: Heidi and Al, I wanted to ask on the investment spending. We're a bit more than 2 years into it. I think we can all look and see the positive results that are coming from it in terms of market share gains and how it's manifesting itself in your volume results. I think what's less clear to us from the outside is just how you define the efficiency of the spend. And you can look at it both ways. You can say, could you get the same results spending less? Or could you get better results if you were spending more. And so I think it would be helpful if you could just sort of talk to a little bit of a look-back analysis on this as we're a little bit more than 2 years in. And what defines and what helps you understand what the right level of spend is and what causes you to add more or presumably you've pulled back at the same time in other areas where you haven't seen the effectiveness. So some detail there would be helpful. Likewise, as we look into '26, if we don't get the help from the Fed that we all want and things remain choppy, what causes you to continue to make the incremental investments? Allen Mistysyn: Yes, Vincent, I think it always starts and ends with how we get a return for the investments we make. We have a very disciplined process around new store adds, rep adds, and we look for stores on what's the time to get to a normal -- steady-state profit? And how long that is. And that gives us some idea, are we in a saturated market or not? And I would tell you that each of the stores we add, including in our densest markets get to profitability faster as we continue to invest in our least dense markets. For our reps, we look at residential repaint in the mid-single-digit growth we've had in residential repaint through this year, through most of the last year. And we look at the investments we made in the second half of 2023, we can look by territory, by sales growth, by margin growth, and I would tell you without a fact -- without a doubt that we are getting a return on those investments, and what dictates how fast or slow you go, and this has been very consistent over many years. We put a plan in place, 80 to 100 stores, similar or a little bit higher number of reps. We look at our performance through the first half. We look at outlook for the second half. We think sales are going to be stronger if we think our gross margin is going to be stronger than we had planned. we are willing and able to invest heavier typically on the rep side. It's a little harder to invest more on the store side. But typically, on the rep side, and they're more focused on res repaint. And again, we look very, very tactically and look at each of those reps and see what kind of return they're getting. But a ton of confidence that we are getting a return for those based on the sales performance we're seeing in a very difficult, I would argue, down market in res repaint. Heidi Petz: And it's a huge testament to our team. They're out every day belly to belly with these customers. And while the market may have gotten kind of worse in some pockets here, I think Al makes a great point on res repaint, we continue to outperform in what I would also consider a highly unprecedented competitive environment. So in that 2-year span, Vincent, obviously, as you well know, there's a lot of gallons up for grabs and we're going to be relentless to grab them. Operator: [Operator Instructions] Your next question is coming from John McNulty from BMO Capital Markets. John McNulty: Maybe an early 1 on Suvinil. Can you help us to think about some of the actions you plan on taking there? How to think about maybe some of the opportunities around synergies and where we might be looking at the profitability levels as we look to 2026. Heidi Petz: Yes. John, I'll start and then hand it over to Al to talk a bit about kind of further out as we think about profitability. But I'm thrilled, I'm beyond excited on this acquisition. I'm going to be out with our team in Brazil here shortly, of course, getting in front of some customers. Really proud of the team's joint effort and their laser focus on business continuity, where we can create more value together as 2 great companies. So a lot of opportunity both commercially and operationally. It's early days. The teams are just getting started. I wish I had all the answers laid out, but I can tell you we've got the right people, the right leaders that are going to help us to realize that value at an accelerated rate. Allen Mistysyn: Yes, John, let me just start impact on the fourth quarter, Suvinil will increase consolidated sales of low single-digit percentage. It increases our consumer brand sales, a low 20% -- 20 percentage. How you talk about an immaterial headwind in the fourth quarter, predominantly due to onetime transaction costs and inventory step up. We'd be accretive in the quarter, slightly accretive in the fourth quarter. As you look out, and we'll give you more detail on our January call. But as you recall, we talked about a $525 million business, mid-teens EBITDA. And I would expect, as we implement our systems, tools and processes and realize the synergies across both organizations because as you recall, we talked about being somewhat of a reverse integration. We'd expect to see that growth into the high teens, low 20s over a midterm period of time. Operator: Your next question is coming from Alexi Yefremov from KeyBanc Capital Markets. Aleksey Yefremov: Heidi, I wanted to ask you about your comments on the second half of next year. I realize it's pretty far away, but are you seeing anything specific to found maybe a little less hopeful about recovery? Or is this just looking at current trends and being conservative? Heidi Petz: Yes. I think it's more a function of our current sight line given how far out we can see relative to backlogs, overall pipeline of the business is honestly more of the comments there. But I will go back to the statements regarding -- we are not yet seeing consistent data points that really telling a story that there's this catalyst coming anytime soon. So I don't believe it's conservatism. I think it's pragmatism. But I can assure you, if the market rebounds faster, we will be prepared for it. Operator: Your next question is coming from Duffy Fischer from Goldman Sachs. James Jaye: You might be on mute, duffy. Why don't we move on? We'll come back to Duffy later. Operator: Certainly. Your next question is coming from Mike Harrison from Seaport Research Partners. Michael Harrison: I was wondering kind of piggybacking on the last question, if you could give some more detail on what you're hearing from your contractor customers about their backlogs and about visibility over the next 3 to 6 months. And I'm just curious within Paint Stores Group, what submarkets are your contractors sounding maybe a little bit more confident? And what submarkets are giving you a more cautious outlook? Heidi Petz: Yes. Mike, I'll start. Let me -- I'll point to the Commercial segment, within that includes the multifamily starts. Again, you're seeing a continued outperformance here for the company. We are seeing some improvement on starts, but I would tell you that we're looking more for trends and a sustained view of some of these positive signals. So we need to see more of that. This also comes over some soft comps over the last 2 years. Our sight line in this area is more like 9 to 12 months. And so when that does start to pick up, it would likely be late back half, if not early '27. Some of that movement is accounted for in our current commercial outlook. Any additional comments, Al, you would like to share. Okay. Operator: Your next question is coming from Matthew [ Deo ] from Bank of America. Unknown Analyst: Can we just flesh out briefly the 4Q implied guidance and the deceleration in year-over-year growth? Is that because it's harder to grow a seasonally weaker quarter? Is there a regional mix issue there? Or is there anything else that might point to higher cost or decel? Allen Mistysyn: No, Mike. I think when you look at our fourth quarter sales guide, our consolidated is expected to be up low to mid. And Paint Stores Group up low to mid. I think we saw -- we beat our third quarter forecast for stores on the back of better exterior gallon sales. I'd say, our fourth quarter sequentially smaller and exterior is really going to be dependent, as we've talked about in the past of Southeast and Southwest and how those pan out. I don't think we're expecting anything dramatically changed. It's more of the same across each of the other segments within stores. I think consumer is a similar kind of outlook including -- or excluding Suvinil and then our PCG group has been in line with our second half guide. So I don't think there's anything to read into that other than exterior being stronger, both in stores and in consumer in our third quarter, and then we'll see how that pans out in our fourth quarter. Operator: Your next question is coming from Mike Sison from Wells Fargo. Michael Sison: Your pricing capture this year has been better or higher than in the past. What do you think pricing capture would be in '26 and going forward? And do you think it's structurally better than you've had historically? Allen Mistysyn: Yes. Mike, I think I'll just touch on '26. Going further than '26 in this environment, it's a little hard to see. We've talked about market dynamics and going out with a higher rate to cover the higher costs that we're experiencing. But in this softer for longer demand environment and the dynamics in the market with our competitors and some of the actions they've taken, we've talked openly about this on each of our calls this year. We're just going to be very aggressive on gallons and balance the gallon growth with the price increase effectiveness. And what I talked about earlier is what we report on with price/mix as one bucket can be impacted by changes in segment sales. Like we saw in our third quarter. So if you look at our third quarter versus our second quarter, we said price/mix was up low single digits. We said on our second quarter, it was up mid-single digits. The price effectiveness itself is similar quarter-to-quarter, but we had better performance in commercial new res and property maintenance. And that's what kind of tempered the effectiveness of that price/mix bucket. Operator: Your next question is coming from John Roberts from Mizuho. John Ezekiel Roberts: Could you talk about where you think industry gallons are down in the U.S. by subsegment, just in buckets here, which subsegments are down low single digit percent [ gallons ] against for the industry, mid-single digit. And are any of the subsegments down high single-digit in your opinion. James Jaye: Yes, John, this is Jim. I think this is another year where gallons -- obviously, we're not through the year, but I think the gallons this year are likely going to be down again, which is what we've seen since we've come out of COVID. I'm not going to get into the specifics by end markets, I would say. But if you look at the different signals that we look at, for example, existing home sales, the starts on single-family, some of the property maintenance, which has remained neutral. I think you can say that gallons are probably challenged across most of our end markets. I think the good takeaway is as Heidi said in her prepared remarks, we're outperforming in all of those, which is our North Star, right, at above-market performance. So it's further evidence of the investments we've made, delivering a return. And even in a down market, we've been able to grow our volumes. Operator: Your next question is coming from Arun Viswanathan from RBC Capital Markets. Arun Viswanathan: Maybe I could get like a little bit of an early read on next year. You do have some share gains coming to you. You've announced the price increase. So in Paint Stores Group, I know you've also signed up some exclusive new contracts. So do you think a mid-single-digit comp is reasonable? Or should we push maybe to high single digits, given that 7% price increase. Heidi Petz: Well, I'll start with what we just covered in the last question, which is we don't expect any help from the market whatsoever anytime soon. We do hold ourselves to higher expectation as you should expect as well. We don't often hold a yardstick based on what's happening in the competitive landscape where we really push ourselves. We talk about what's possible often in our organization and really push to think differently and think outside of the box. So when I think about this environment, our ability to go demonstrate value with these contractors and gain some exclusivity, I think, is a testament to our differentiation on display. In this environment, these contractors in the stores are looking for predictability and reliability to partner, and that's exactly what we're setting out to accomplish. Allen Mistysyn: Arun, the only thing I would add to that is, as we have typically done, we're headed into our 2026 operating plan process where we sit down with each of the divisions and the field sales organizations and field sales teams to talk about what's happening in their individual markets and by segment. And it gives us a much better idea of the trends that we expect. We'll -- they'll be having conversations with their customers on the price increase, and we'll see how those are progressing and that will give us a clear picture what to expect on the full year when we look at sales volume, and we certainly will give you an update on that in January. Heidi Petz: We're going to continue taking share, but we're not immune from what's happening in the market. Operator: Your next question is coming from Patrick Cunningham from Citi. Patrick Cunningham: Maybe just a question on Performance Coatings. Can you help square the negative operating leverage despite the positive sales? Maybe just some color around the mix drag and higher costs there. And then it seems like you're pretty firmly guiding for low single-digit growth across that segment for 4Q. Should we expect similar margin declines with some of these similar mix dynamics? Just any sort of framework there would be helpful. Allen Mistysyn: Yes, Patrick. On the adjusted segment margin, we talk about the unfavorable mix by region and by business. We look at North America, which is our most mature market, and our sales were only up low single digits. And when you look at Europe, which we have grown quite a bit through acquisitions, and we were up a high single digit at a differing margin -- operating margin performance along with Latin America being down, which is typically a better market for us. So those combinations drove that -- our gross margin down, drove the profit margin down and offset by higher volumes. I think looking at our fourth quarter, my expectation is we're planning to see some moderation in that mix, unfavorable mix. We're looking at -- I expect to see some gross margin expansion due sales volume, I think, our -- as we continue to maintain good cost control, and that team has done a terrific job all year controlling their costs. I'd expect to see some leverage on SG&A and segment profit margin improving in our fourth quarter. And we'll see how it goes into '26. And again, we're going through the planning process now, and we'll give you an update on '26 in January. Heidi Petz: We don't see any strong catalyst for market recovery, but we're not waiting for that either. I think there's some really good bright spots to point to. We mentioned in my prepared remarks, I'd point to Auto Refinish as a great example being up mid-single digits, and we are confident in taking market share, especially in North America, where we're up high single digits. [ I'd point ] to certainly the direct business, but our branches continue to demonstrate value. The large A shops are improving. The larger shops, some of the small and medium shops continue to see declines, but we are being very bullish right now, making sure that our Collision Core continues to build momentum. Adoption continues to grow, very proud of the team's efforts there. There are a number of different examples to point to across the portfolio, but just to reinforce Al's point, a lot of confidence in the team's focus on both growing volume and significant cost control. Operator: Your next question is coming from Josh Spector from UBS. Joshua Spector: This might be redundant, but I'll try again here around Paint Store volumes. I guess if we look at the first half, your organic volumes same-store sales down maybe 3% to 4% depending on where you landed on pricing. Your second half guide is closer to flat, maybe plus or minus 50 basis points on the volume side. So as we think about a lower for longer environment and maybe some acceleration in share gains in commercial and multifamily, should we be thinking about a flattish volume environment for '26 as the base case? Or would you go back to what we might have thought a quarter ago, which is maybe down low single digits? Allen Mistysyn: Yes, Josh, I don't want to give you a firm outlook today for 2026. But from quarter-to-quarter or half to half, you look at how like in our third quarter exterior sales performed better than it did in the first half, which gives us a little bit of tailwind on volume. So when we look at our forecasting models, depending on the timing of how commercial comes in, is property maintenance CapEx is going to come back or still stay soft. You're looking up or down low single digits. And I think initially in our first consideration is starting there and then working with our teams to see how we can accelerate the share gains both the new account activity and share of wallet and see how we can build those in to get to a sustainable up low single-digit volumes with all the good actions they've taken as a team to control their G&A costs while still putting in stores, still putting in reps. We have 95 more reps year-over-year -- our stores year-over-year. We have over 110 more reps year-over-year and their SG&A, we got leverage in SG&A in the third quarter. So I think there's a combination of things that we're looking at. But segment by segment, we'll look at and see where we end up. But initially, right now, it's probably up or down low single digits until we get a better line of sight coming out of the year. Operator: Your next question is coming from David Begleiter from Deutsche Bank. David Begleiter: Heidi, just on your price increase, given the challenges we're seeing now in Pittsburgh Paint, why wouldn't you not raise prices next year just to apply maximum pressure on Pittsburgh Paint and really step on their neck while they were down. And sorry to be so graphic. Heidi Petz: That was very graphic. David, I'll go back to a comment Al made earlier and completely this guides how we're thinking about the current operating environment, which is about balancing gallon growth with price increase effectiveness. We are going to be extremely aggressive on volume. I mentioned there's a lot of gallons up for grabs. We need to go earn that. It doesn't just come our way naturally. The team is out there across the Paint Stores organization, every store manager, assistant manager, our reps, they're fighting tooth and nail every day to make this happen, and I'm very proud of the team's achievement that allows us to kind of beat the market. But it is a balance. And I think what you'll find, as we've always done historically, when we come out with price, we want to do it the right way. We want to get out in front of our customers, give them time to plan, get ahead of the bidding season. We don't want our customers start absorbing this and helping them to pass that along. But the timing of the increase is of strategic importance, but we're going to be extremely aggressive on volume. So if there's a way to thread the needle, it is going to be a little bit of art and science to balance the two. Allen Mistysyn: And David, I'd just add. I appreciate the comment on PPC. But we have a disciplined approach to how we look at pricing, how we approach our strategy. And we just aren't going to react to each competitor's actions in the market that we can't control. We've done very well. We've been very successful on managing what we can manage and sticking to the things that we know how to do. So we're going to stick with that. It's been a successful formula for us, and it's going to be going forward. Operator: Your next question is coming from Kevin McCarthy from Vertical Research Partners. Kevin McCarthy: Do you have any price increases on the table that you care to call out for consumer brands or across the Performance Coatings Group. Just trying to get a sense of whether there might be a potential for any price acceleration on those platforms relative to the 7% that you called out for Paint Stores? Allen Mistysyn: Yes, Kevin, based on the overall cost basket dynamics and increasing, we have targeted price increases across each of the businesses in each of the regions to help offset that and keep moving us forward. Heidi Petz: And to move forward by investing in our customer success. And so it's going to be incumbent that we get that accomplished. Operator: Your next question is coming from Chris Parkinson from Wolfe Research. Christopher Parkinson: Great. Understanding there are a lot of moving parts heading in 2026. So when we think of all the dynamics between price cost and manufacturing. Is there a scenario out with for which you see Sherwin consistently being at or above 50% gross margin absent any material volume recovery. Have those dynamics or puts and takes really changed since last year's Analyst Day? Allen Mistysyn: Yes, Chris, can we sustain sustain 50% gross margin implies volume growth. And like we talked about, there's going to be choppiness across each of the segments, each of the businesses and regions. And one thing I will say is, I believe Paint Stores Group will grow faster, excluding Suvinil acquisition, but will grow faster than the other segments over the next year over the midterm at a higher gross margin that helps drive an overall consolidated gross margin improvement. We did experience a headwind in our supply chain this year because of the lower production volumes. And I would say that the global supply chain team has done a really terrific job trying to offset these low- to mid-single-digit production gallon decreases by controlling their costs and being really creative on how we control our costs. So we're not losing people because we are confident in our strategy. We're confident that, that volume will return. And we want our people there when it does return and we bring hours back and we fill our factories back up to more efficient capacity utilization. So I don't want to commit to above 50% until I understand we have a consistent, sustained volume growth but we've certainly positioned ourselves very well to get there when volume does come back. Operator: Your next question is coming from Greg Melich from Evercore. Gregory Melich: Maybe on -- following up on that point, Al, could you help us understand this year, if we look at the full year or just the third quarter, how much volume hurt gross margin rate? And what sort of volume growth you'd need to get 100 bps of leverage out of margin? What's the variable margin there? Allen Mistysyn: Yes, Greg, I think the -- you're talking gross margin impact with the supply chain inefficiencies are in the low 10, 20, 30 bps. And Greg, I'm glad you asked that follow-up question because it gives me an opportunity to talk about our focus on driving operating margin and not just the gross margin. And we saw that in our third quarter with the gross margin expansion. We got leverage on SG&A to help drive the operating margin forward on an adjusted consolidated basis. I think you know volume is the #1 driver of operating margin expansion. And all the things, the good things each of our groups and divisions have done to get their cost base down, I would tell you that a low single-digit volume growth or any volume growth will be accretive, and we'll see operating margin expansion. And I'm trying to -- what I'm trying to say is it will be less today than it would have been 2 years ago, if that makes sense to you. We'll get better leverage on future incremental volume than we would have had prior to coming into the cycle. Operator: Your next question is coming from Garik Shmois from Loop Capital. Garik Shmois: Just wanted to follow up on that last point. You said the 30% incremental margins on the low single-digit volume growth in Paint Stores that you got in this quarter. Just wondering if that's a good benchmark moving forward, just given what you just mentioned, both for that segment and maybe help us think about incremental margins and volume in the other segments when demand does start to improve more consistently? Allen Mistysyn: Yes, Garik, I think with Paint Stores Group, historically, what we've said is we expect mid-20% incremental margins on lower volume growth, low single-digit volume growth. I think you saw the benefit that, that group, all the actions they've taken throughout the year to get their costs lower, while still investing. So we've got SG&A leverage in the quarter and flattish margins, and that's what helped drive that. I think drove the 30%. I think as we go forward, we'll consistently look at the outlook. And if we think our volumes are higher, we'll lean in like we've done in previous years and add more selling -- sales reps to take advantage of the market share opportunities that we have. I think it's -- our Performance Coatings Group, I think, is dependent on -- because of the difference in business region mix, that one's a little harder to say. If you told me that our volume growth would be predominantly in North America, our largest region, our most mature region and by definition, our highest operating margin region. Then yes, I'd say our float -- incremental margin will be in that 20s, in that 30s, depending on -- so if it's the other regions, we're going to get varying degrees. And then Consumer Brands Group, I would just point to the strong volume we had in 2020. And the strong incremental margins that we had there and the strong volume will also help supply chain efficiencies to help their operating -- incremental margins growth. So we have examples. We just have to see sustained volume growth as we come out of this. Heidi Petz: Garik, 1 piece I would add to that as well, we launched a few years ago, we talked about Success by Design, but our 6 enterprise priorities, one of them is simplification. And we've done a lot of work globally to understand where are the costs sitting that we're not getting paid for. So the team's credit, you've heard the expression, don't let the downturn go to waste or don't let a crisis go to waste. We're saying, don't let a downturn go to waste. There's a lot of self-help that we can do to make sure we're continuing to improve our cost position. So I'm confident that there's good progress, but there's a lot more ahead. Operator: Your next question is coming from Eric Bosshard from Cleveland Research. Eric Bosshard: On the consumer brand side, I'm curious what organic growth you saw in that business. And then if you zoom back, I'm interested in the volume and pricing in '25 and how you think about that in '26? Heidi Petz: I'll start us off here. Not a lot of organic growth. I think DIY is still very much under pressure. And as a reminder, the DIY segment is a very important part of our long-term strategy. It represents about 40% of the available gallons in the market. So very important certainly within our stores, but absolutely our strategic retail partners as well. The Pros Who Paint, we continue to see some good progress in movement here. We like how we're positioned here. It continues to be a growing segment on a smaller basis, but it is an area that we're continuing to invest in people, products, services to support our strategic partners. So we're good trajectory. We just need more volume. Allen Mistysyn: Eric, the only thing I would add color around for the quarter is we did see adjusted operating margin expansion and predominantly, even though we had our volume backwards, the sales volume we had in the quarter was more skewed to exterior sale gallons and also our premium product gallons grew faster than the total, which was a nice head -- tailwind for us in the quarter and more than offset the supply chain inefficiencies that we saw with the lower production volumes in the quarter. So I know that team is continually pushing for driving the premium side of the business, and we saw it in our third quarter, and you can see the positive results with that. Operator: Your next question is coming from Chuck Cerankosky from Northcoast Research. Charles Cerankosky: Great quarter. I'd like to ask about a portion of the res repaint market, if that's how it's categorized, there seems to be a lot more activity based on our work around investors buying houses and doing very significant rehab of those properties and then selling them back into the existing home market. Is that how it flows through the housing numbers and how significant is that business for Sherwin's contractors? Heidi Petz: Well, remodeling is definitely, I think, more favorable than what we're seeing relative to the new residential side and the building side. There has been certainly increasing activity. By and large, though, the market does still continue to be choppy. So I don't believe that, that subsegment is enough to offset the core of the residential repaint contractor in general. But we're certainly going to take advantage of that subsegment. Allen Mistysyn: Yes. Chuck, I think the only other thing I would highlight there is, again, we continue to invest in the res repaint Segment. It's our largest segment. It's our fastest-growing segment, and it's our largest opportunity in that situation you talked about would be part of that res repaint segment. And again, we're being aggressively going to the new account and share of wallet growth. Operator: Your next question is coming from Laurence Alexander from Jefferies. Laurence Alexander: In the past, you've spoken about when a recovery occurs, you expect to get an amplification effect or an acceleration in the rate of share gains or the delta that Sherwin outperforms. If we do have another year or so of softer for longer, and you're leaning heavily into share gains to -- in a tougher environment, are you pulling forward some of the share gains that we would normally see in a recovery? Or do you still expect that amplification effect? And do you expect that even to be larger because you're taking more share in the downturn? Heidi Petz: So Laurence, that was a 2-part question because I answered your first question. So no, we do not believe it's a pull forward on market share. The expectation is that regardless of where the market is, that we are at a minimum of 1.5 to 2x the market. So we are taking share gains. I also would point to some of the exclusive contracts that we're picking up across different end markets on the store side. We're doing that quietly. I believe that when the market starts to move that you will see that we've created structural competitive advantage given some of the additional wins we have here. Operator: Your next question is coming from Duffy Fisher from Goldman Sachs. Patrick Fischer: So question on the SBUs within Paint Stores. So if you look, both of the resi businesses have been pretty flat -- I mean sequentially flat as far as their improvement, so they're not accelerating. The other 4 businesses all accelerated in the third quarter in their growth rate. And so I was just wondering, is that delayed pricing rolling through, is that that those markets actually accelerated in demand themselves? Or is that basically where the overlap on your competitive advantage is taking share? What's driving those for with the acceleration in Q3. Heidi Petz: Duffy, it's not the pricing piece that you referenced. It is our opportunity in this unprecedented environment to demonstrate the value that Sherwin-Williams can provide. And I would tell you, across every one of our end markets our teams are out, they're responding. Our employees understand how to -- in this environment, how to rapidly adapt and adjust to make sure that we are anticipating what it is that our customers and our contractors are needing. When we talk about bringing differentiated solutions, it's in these times when I think our differentiation is even more on display because we're committed to our strategy. We are steadfast in putting our customers first, and we have their success in mind. So we're going to continue bringing new solutions even in these times. Al used the word creative earlier and our team's willingness to be creative in this environment is why this is such an important quarter for us, and Sherwin-Williams is weathering this softer for longer environment, we're going to continue to do that. Operator: Thank you. That concludes our Q&A session. I will now hand the conference back to Jim Jaye for closing remarks. Please go ahead. James Jaye: Yes. Thank you again, everybody, for joining our call today. And thanks to all the employees of Sherwin-Williams for all of their hard work. As Heidi said, we continue to operate here in a really challenging demand environment, and we expect that's likely going to continue well into next year. But at the same time, we see challenge as opportunity. So we've got a lot of confidence in our strategy, controlling what we can control: serving our customers, focusing on their success, making our targeted growth investments and controlling our G&A spending. That's the recipe, that's the playbook. So we are focused on finishing '25 strong, and we're going to continue to build on our momentum hopefully, that will propel us well into '26. So thanks again. As always, we'll be available for your follow-up calls and appreciate your interest in Sherwin-Williams. Operator: Thank you. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.
Operator: Hello, everyone, and welcome to HNI Corporation Third Quarter Results Conference Call. Please note that this call is being recorded. [Operator Instructions] I'd now like to hand the floor over to Mr. Matt McCall. Please go ahead, sir. Matthew McCall: Good morning. My name is Matt McCall. I'm Vice President, Investor Relations and Corporate Development for HNI Corporation. Thank you for joining us to discuss our third quarter 2025 results. With me today are Jeff Lorenger, Chairman, President and CEO; and VP Berger, Executive Vice President and CFO. Copies of our financial news release and non-GAAP reconciliations are posted on our website. Statements made during this call that are not strictly historical facts are forward-looking statements, which are subject to known and unknown risks. Actual results could differ materially. The financial news release posted on our website includes additional factors that could affect actual results. The corporation assumes no obligation to update any forward-looking statements made during the call. I'm now pleased to turn the call over to Jeff Lorenger. Jeff? Jeffrey Lorenger: Thanks, Matt. Good morning, and thank you for joining us. I'm going to divide my commentary today into 3 sections. First, I will provide some comments about our third quarter results. Non-GAAP earnings per share increased 7% year-over-year, driven by a record third quarter non-GAAP operating margin. Next, I will discuss our expectations for the fourth quarter of 2025. Our full year earnings outlook is unchanged from what we provided on last quarter's call. We continue to anticipate a fourth consecutive year of double-digit non-GAAP earnings improvement. And finally, I will provide additional detail about recent demand activity and how we see our markets playing out in the fourth quarter and as we move into 2026. Following those highlights, VP will provide additional color around our fourth quarter outlook. He will also comment on the strength of our balance sheet, both currently and what we anticipate after the completion of the pending acquisition of Steelcase. I will conclude with some closing comments, including some additional thoughts on our Steelcase transaction before we open the call to your questions. I'll begin with the third quarter. Our members delivered another strong quarter despite ongoing tariff-driven volatility and continuing macro uncertainty. The positive momentum of our strategies, the benefits of our diversified revenue streams, our focus on items within our control and the merits of our customer-first business model continue to deliver strong shareholder value. For the quarter, we delivered non-GAAP diluted earnings per share of $1.10. EPS grew 7% versus last year, which was modestly ahead of our internal expectations. Total net sales in the third quarter increased 3% organically over the same period a year ago and profit margins in the third quarter were strong. Our non-GAAP operating margin expanded 10 basis points year-over-year to 10.8%. This non-GAAP EBIT margin was the highest on record for the third quarter. In the Workplace Furnishings segment, organic net sales increased 3% year-over-year, fueled by growth across all major brands. We delivered similar organic growth rates in our brands focused on small- and medium-sized businesses and on contract customers. From a profitability perspective, Workplace Furnishings' non-GAAP segment operating profit margin expanded 40 basis points year-over-year and exceeded 12%. Third quarter profitability benefited from our profit transformation efforts, recognition of KII synergies and modest volume growth. In Residential Building Products, third quarter revenue was roughly unchanged versus the prior year period. New construction revenue was down slightly, while remodel retrofit sales grew modestly, both on a year-over-year basis. We delivered this top line performance despite continued challenging housing market dynamics as we continue to compete well and our internal growth investments are bearing fruit. Consistent with expectations discussed on last quarter's call, third quarter segment operating profit margin contracted year-over-year driven by continued investment. However, segment operating margin still came in at a strong 18%. Despite expectations of ongoing uncertainty, we remain encouraged about the opportunities tied to the broader housing market, and we continue to invest to grow our operating model and revenue streams, and the consistently strong profit margins in this segment are evidence of the business' unmatched price point breadth and channel reach, along with the benefits of its vertically integrated business model and overall operational agility. To summarize, our third quarter performance demonstrates the strength of our strategies and our ability to manage through varying macroeconomic conditions while remaining focused on investing for the future. We expect strong results to continue, driven by our margin expansion efforts and continued volume growth. That leads to my comments about our outlook for the fourth quarter. Overall, we expect our margin expansion efforts and continued revenue growth will support ongoing year-over-year EPS improvement, all while we continue to invest to drive future growth. In Workplace Furnishings, segment orders increased 2% after excluding the estimated impact of prior quarter pull-forward activity and hospitality orders. We are again excluding hospitality from our adjusted order growth and backlog metrics as the business has experienced meaningful tariff-related volatility over the past 2 quarters, which has temporarily skewed results. Adjusted orders from contract customers performed better than those from small- to medium-sized businesses. Our adjusted segment backlog at the end of third quarter was up 7% from the third quarter of 2024. I will discuss our outlook for our workplace markets, including hospitality more in a moment. Moving to Residential Building Products, orders in the third quarter increased 2% year-over-year. Remodel retrofit orders outperformed and were up mid-single digits from third quarter 2024 levels, while new construction orders were down low single digits. Overall, year-over-year segment order growth accelerated towards the end of the quarter. Builder sentiment has weakened in recent months and continues to reflect the impacts of elevated interest rates, ongoing affordability issues and weaker consumer confidence. And housing trends have broadly followed builder sentiment with permits moving lower. Despite expectations of ongoing uncertainty and headwinds, we remain encouraged about the opportunities tied to the broader housing market, and we continue to invest to grow our operating model and revenue streams. I will finish by making a few comments about our markets and provide additional detail around our elevated EPS growth visibility. On our last few calls, we highlighted an increased focus on investing to drive growth in both segments. Our 2025 to-date revenue strength and encouraging leading indicators have provided added support for our growth initiatives and investments. As we look at our Workplace Furnishings segment, we are encouraged about the developing fundamentals of this business. The macro and industry backdrops have shown consistent improvement in recent months. Return to office data appears to be indicating an inflection. The castle card swipe data following Labor Day reached post-COVID highs with Class A buildings in the top 10 markets approaching 98% peak day occupancy. Further, in a recent KPMG survey, nearly 80% of CEOs surveyed now expect employees to be full time in office over the next 3 years. This is up from fewer than 40% in the April 2025 survey. And according to CBRE, nonviable space is being converted at record levels. This positively impacts our business in 2 ways. First, it results in more forced moves as landlords encourage current tenants of this nonviable space to relocate. And second, it will accelerate the expected Class A square footage shortage, which will either drive the addition of new space or increased investment in upgrading existing Class B space. Each of these dynamics result in more furniture events. Finally, calendar year 2025 is expected to see the highest net absorption of office space since 2019. Historically, absorption has been an important indicator of office furniture demand. JLL estimates more than 6 million square feet was absorbed on a net basis in the third quarter of 2025 alone. This compares to total negative net absorption of more than 100 million -- 150 million square feet over the past 5 years. Office vacancy rates are falling for the first time in 7 years as we enter what JLL has deemed a new office growth cycle. In New York City alone, businesses leased 23 million square feet of additional office space during the first 9 months of 2025. This is the largest amount of new workspace rented for that period in 2 decades. And in total, 18 of the largest U.S. markets are exceeding pre-pandemic leasing activity over the past year. The macro and industry backdrops are clearly improving, and we expect our contract business to disproportionately benefit from these trends as much of the industry growth cycle to date has been in secondary and tertiary markets. Finally, I will comment on our hospitality business. As I mentioned earlier, compared to our other businesses, this vertical has seen more tariff-related demand volatility over the past 2 quarters. Despite this pressure, we expect revenue in this business to be relatively flat in 2025 overall. We have seen recent improvement in preorder activity, and our pipeline continues to build, pointing to a solid growth year in 2026. Looking ahead, we believe we are particularly well positioned to benefit as the workplace furnishings market continues to improve. We have strong market positions and offer compelling value to our targeted customers with a diversified portfolio of brands. Moving to Residential Building Products. We believe in the positive long-term market fundamentals. We continue to perform well despite an ongoing soft new construction environment, and we acknowledge a market-driven revenue recovery will take some time. We are, however, optimistic about our opportunities to increase revenue through our growth initiatives. Specifically, we continue to invest in developing market-leading new products that offer customers more options and features. We are driving new programs to increase homeowner and homebuyer awareness of their fireplace options, ensuring our products are considered in all remodel and new construction projects. And we are strengthening our already strong relationships with builders across the country, helping them deliver the best overall value to the homeowner. Encouragingly, we are outperforming the market in this segment despite still being in the early days of each of these initiatives. And while we invest in growth, we will continue to deliver high-margin results and strong profits in this business. Longer term, single-family housing remains undersupplied and demographics will support additional demand growth. The results of our ongoing investments, which will enhance our connection to customers and build on our leading brands will fortify our position of strength in the industry. Finally, and importantly, we continue to have elevated earnings visibility this year and next. Our outlook for 2025 revenue continues to include full year growth in both segments. Our outlook for 2025 earnings reflects expectations for mid-teens percent EPS growth. In addition to increased profits and volume growth, KII synergies and the ramp of our Mexico facility are expected to continue to drive significant savings. These 2 initiatives are expected to contribute a total of $0.75 to $0.80 of EPS in 2025-2026 period. I will now turn the call over to VP to discuss our outlook for the remainder of 2025 and our balance sheet. VP? Vincent Berger: Thanks, Jeff. I'll start by discussing our outlook for revenue and profit. Beginning with the top line. Fourth quarter revenue in Workplace Furnishings is expected to increase at a high single-digit rate year-over-year organically. The impact of divestitures is expected to reduce the year-over-year organic revenue growth rate in Workplace Furnishings by a little less than 100 basis points. The benefits of our order and backlog growth, along with an extra week in our fiscal year are expected to drive solid revenue growth in the fourth quarter. For Residential Building Products, fourth quarter net sales are also projected to increase at a high single-digit rate compared to the same period in 2024. Pricing actions are expected to be the primary driver of growth. However, we also [Audio Gap] borrowing capacity will continue to provide us with significant financial flexibility. Moreover, while we expect our initial post-closing net leverage to approximate 2.1x, we continue to project our debt levels will return to our targeted range of 1 to 1.5x within 18 to 24 months of closing. In the meantime, we remain committed of payment of our long-standing dividend and continuing to invest in our business to drive future growth. I'll now turn the call back over to Jeff. Jeffrey Lorenger: Thanks, VP. During the third quarter, we remained financially disciplined, managing the middle of the income statement to drive profit improvement while pursuing revenue growth. As we look forward, several positive secular trends and our HNI-specific initiatives will help offset macro-related risks and continued tariff-driven volatility. We will remain focused, conservative and ready to adjust as required. And as a result, our earnings outlook for the full year is essentially unchanged, and we continue to expect the fourth consecutive year of double-digit non-GAAP EPS growth. This outlook demonstrates the benefits of a stronger-than-expected third quarter, our ongoing visibility story and our proven ability to manage through changing economic conditions. Before we take your questions, I wanted to provide some thoughts on the pending Steelcase acquisition. As we approach the closing, we are excited about the future of bringing together our combined capabilities to create new career growth opportunities for our team members, deliver more value for our customers and dealer networks and further support and invest in the communities in which we operate. The deal is right from a strategic, financial and cyclical perspective, and our 2 companies are highly complementary on many fronts. We currently expect synergies to reach $120 million and ultimate accretion to total $1.20 per share when fully mature, excluding purchase accounting. And as VP highlighted, our anticipated strong free cash flow will help us quickly deleverage our balance sheet. The addition of Steelcase will further strengthen the tenets of the HNI investment thesis, and we are positioned for continued success. We have elevated earnings growth visibility for several years, broad and diverse product and market coverage in Workplace Furnishings, market-leading positions in Residential Building Products, and we continue to invest to drive growth. All this is supported by our strong balance sheet and the ability to generate continued free cash flow. I want to thank each HNI member for their continued dedication and congratulate them on another excellent quarter. We will now open the call to your questions. Operator: [Operator Instructions] Your first question comes from the line of Greg Burns of Sidoti & Co. Gregory Burns: That $1.20 of accretion from Steelcase that you just mentioned, is that considering just the synergies that you've already outlined? Or is that... Vincent Berger: Yes, Greg, that's the $120 million that we talked about on the investor call back in August. So that number has not changed. And just the way the share count works, that now converts to about $1.20 in accretion. Gregory Burns: Okay. So that's just your initial outlook, maybe there's potential upside to that if you get your hands around the business and drive additional savings. Vincent Berger: Greg, I think for that -- I think just one comment there. That's a number that we're really confident in. And we're going to use our disciplined integration process. And once we get in there and if there's more, we'll look for more. But that's what we're on record for right now. Gregory Burns: Okay. Great. And then where are you in terms of the $0.75 to $0.80 from KII and Mexico? How much have you gotten so far and what remains? Vincent Berger: Yes. We had said that $45 million to $50 million would be recognized between '25 and '26. We had mentioned kind of splitting it half and half. We're seeing a little bit more come forward of '26 in the last quarter here of '25. So I would tell you, maybe a little bit more in '25 and '26. But I think more importantly, to Jeff's point on visibility, we do see the $45 million to $50 million coming through. Gregory Burns: Okay. And you gave us a lot of data points around kind of some of the positive industry level fundamentals in the office space. We've seen kind of this slow and steady demand improvement happening over the last couple of years, kind of low single-digit growth. But when we think about the -- where the industry is at relative to maybe pre-pandemic levels, I know you've passed along a lot of pricing. Where are we in terms of volume, like relative to maybe where we were pre-pandemic? Like where are we in terms of industry-wide volumes? I'm just trying to get a sense of where we're at in the cycle and maybe what the potential uplift from here could be if we do get a more positive demand environment going forward? Jeffrey Lorenger: Yes, Greg. I think we're probably -- with all the pricing, it's a little tough to say. But I think confidently, we probably are 30% to 35% on the volume side, still down just given pricing actions and tariffs. But -- so that's kind of -- I think as you think about that, that's how we think about the post-COVID kind of cycle and some of these other macro backdrop items starting to turn around. So that's how I think about, that's how we think about, and that's why we're bullish about the space. Vincent Berger: Yes. Even if it returns half that, Greg, you're looking at mid-single-digit volume growth for a significant number of years. So the backdrop is set up, even if it doesn't get back to the 30% more, there's still a lot of volume growth opportunity. Operator: Your next question comes from the line of Reuben Garner of Benchmark. Reuben Garner: Can we -- can you kind of give us a compare and contrast about your full year guidance? I guess, what's embedded in the fourth quarter now versus maybe how it looked a few months ago? It looks like maybe the top line is a little higher, but there's some more cost in there as well. Can you just kind of give us the breakout of that? Vincent Berger: Yes, I can walk you through that, Reuben. Starting with revenue, I think it's probably -- if I look at Workplace and Residential revenue, it's mostly actually in line with prior expectations. Both are expected to be in the fourth quarter, up high single digits with the extra week. So I think where we're seeing a little bit of the pressure is the product mix. When we look at what's come through in backlog and the pipeline, there's more project-driven business and systems. So that's really a timing issue. It draws a little bit lower margin, but on the backside of that comes other business that goes with that with ancillary products that will come probably in Q1. So a little timing there. I think the second part of our Q3 beat is going to be timing of investments. Some of it slid in the fourth quarter or into the fourth quarter, and it's part of that actually saved in the third quarter. So those are going to come back. I think the key there is our second half is still unchanged. So I think you got a little bit going between the 2 quarters. And I think a couple of other things to mention. Jeff mentioned, I mentioned insurance-related pressure year-over-year. That's hitting us on the SG&A side. And I think we probably need to update our tax rates. Our second half tax rate is now at 24.4%. That's about 80 bps higher than we talked about prior in the year that gets us to a full year tax rate of 23%. So when you boil that all together, the back half is really not changing. It's got a little bit of timing and dealing with some onetime expenses. Reuben Garner: Okay. That's really helpful. And then on the residential building products side, you guys have definitely outperformed kind of what the end markets have been like so far this year. And I know you've got some investments ongoing there to drive growth. How much runway do you have on that front? I guess maybe to ask it differently, if we're looking at kind of a flattish environment next year, like can you -- do you think you can still grow above and beyond the market on the volume side? Jeffrey Lorenger: Yes, Reuben, it's a good question. I think we can. It's all relative to the macro environment, right? I mean -- but we -- I think given the investments we're making, like right now, the new construction business -- I'll give you an example, we're outperforming, for instance, in October, our orders were flat and permits 90 days prior to that were down high single digits, and that's kind of the lag time we've been seeing. So that tells you we believe we can outperform this market. The question is where is the market ultimately going? And your guess is as maybe good as ours, but we definitely we can outperform. We got retail performing well. Our gas inserts are up year-over-year. We've got stoves now going into the big box channel, and that's early innings. Our wholesale business is actually up year-over-year because the operating model is strong in that part of the world to support smaller independent dealers. And just overall investments in our superior service model, our vertical integration and builder intimacy efforts are starting to take shape. So these are in the early innings, but they are bearing some fruit. So we do believe we'll be able to stay ahead of the demand curve, if you will. The question is, where is that macro demand curve and what gap can we put on top of that. Reuben Garner: Okay. And I'm going to sneak one more in on the contract business. It seems like some good momentum on that side and the timing of you guys adding Steelcase seems nice. Can you talk about any risks out of the gate as you're integrating the company? And if we did see an acceleration in demand, just kind of what gives you confidence that you'd be able to kind of, I guess, participate in that upswing as you're putting the 2 companies together? Jeffrey Lorenger: Yes. That's a great point, Reuben. Let me start with, first of all, we're going to -- there's really no change on the front. Our dealer partnerships are going to remain intact as they are. The brand distribution is going to remain intact. Sales force is intact, both for HNI and Steelcase companies. So I think our approach there will avail us the ability to take advantage of some of those trends because everybody's heads down in that regard. And the cultures are good. We're out of the blocks. And so we're bullish about being able to work on what we need to work on, as we've talked about, cost synergies in some of those areas while keeping the front end of these businesses separate and focused on their unique brand position so that we continue to work to build on those. So we would anticipate being able to participate in any of this as these trends continue to evolve, particularly in some of these larger markets. Operator: Question comes from the line of Steven Ramsey of Thompson Research Group. Brian Biros: This is Brian Biros on for Steven. Jeffrey Lorenger: Sure. Brian Biros: On the resi side, I guess, sales were flat. Orders grew 2% and really accelerated at the end of the quarter, it sounds like. So I guess can you just parse out maybe like why orders grew and if there's anything to call out really that drove the acceleration into the quarter end? Vincent Berger: Yes. And are you talking about the resi side or Workplace, Brian, just to make sure I'm... Brian Biros: Sorry, the resi side. Vincent Berger: Yes. Yes. You kind of nailed it. So the -- if you look at orders for the quarter, we're up 2% for the segment. The actual remodel retrofit was up 7%, and it actually was accelerating as we went through the quarter. We actually grew backlog to 13%. So that's given us confidence in the high single digits for the quarter. The backdrop of everything that Jeff just talked about is supporting that, which is allowing us to outpace the market. We're starting to see good signs for a retail season in most of the country outside the West Coast. All those support our high single digits with the extra week. So when we look at that business for the full year, I think it's more important, we're going to grow mid-single digits in a very tough market that didn't grow. And although most of it will be price, we actually are going to show unit volume growth in the fourth quarter and a bit for the full year. Brian Biros: Got it. Helpful. And secondly, I guess, just on the Workplace segment, the opportunity set there, maybe by sector, is there a way to think of how much that reflects return to office compared to non-office verticals? Jeffrey Lorenger: So yes, I think that's -- it's pretty hard to parse that. I think it's some of both. The verticals have been holding up well. You look at education, you look at health care. Obviously, federal government is in kind of in a weird spot right now. But I think the return to office stuff, if I had to say, is probably in the earlier innings definitely than some of the other vertical plays. But we do see some of those verticals as we look out into the future that's still staying strong. But I'd say verticals have been a little stronger than return to office and return to office is just really getting going. Operator: I'd now like to hand the call back to Mr. Lorenger for final remarks. Jeffrey Lorenger: Great. Appreciate it. Thanks -- thank you for taking an interest in HNI, and have a great day. Appreciate the time. Operator: Thank you so much for attending today's call. You may now disconnect. Goodbye.
Operator: Ladies and gentlemen, welcome to the Analyst and Investor Call Half Year 2025 Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Christian Waelti. Please go ahead, sir. Christian Waelti: Thank you, Sandra, and good afternoon, good morning, everyone. As you know, earlier today, Landis+Gyr issued its results ad hoc release and related presentation for the first half year 2025, which are available on our website. This session will follow the structure of the earnings presentation, so we encourage you to follow along. We'll conclude with Q&A, where Sandra will provide further instructions and where you will be able to ask questions. Please take a moment to review the usual disclaimer on Slide 2 of the presentation. A brief note on reporting before starting. The results of the EMEA operations are presented as discontinued operations for all periods. Unless stated otherwise, the figures we are sharing reflect Landis+Gyr's continuing operations only. After the short introduction, I'd like to hand the floor over to our CEO, Peter Mainz. Peter Mainz: Thank you, Christian. Good morning and good afternoon, everyone. And thank you again, Christian, for reminding us to consider our financials from a new perspective. I'm here with Davinder, our Chief Financial Officer, and we are pleased to present our half year 2025 financial results. With that said, let's now start with a review of the highlights of our performance in the first half of 2025. Let's move to Slide 3. The first half of our financial year 2025 was marked by solid commercial momentum, as you can see. We are pleased to report a strong order intake of $595 million, resulting in a book-to-bill of 1.1, driven by key grid edge tech wins in the Americas. We're also particularly happy with the resulting order backlog that reached a new record for our company with close to $4 billion, building a very solid base and a clear outlook for long-term growth. Both our net revenue and EBITDA are noticeably improving compared to the second half of financial year 2024 when we started our strategic journey. At the end of September, we announced the divestment of our EMEA business, concluding a process we talked about every time we stepped in front of you since late 2024, and that our outcome allows us to return the proceeds to our shareholders through a share buyback program. Let's move to Slide 4. More information on this point specifically. We are very happy to have completed and fulfilled the commitment that we announced about 1 year ago. It was a very competitive process where the investment in preparation we made delivered a strong financial outcome. The 13.4x EBITDA multiple of 2024 actual adjusted EBITDA is a strong indicator in this regard. But outside the numbers, it is also a great outcome for our customers as this makes us comfortable continuing to perform over the next period. And most important, it is a great outcome for our employees who were very positive and welcomed this decision. Credit of this positive outcome goes to our EMEA team led by Rob Evans for their dedication and focus to deliver exceptional operational performance while in parallel dedicating time and energy to the sales process. As previously indicated, this allows us to return the proceeds from the divestment to our shareholders with a share buyback program for which we have announced concrete parameters, namely $175 million on the first trading line. This program will start as of tomorrow. Let's move to Slide 5. Last year, at the occasion of our half year results presentation, we announced 3 strategic initiatives. I'm pleased to report that we have now successfully executed 2 of them. And as we move forward, our focus on the Americas will remain a key priority. As mentioned, the divestment of EMEA on which our teams together with the buyer are currently working hard to carve out the business with the aim to close the transaction in the second quarter of 2026. The current priority is and remains the Americas with a focus on advancing high-quality business built around grid edge intelligence solutions and delivering value to utilities across the globe. The focus on this business will elevate both our EBITDA and cash profile, with very low capital intensity, creating a very different financial profile of the business. While we focus on the Americas, we remain a global business, and we're excited about the global appeal of the offering that we have. And with that in mind, we keep on working towards the U.S. listing in 2026, aligning capital markets with the majority of our business activity. Moving on to Slide 6. We are focusing on the Americas as we believe there is a tailwind that is exceptionally strong with electricity demand growing again after 10 to 15 years of basically 0 growth. There is a real fundamental load growth, thanks to AI and data centers, manufacturing, reshoring and industrial hydrogen production. An assessment we can also see in the utilities capital expenditures going up substantially, which is validated in every single CEO conversation I'm having at the moment. Peak demand growth leads to peak demand no longer supported by permanent energy resources, a secondary tailwind further driving the need for our technology. Let's move to Slide 7 and how this trend translates into business for us. The strength that we continue to see in our pipeline translates into our order intake, and we're excited about that. In the first 6 months, we won close to $600 million of new business with a strong book-to-bill ratio of 1.1. Contrary to last year, when we won some very large orders, this time, we have received a multitude of orders, which speaks to the solid pipeline that we have. Our backlog increased by 30% over the past 12 months and stands at a record $4 billion. We are very pleased about the fact that 43% of the backlog is recurring in nature for our software and services business. In Asia Pacific, the backlog has nearly doubled over the past 12 months, leveraging the same technology platform as in the Americas and benefiting from the region's unique drivers. A recent example of this is the PLUS ES contract in Australia we have recently announced, introducing our grid edge platform on this continent as well. And now I will give the floor to Davinder, our CFO, that will run us through the financials in more detail. Davinder Athwal: Thank you, Peter. Good morning and good afternoon, everyone, and thank you for joining us today. Let's begin with our consolidated key financial results on Slide 8. Our net revenue for the first half was $535.9 million, reflecting a year-over-year decline. This is primarily due to early milestone completions in the Americas and the wrap-up of a major APAC project in the prior year period. However, on a sequential semester basis, we saw solid growth momentum with meaningful improvements in both revenues and margin. As anticipated, the lower sales volume impacted both gross margin and adjusted EBITDA on a year-over-year basis, driven by reduced operating leverage in the current half year and the absence of a onetime gain recorded on the sale of real estate in India in the prior year period. That said, both metrics improved by more than 200 basis points each compared to the second half of fiscal '24, thanks to disciplined execution and the realization of operational efficiencies. Let's now turn to our regional performance, starting with the Americas on Slide 9. Revenue in the Americas declined by 16% year-over-year, largely due to the early completion of deliverables on a large software project in Japan last year as well as lower sales of certain legacy meters in the current period. The lower software revenue in the current half year, in particular, caused a drop in both gross margin and profit. Despite these headwinds, adjusted EBITDA margin held strong at 17.5%, even after a temporary 100 basis point impact from tariffs in the half year-to-date. This margin resilience reflects our sharpened focus on operating expenses, which were reduced by nearly $14 million year-over-year. Now let's move to APAC on Slide 10. APAC revenue declined by 17.4% year-over-year, largely because the prior year period saw a peak in sales related to an AMI project in Hong Kong that completed together with a delayed project rollout in Bangladesh in the current half year. We do, however, see improved momentum in Singapore and New Zealand as well as consistent performance in Australia. APAC's adjusted margin was impacted by lower operational leverage and mix when looking at a normalized view, excluding the one-off real estate gain in India. Now let's review our liquidity position on Slide 11. We ended the half year with net debt balance of $209.3 million. Key movements since the prior year-end included $41.1 million in dividends paid in July, $37.7 million in cash generated from operations, $12.9 million in capital expenditures focused on growth and efficiency projects and $10.1 million in transformation expenses tied to our key strategic initiatives. We closed the year with a net debt to adjusted EBITDA leverage ratio of 1.4x, providing us with the balance sheet strength to fund future growth. That concludes my prepared remarks. Thank you again for joining us today and for your continued interest in Landis+Gyr. I'll now hand it back to Peter to walk through our remaining fiscal '25 guidance. Peter? Peter Mainz: Thank you, Davinder. Before addressing the guidance, let me close by commenting on the improved look of our high-quality global business and the new starting point we have created. Let's move to Slide 12. On this slide, we have depicted the impact on both revenue and adjusted EBITDA from removing the EMEA business from full year 2024 financials. It invigorates that we are now paving the path towards a more focused and efficient operating model with a portfolio weighted towards higher-margin business as seen through the immediate 300 basis point improvement in adjusted EBITDA. After selling the EMEA business, this marks a fresh start for our high-quality company with significant predictable recurring revenue and substantial improvements across every financial metric. This is reflected in the guidance discussed on our next slide. So let's move to Slide 13. For net revenue, we confirm our 5% to 8% growth guidance we gave in May this year for the continuing Landis+Gyr business. We expect a strong top line performance in the second half, driven by the momentum built in the first half. For the adjusted EBITDA margin, we increased our forecast from initially 10.5% to 12% to now 13% to 14.5% of revenue. This raise in margin is a result of the focused high-quality business we have created with the strategic transformation. In fiscal year 2025, we will carry $10 million to $15 million of dis-synergies, mainly corporate costs that will go with EMEA after closing. For fiscal year 2025, we need to think about this on a pro forma basis, and it will elevate our profitability further in 2026 and beyond. Let's move to Slide 14. Let me wrap up why we believe Landis+Gyr is exceptionally well positioned for the future. We are a trusted leader in energy technology with a platform deeply embedded in our customers' operations and a track record of being invited back again and again. Across our core markets, we hold substantial share and benefit from a record $4 billion backlog, representing more than 3 years of revenue for the continuing business. This gives us strong visibility in an ever-growing base of recurring revenue. Our financial profile has strengthened significantly. We have sharpened our focus, increased EBITDA and cash generation and lowered our capital intensity, in essence, improving every single financial metric. We are returning value to our shareholders with $175 million buyback and staying disciplined in our execution. With structural demand drivers across electrification, grid modernization and AI, Landis+Gyr is focused, aligned and ready to lead the next era of intelligent energy. And now we'll open the call for questions. Sandra, please. Operator: [Operator Instructions] Our first question comes from Akash Gupta from JPMorgan. Akash Gupta: I have a few questions, and I'll ask one at a time. My first one is on North American growth. So if we look at your full year guidance and look at what you delivered in the first half, on my back-of-envelope calculation, it looks like you are guiding for mid- to high teens sequential growth in second half in North America. Maybe if you can start with what is driving it? How much visibility do you have? And what are the risks in delivering this strong growth that you're expecting in the second half? Peter Mainz: Yes. Thank you, Akash. So obviously, what is driving it, it starts with the backlog that we have on hand. And if you look at the growth rate that you mentioned, that's also -- we saw a similar growth rate in the first half of this year compared to second half of last fiscal year. And part of the substantial growth we also see in the second half, the first couple of months of this first half was a bit impacted by the tariffs, and we had to shift our supply chain a bit, but it's really driven by the momentum that we have created and the momentum manifesting itself in the best way in the backlog that we have as we start the second half of this year. Akash Gupta: And my second question is on tariffs. I mean you mentioned that you got hit by $5 million. Maybe if you can talk about, is this gross impact or net impact? And what sort of protection do you have in your contracts if something changes materially on tariff fronts in the future? Peter Mainz: Okay. So the most important thing, if you recall, at the beginning of the year, we said tariffs will have a minimal impact on our financial performance throughout the fiscal year, and that is still true. And the number that you see, the net impact of about $5 million, that's really what we've seen in the first 2 months or so, I would say, of the year when we said we needed to make some sourcing changes to be compliant with USMCA. And as the rules of the game became a bit clear as we started the year, we needed a couple of weeks to clarify that. So we incurred costs in the first, I would say, 2 to 3 months. And we expect those costs to be in the rear mirror here. Akash Gupta: And my last question is on more of the big picture question. When I look at your Slide #6, where you talk about U.S. power demand and growth. I think what I want to understand is that a substantial part of this growth is coming from data centers. And as we hear, there are -- most of the data centers may have their own power generation on top of grid connection. So the question is that how does this adoption of data centers, both directly and indirectly going to impact your business? Maybe you can give us some examples to better understand how do you expect the demand to change because of this data center growth in U.S. power market? Peter Mainz: So it's still -- obviously, we'll see a mix how data centers will be powered. But when I speak with utility executives, data center and onshoring is still a substantial growth for the capital expenditures that they have to spend to bring those users of energy life on the grid. So it's driving them substantially, and we believe only a smaller portion will be powered independently. And even if they are powered independently, they need to be connected to the grid and require what we provide flexibility. So we see it as a consistent driver in the capital expenditures and where we see it the most as utilities look at their increasing capital expenditures, they look at which capital expenditures make the most sense. If they are pushed by the utility commission to adjust their capital expenditures, then they go back, which are the expenditures with the highest return on capital and that's where investments in our technology come up being on top over and over again. So we see that as one driver. And the second driver is also -- is the one as we see this peak demand growth and it's turning more into a peak plateau versus a peak. We also see that with some of the permanent energy resources are no longer sufficient to provide that. And again, that's the second driver providing substantial flexibility in the grid to provide the resilience to do that. So those are the 2 drivers that we see. And every time we engage with utilities, they bring that up over and over again. Resilience in light of the demand growth is a big driver. So that's the big driver we see. Operator: [Operator Instructions] We have now a question from Jeffrey Osborne from TD Cowen. Jeffrey Osborne: Just a couple of questions on my side. I was wondering if you could split up the recurring revenue that you mentioned between services and software. What's the mix between the 2? I assume it's more weighted to services. Peter Mainz: So we haven't broken that one out specifically. I don't think you're right with that statement, but we have not broken that one out specifically. So I couldn't provide you a percentage here on this call. Jeffrey Osborne: Got it. I'm just trying to think of the margin implications as we move forward as that revenue is recognized over the next 3 to 5 years. I assume that would have a pretty pronounced impact on EBITDA for the Americas segment. Is that true or no? Peter Mainz: Yes. We don't have Microsoft margins on our software. We have industrial software margin, but they're definitely accretive to the overall margin that we see for the business in the Americas. Jeffrey Osborne: Got it. And then can you just update us -- I think on the last call, 6 months ago, there were a couple of customers that had transitioned from the legacy technology to the new and you had taken a $20 million inventory write-down. Have those customers started ramping up with the newer Revelo platform? Or is that still something to come here in the second half? Peter Mainz: So when I look at the pipeline and I look at the order intake, that is more or less exclusively Revelo and grid edge technology today. When we look at the execution customers that signed contracts 3 years ago or so, they're still deploying the technology of that generation at that time. But we see a dramatic shift to grid edge to Revelo. Jeffrey Osborne: Got it. And just 2 quick last ones. What needs to go right to be at the high end of the guidance of 5% to 8% growth? If you could just respond to that? And then I didn't see any wins announced in the order, it sounded -- or in the quarter, the half. It sounded like you mentioned Australia, but is it the right way to think that you just had quite a few smaller wins and not any sort of marquee investor-owned utility wins in the quarter? Peter Mainz: So as we said, like different from the last time, we didn't have the one big one in our order intake. We had a multitude of orders. I think the largest one was close to $200 million. That was the largest one. So I think we had a good plan and a good mix of order intake. And as I say, every time we are not landing one of those big ones, being close to one is an exceptional result. So I think it's -- the order intake is more a testimony to the strength of the pipeline as it came in than to a single order. So we quite like that one. And between you asked the 5% to 8%, what moves us to 8% versus the 5%, I think it's execution until the last day of March of our fiscal year. Jeffrey Osborne: But I assume you're not hoping for any type of regulatory decisions between now and March to go your way that everything would be in backlog and it's more around execution and timing of implementation? Or is there still wins that you need to get from a turns business? Peter Mainz: No. I think anything you need regulatory approval today to wait for revenue. I think we're a bit too far advanced into the fiscal year for this to happen. So it's -- what we need to ship and execute is part of the $4 billion of backlog that we articulated today, and then you have a small portion of just business that comes in day in, day out from the existing customer base we have. So we feel quite good about the starting point. Operator: We have a follow-up question from Akash Gupta from JPMorgan. Akash Gupta: The first one is on the share buyback announcement that you plan to spend up to $175 million for share buyback. And the question I had was the consideration of share buyback over, let's say, bolt-on M&A. We often hear that some of your smaller competitors in North America, which are part of large organizations, they are kind of struggling in their smart meter business. And there is some speculation in the market that some of them might come in the market. So maybe can you talk about rationale of share buyback over bolt-on M&A? And if there will be any good interesting assets on the block, would you consider changing your capital allocation? Peter Mainz: So we've been fairly consistent from the time we announced that we're looking for options for the EMEA business that with the proceeds, we want to return it to the shareholders. And if you look at the list of activities that we still have in front of us for the next, I would say, 6 to 12 months, we still need to close the EMEA business. We're looking at the listing at the U.S. that consumes a tremendous amount of resources. So for M&A throughout that period of time, there would just be exceptional risk, and that's really not at the forefront of capital allocation for us for that period of time. So I think that's really the answer for the next 12 months period. Akash Gupta: And lastly, I think you announced in the release that you will be now providing quarterly trading update for third quarter in January. So I think that's a welcome step. But just wondering what sort of information shall we expect in the quarterly trading update? Peter Mainz: Well, you're certainly going to see revenue and gross margin when it is customary for a trading update, I guess, order intake. I think those would be the key numbers that we'll provide -- to provide comfort that we are on track for the full year numbers. Operator: [Operator Instructions] Gentlemen, so far, there are no further questions. Back over to you for any closing remarks. Peter Mainz: Looks like with our presentation, we tackled most of the questions that everyone had. So thank you again for joining us today. I appreciate your time and interest in Landis+Gyr, and I look forward to meeting all of you soon, either virtually or in person. Goodbye. Have a great day. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Operator: Good day, and thank you for standing by. Welcome to NOV Third Quarter 2025 Earnings Conference Call [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the call over to Amie D'Ambrosio, Director of Investor Relations. Please go ahead. Amie D’Ambrosio: Welcome, everyone, to NOV's Third Quarter 2025 Earnings Conference Call. With me today are Clay Williams, our Chairman and CEO; Jose Bayardo, our President and COO; and Rodney Reed, our Senior Vice President and CFO. Before we begin, I would like to remind you that some of today's comments are forward-looking statements within the meaning of the federal securities laws. They involve risks and uncertainty, and actual results may differ materially. No one should assume these forward-looking statements remain valid later in the quarter or later in the year. For a more detailed discussion of the major risk factors affecting our business, please refer to our latest Forms 10-K and 10-Q filed with the Securities and Exchange Commission. Our comments also include non-GAAP measures. Reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website. On a U.S. GAAP basis, for the third quarter of 2025, NOV reported revenues of $2.18 billion and a net income of $42 million or $0.11 per fully diluted share. Our use of the term EBITDA throughout this morning's call corresponds with the term adjusted EBITDA as defined in our earnings release. Later in the call, we will host a question-and-answer session. Please limit yourself to one question and one follow-up to permit more participation. Now let me turn the call over to Clay. Clay Williams: Thanks, Amie, and good morning. NOV executed well in the third quarter. Revenues of $2.2 billion were down just slightly, less than 1% year-over-year and sequentially despite a challenging macro environment and softening oilfield activity. EBITDA was $258 million or 11.9% of revenue, up sequentially despite rising tariff and inflationary headwinds. Cost control and strong project execution allowed NOV to lift margins sequentially while increasing free cash flow to $245 million. Energy Equipment saw strong demand for its growing production-related portfolio, leading to higher backlogs and record revenues from our subsea flexible pipe and our gas-focused process systems businesses. These businesses as well as our marine construction and production and midstream units all achieved their highest EBITDA in 5 years, expanding segment year-over-year margins for the 13th consecutive quarter. Our drilling activity-driven Energy Products and Services segment once again outperformed the underlying global rig count declines of 8% year-over-year, aided by our growing share of efficiency-enhancing downhole technologies and strong demand for drill pipe, including NOV's proprietary wired drill pipe data telemetry system. But generally, activity continued to soften. In North America, E&Ps once again trimmed short-cycle oil activity which is likely to slow further seasonally in the fourth quarter. Internationally, the Saudi rig suspensions appear to be behind us. And while spending there remains low, expectations are building for a few more rigs to go back to work in 2026. Elsewhere in the Middle East, demand from the UAE, Qatar and Kuwait remain healthy as customers continue to invest to meet production goals. Many are pursuing unconventional shale developments. Argentina, Saudi Arabia and the UAE are leading the way, but interest is emerging elsewhere around the globe, as I'll speak to in a moment. Offshore, our customers expect a meaningful exploration and development drilling ramp to begin in late 2026. Offshore FIDs are expected to pick up over the next few years following a lull in 2025, and our discussions with customers around deepwater FEED studies support this view. Bookings tied to offshore development are already up double digits year-over-year. Further out, NOV's prospects through the next decade are extraordinarily bright. Why? Step back from the near-term noise created by OPEC quota unwinding, oil oversupply, commodity price pressures, tariffs, inflation and geopolitical uncertainty, and you will see 2 major structural shifts that are setting up a powerful decade of opportunity for our company. First, the globalization of unconventional shale development. Oil and gas are commodities and the winners and losers in all commodity industries live and die based on costs, development costs and marginal production costs. The clear winner in the race to lower marginal production costs since about 2012 or so has been North American unconventional shale, which has arguably provided more than 80% of global supply growth since then. It's been the winner of the horse race to lower cost. And as the winner, it has attracted the most capital. Technology, capital and ingenuity led marginal cost for the shale juggernaut lower and lower, outpacing the marginal cost reduction secured for offshore and other sources of oil and gas. And these competing sources saw capital investment fall sharply through the same period. But as North American shale producers have chipped away at Tier 1 inventory locations, production growth is flattening here and may well be peaking now. And as the mix of lower quality Tier 2 locations rises, marginal cost per barrel for North American unconventional shales is creeping up as comments from producers in the past few Dallas Fed surveys note. After 20-plus years of refining the technology to enable North American shale revolution, these same technologies are now being deployed at scale internationally because international E&Ps see opportunity to develop lower marginal cost sources of oil and gas elsewhere. The advantage international shales have at this point is that they will benefit from decades of advancement and several hundred thousand shale wells that have been drilled and experimented with and continuously optimized here in North America. And these learnings will now be applied to new virgin international rock. The near-term challenge they have is they lack the necessary tools and equipment. That's where NOV comes in. Since prosecuting a successful unconventional shale play requires pretty much everything NOV makes, we're pretty excited about this. Recall that the U.S. shale miracle started with a complete retooling of its land rig fleet and the build-out of a lot of frac, coiled tubing, wireline completion and production equipment. These tools and technologies are squarely in our wheelhouse, and we see the emerging build-out of infrastructure to support international shale development is driving demand for us for years to come. Second, the reemergence of deepwater and offshore development. After years of second place finishes and the marginal cost horse race, deepwater is back to winning. Deepwater has quietly but steadily gotten better since 2012. NOV-supplied offshore drilling rigs are drilling more efficiently, higher hook load capacities are enabling more cost-effective casing programs. The standardization of subsea production kit and FPSO designs have all served to steadily reduce the marginal cost of deepwater barrels and make its economics more compelling. Simply put, we believe that deepwater broadly has brought marginal costs below North American shales, and it is now winning the marginal cost horse race. This is a big deal. We believe this inflection, this leadership change will drive many more investment dollars into deepwater in the coming decade to satisfy growing global energy demand. Evidence of this is apparent in exploration success stories in new basins in Guyana, Suriname, Namibia, Senegal, the Eastern Mediterranean, the Paleogene and the Gulf Hope America. Industry forecasts call for offshore oil output to rise to roughly 13 million barrels a day by 2026, making deepwater the leading source of incremental supply growth. The pivot in spend is further helped by the emergence of profitable floating LNG, which adds natural gas as another viable target for offshore E&Ps. NOV's technology portfolio from subsea flexible pipe and process systems to mooring solutions and rig aftermarket and automation is critical to enabling this expansion. Customer performance expectations favor selection of NOV technology, providing NOV a strong competitive advantage in deepwater operations. Finally, I'll stress that this 166-year-old horse race is never over. Innovative North American shale operators have an amazing track record of honing costs to improve competitiveness. But honestly, all operators in all basins do, and they have to, given the business they're in. But right now, we see deepwater pulling into the lead and international shales entering the race as a serious contender. We believe these 2 will define the next decade plus of oil and gas development and both depend on the tools, equipment and technology that NOV delivers. Back to the near term, however, as I said, we expect market conditions to remain soft through the next few quarters. Tariffs and inflation uncertainty will continue to weigh on margins in the near term and global drilling activity is likely to drift lower. But looking further ahead, we see the back half of 2026 and beyond as a period of strengthening demand across both offshore and international land markets. As deepwater projects ramp and unconventional development expands globally, NOV's technology leadership and global platform will enable us to capture the growth efficiently and profitably. And that's why I'm so excited about NOV's future. To my NOV teammates listening this morning, thank you for all that you do to strengthen and improve and lower the marginal cost of the operations of all of our customers globally. You've helped build NOV to perform through cycles and to lead in the next phase of global energy development. And I'm grateful for the way that you get up every day, put your boots on and make this industry better. Now let me turn it over to Rodney. Rodney Reed: Thank you, Clay. Consolidated revenue was $2.18 billion, down slightly year-over-year and sequentially. Operating profit was $107 million or 4.9% of sales. Net income was $42 million, and the company recorded $65 million within other items. Adjusted EBITDA totaled $258 million, representing 11.9% of sales. Sequentially, EBITDA margins improved as strong operational execution and cost controls offset the effects of softening oilfield activity and higher sequential tariff expense. Free cash flow generation remained robust at $245 million. Over the last 9 months, NOV converted 53% of EBITDA to free cash flow and achieved a 95% conversion rate during the quarter, which was a result of strong cash collections on projects and a focus on systematic structural working capital efficiency improvements. During the quarter, we repurchased 6.2 million shares for $80 million and paid dividends of $28 million, bringing total capital return to shareholders year-to-date to $393 million, which includes a supplemental dividend of approximately $78 million paid in the second quarter. During 2025, we expect to significantly exceed our minimum threshold of returning 50% of excess free cash flow to our shareholders. For the quarter, tariff expense came in just under $20 million, increasing approximately $6 million sequentially. For the fourth quarter, we expect our tariff expense to be around $25 million. We continue to realign our supply chain and execute strategic sourcing initiatives to reduce tariff impacts. We also remain focused on removing structural costs to improve margins and returns, including consolidating facilities, standardizing internal processes and rationalizing product lines or regions that don't meet our profitability requirements. These programs are on track to deliver over $100 million in annualized cost savings by the end of 2026, although tariffs and other inflationary impacts remain headwinds. While we expect the near-term environment to remain choppy, we're executing well, managing what we can control and positioning NOV well for the future. With that, I'll turn to segment results. Starting with our Energy Equipment segment. Third quarter revenue was $1.25 billion, up 2% from the third quarter of 2024. EBITDA increased by $21 million to $180 million, resulting in a 140 basis point increase in EBITDA margins to 14.4% of sales, driven by strong execution in our capital equipment business more than offsetting lower aftermarket revenue. Capital equipment sales accounted for 63% of the segment's revenue in the third quarter of 2025, increasing 20% year-over-year due to strong growth in offshore production equipment. Aftermarket sales and services accounted for the remaining 37% of energy equipment revenue with sales declining year-over-year by 19%. Capital equipment orders of $951 million for the quarter more than doubled sequentially, reaching our second highest quarterly bookings in the last 18 quarters. Orders represented a book-to-bill of 141% for the quarter and 103% book-to-bill over the trailing 12 months. Continued strength in demand for our offshore-related production equipment offerings led the order book with multiple orders for subsea flexible pipe, a monoethylene glycol processing module and our second order for a large submerged swivel and yolk system for LNG offtake in Argentina. Backlog at the end of the third quarter was $4.56 billion, the highest since we started reporting Energy Equipment as a segment. Our Subsea flexible pipe business had another exceptional quarter with solid year-over-year and sequential revenue growth. The operation also continues to improve profitability due to strong execution on projects. The business delivered record quarterly revenue and bookings with project backlog achieving an all-time high. While the business is performing exceptionally well, our team continues to identify ways to further optimize our manufacturing processes to accelerate production and improve operational efficiencies. Our Process Systems business continued its strong performance, both for offshore production and onshore gas fields with revenue growing high double digits year-over-year, finishing the quarter with record revenue and EBITDA. Offshore production market forecasts remain robust, which should continue to drive demand for gas processing and produced water treatment opportunities. Additionally, the build-out of FLNG and FSRUs is driving opportunities for our fluid and gas transfer systems like the order I previously mentioned for the Submerged Swivel and Yoke system for an FLNG project in Argentina. Our Marine and Construction business experienced a sharp increase in revenue compared to the third quarter of 2024, driven by a significant increase in progress on crane and cable A projects, partially offset by lower activity related to wind turbine installation vessels. The outlook for offshore supply vessels, which provides opportunities for our subsea cranes remains strong, and we continue to see tenders for cable lay vessels. The fixed wind market remains challenging. However, we see the potential for another award later this year or early next year with the continued need for larger newbuild vessels in Europe and Asia. Several countries are still planning to expand offshore wind supply, which could lead to a shortage of WTIVs around the end of the decade and therefore, should drive incremental new build demand over the next few years. Revenue for our intervention and stimulation capital equipment fell double digits year-over-year due to a steep drop in demand for pressure pumping equipment in North America, partially offset by strong and growing demand for coiled tubing and wireline equipment. This growing demand related to the development of unconventional resources in international markets and to offshore activity has led to 3 straight quarters of bookings growth and trailing 12-month book-to-bill of over 100%. Revenue from drilling capital equipment decreased high single digits year-over-year due to market uncertainty and contracting gaps from some offshore drillers. Capital equipment orders improved sequentially, but the demand remained soft as offshore drilling contractors preserve capital while navigating through white space in their contract portfolio. Outlook for the offshore drilling appears to be improving for the second half of 2026 and beyond, as Clay mentioned, leading to a more constructive dialogue regarding opportunities to support recent and upcoming tender awards, including higher hook load capacities, crown compensators, managed pressure drilling and BOP upgrades. Additionally, demand for automation and robotics continues to gain momentum for land and offshore rigs due to improved safety and operational efficiencies provided by our ATOM RTX robotics packages. In our drilling aftermarket business, revenues were down significantly compared to prior year. The decrease is the result of lower spare parts bookings over the last few quarters as customers slowed spending in response to gaps in contracting activity, but we did see a mid-teens percentage increase sequentially in spares bookings, which should lead to a stronger fourth quarter revenue for the drilling aftermarket business. For the fourth quarter, we anticipate a less pronounced than usual seasonal increase in our Energy Equipment segment due to timing of capital equipment deliveries. As a result, we expect revenue to decline 2% to 4% year-over-year with EBITDA in the range of $160 million to $180 million. Our Energy Products and Services segment generated revenue of $971 million, a 3% decrease compared to the third quarter of 2024 reflecting lower global activity levels and delayed capital equipment orders for infrastructure projects, partially offset by technology-driven share gains. EBITDA was $135 million or 13.9% of sales. Higher decrementals resulted from an unfavorable sales mix, pricing pressures in North America and increased tariff expense. We're focused on reducing structural costs, including consolidating facilities and exiting product lines or regions that don't meet our return requirements. North America represented 57% of segment revenue and grew 7% year-over-year on higher drill pipe sales compared to a 10% decline in rig count. Segment revenue decreased 15% year-over-year in international markets due to some activity declines in the Middle East and Latin America. For the quarter, the sales mix for energy products and services was 51% services and rental, 31% capital equipment and 18% product sales. Services and rentals revenue declined 4% year-over-year as demand for our solids control services declined in the mid-teens due to lower international activity. However, increased traction for our efficiency-enhancing technologies in North America as well as in unconventional and tight gas applications internationally helped to partially offset the impact of an 8% global rig count decline. In North America, drill bit revenue rose mid-single digits due to market share gains tied to superior performance and reliability, and we realized growing demand for our drill bits, downhole tools and tubular coatings from the increase in gas-directed drilling, particularly in high-temperature applications in the Haynesville. Internationally, our downhole drilling motors were deployed in the first unconventional wells drilled by an independent in Bahrain and rentals of our downhole technologies increased in Argentina, supporting unconventional development. Tubular coating and inspection revenue was down modestly year-over-year with strong growth in North America coating sales, partially offset by lower demand in Latin America and the Eastern Hemisphere. Capital sales increased 5% year-over-year, supported by mid-teens percentage growth in drill pipe sales as customers replenished inventories. Drill pipe bookings reached their highest level since early 2022. However, composite pipe and tank sales declined primarily due to delays in infrastructure projects affecting timing of orders. Orders for infrastructure projects stepped up late in the third quarter and included an order for 2 large fuel storage tanks for a data center and 9 miles of 55-inch glass reinforced plastic pipe in Brazil. The strong order intake for our drill pipe and fiberglass businesses positions us well for improved capital equipment revenues in the fourth quarter. Product sales decreased in the mid-teens percentage range year-over-year with higher downhole tool sales in Asia more than offset by fewer international bulk sale deliveries. Additionally, we are seeing an increase in international customers changing their preference from purchasing to renting drill bits, more in line with predominant customer preferences in North America. Looking to the fourth quarter, we expect a modest sequential pickup in capital equipment sales from our Energy Products and Services segment to be more than offset by softer market conditions. As a result, we expect fourth quarter segment revenue to decline 8% to 10% year-over-year with EBITDA between $120 million and $140 million. With that, I'll turn the call over to Jose. Jose Bayardo: Thank you, Rodney. NOV executed well during the third quarter in a challenging market environment. While we expect near-term activity levels to remain soft, we also believe that growing demand, natural decline rates and a decade plus of underinvestment in exploration will drive a meaningful recovery, potentially beginning as soon as late 2026. We have a very constructive view regarding the industry's and NOV's outlook over the medium to longer term as a result of the market backdrop and how we are positioning the company. We remain sharply focused on improving operational efficiencies while positioning NOV to capitalize on key secular trends, including offshore production supplanting U.S. unconventional resources as the dominant incremental source of global oil supply, accelerating activity in international unconventional basins, natural gas becoming the fuel of choice for power generation and the application of technology to drive efficiencies. These trends are driving actions we see from our oil and gas operator customers and are driving how we invest in and position our business. Clay highlighted that we provide many of the critical tools, equipment and technology required to meet the growing needs of our customers. NOV has a unique but broad portfolio of solutions and serves multiple end markets that often move through cycles at different rates. The diversity in our business, along with our technology and service-driven market leadership are intentional and strategic and provide operational and financial resilience. Let me explain what I mean. In 2023 and 2024, NOV generated roughly $1 billion in adjusted EBITDA, and we expect that we'll deliver about that same amount in each of 2025 and 2026. While our earnings appear stable at the consolidated level, our mix can change meaningfully from year-to-year. Following the pandemic, we realized a rapid recovery in demand for shorter-cycle activity-driven products and services, particularly in North America. As a result, our Energy Products and Services segment drove our growth and contributed roughly 62% of our adjusted EBITDA in 2023. Since then, we've seen slowing activity in North America, which has been offset by growing demand for capital equipment in offshore and international markets. As a result, we expect Energy Equipment's contribution to EBITDA to rise from 38% in 2023 to approximately 55% in 2025, while Energy Products and Services EBITDA contribution moves to about 45%. While we have seen a sizable shift in the contributions from our 2 reporting segments, some of our businesses have realized a greater than 40% increase in their revenues and significantly higher percentage movements in EBITDA, which offset declining activity in North America. The diversity in our portfolio provides resilience during times when market cycles are out of phase as we've seen over the last decade. And when, not if cycles align, likely driven by higher commodity prices and a more sustained global up cycle, the amplitude of NOV's earnings will be materially higher even without an offshore rig new build cycle. While our business is intentionally diverse, we're extremely deliberate about how we position our portfolio and how we compete. Each of our operations leverages NOV's energy expertise-driven core competencies in engineering, material science, manufacturing, service delivery and supply chain management. We also focus on participating in businesses where we can be market leaders and establish and advance competitive advantage often achieved by harnessing our core competencies and world-class R&D capabilities. Additionally, we focus on markets that have high barriers to entry, typically due to complex technological hurdles and the associated capital requirements. Market leadership in high barrier-to-entry markets enables scale. Scale across multiple product and technology-oriented businesses that can leverage common manufacturing, engineering and supply chain resources further advances competitive advantage and provides resiliency during market cycles, allowing us to continue investing in innovation regardless of market conditions. You'll find market leadership across our product portfolio. We pioneered numerous technologies that helped unlock the shale revolution by enabling efficient drilling and completions of ultra-long lateral wells. As Clay noted, these technologies are now realizing accelerated adoption in emerging international unconventional markets. We've also pioneered numerous technologies that unlocked major efficiencies associated with the exploration and development of deepwater resources. Our game-changing leach PDC cutter technology dramatically increased thermal stability and wear resistance of drill bits, leading to substantially higher rates of penetration and longer run times with fewer trips. While the bulk of the industry now uses our technology, we continue to leverage our material science expertise to further advance cutter technology that drives improvements in rate of penetration and reduces costs. These advances have allowed our ReedHycalog drill bit business to gain share in many markets, including the U.S., where its revenue grew 11% year-over-year against an 8% decline in drilling activity. Another game-changing downhole technology we pioneered was our Agitator friction reduction tool, which enables operators to drill farther and faster. We continue to advance our technology to build better fit-for-purpose versions of the tools such as our Agitator ZP and our Agitator RAGE friction reduction tools. The ZP is a zero pressure drop friction reduction tool that allows customers to maintain maximum flow rates in pressure-limited drilling situations. On the opposite end of the spectrum, our agitator RAGE leverages the high-pressure capabilities of super-spec drilling and pump packages to produce extreme levels of friction reduction for tight curves, U-turns and ultra-long laterals in the most demanding environments. Revenue from new downhole drilling technology, which includes our latest agitator offerings is up over 30% year-over-year, comprising almost 20% of our downhole tools business' revenue with more room to run. Even in areas where many people may not think technology plays a big role, such as in tubulars, innovation drives our market leadership. After setting the global standard for premium high-torque drill pipe with our XT connection that can handle 70% more torque and improve hydraulics with up to a 50% reduction in internal pressure loss in comparison to standard API connections, our engineers developed our Delta connection. Delta can handle 20% higher torque than the XT connection for extended length drilling applications and its proprietary design prevents gulling, reducing total cost of ownership and enabling up to 50% faster makeup than other premium connections, reducing tripping time. We also recently introduced wear-resistant drill pipe to address accelerated body wear in extreme drilling environments and insulated coatings to protect against extreme well temperatures that cause premature failures of bottom hole assemblies. Additionally, we are a leader in providing subsea flexible pipe for deepwater production. We have won the Supplier of the Year award from the largest global consumer of subsea flexible pipe 2 years in a row as a result of our technology execution and service. We continuously advance technology that addresses our customers' most pressing needs. This quarter, we received an order for our active heated flexible riser system, which combines flexible pipe and heating technology to address flow assurance challenges in environments where heavier oils become even more viscous and cold deepwater conditions. We also offer our OptiFlex condition monitoring system that utilizes embedded fiber optics to continuously measure temperature and fatigue, and we're undergoing qualifications for what we believe is the leading contender to cost effectively mitigate CO2 stress corrosion cracking, which is a costly issue in Brazil's pre-salt fields. We've been investing in our solution for the CO2 stress corrosion cracking challenge since 2019, reflecting our commitment to invest in critical solutions for our customers throughout the cycle. I could go on all day covering the technology leadership across our product portfolio, but you probably detect the pattern here. NOV pioneers technologies that provide meaningful advancements for the industry, then we continue advancing our technologies, allowing us to maintain our competitive advantage and market leadership. While we focus on rapid innovation and continuously improve our products, R&D efforts that drive potentially revolutionary changes like our CO2 stress corrosion solution and our industry-first 20,000 psi BOP take place over longer periods of time, sometimes over a decade, an investment horizon that few in this industry have the fortitude to stomach. We continue to be relentlessly focused on several other potentially revolutionary long-term R&D initiatives and would like to highlight a couple of our ongoing efforts to digitize and automate the energy industry. Over a decade ago, we commercialized wired drill pipe that can transmit data at up to 58,000 bits per second compared to the 5 to 15 bits per second for standard mud pulse telemetry. Since our initial commercialization, we have significantly improved connection reliability, lowered costs and built a portfolio of advanced sensors and tools that harness the capabilities of real-time broadband data transmission. Additionally, we've invested in a software stack to aggregate, visualize and contextualize data to drive more value for our customers through better analytics, decision-making and automation. During the third quarter, our downhole broadband solutions team helped the customer drill an important exploration well in the North Sea. Our wired drill pipe technologies enabled advanced geosteering for ultra-long horizontal sections at unprecedented speeds, reaching up to 200 meters per hour and precision, accessing significantly more reservoir than the customer previously thought possible. The operator stated that a typical exploration well might intersect a few hundred meters of reservoir, but we helped our customer drill a multilateral multi-target exploration well that exceeded 20 kilometers of reservoir exposure. This complex well drilled with leading-edge technology cost a bit more than a conventional exploration well, but it accessed a very large multiple of the amount of reservoir a conventional well would have encountered. Additionally, with the quality and quantity of data collected, we helped the customer meaningfully reduce uncertainty and accelerate their time line from discovery to development. Lastly, I want to highlight the success we're having with drilling automation. Our NOVOS drilling automation system was designed to automate repetitive drilling activities and more importantly, to serve as a platform that would allow multi-machine control and rig floor automation. Leveraging this platform, we developed our ATOM RTX robotic system, which we commercialized in January 2024 on a rig working for an IOC in Canada. Our ATOM RTX system completely automates the vast majority of operations without human intervention on the rig floor, significantly improving safety and drilling performance while providing high levels of consistency. We now have a total of 6 operational robotics packages, 3 on land and 3 offshore, and the IOC using our robotic system in Canada recently shared with us that the automated rig is their best performing rig in the region. We're hearing more and more of our customers describe our robotic system as the next top drive for the industry, which, by the way, was another revolutionary technology that NOV pioneered for the industry. Excitingly, the backlog for our ATOM RTX system is growing at a healthy clip. NOV's technology and market leadership and business diversity drives operational and financial resilience. This resilience enhances our ability to leverage our core competencies and invest through cycles to further advance our competitive advantage. But none of this would be possible without our fantastic people. NOV will play a key role in the emergence of international unconventional resource development and the coming growth of deepwater production. Our technologies from downhole tools to advanced digital solutions are developed through intensive collaboration among multidisciplinary teams and close engagement with our customers to improve the efficiencies and lower the marginal cost of energy production. Few organizations outside NOV possess the breadth of capabilities required to commercialize solutions of this complexity. The people of NOV continuously demonstrate a remarkable ability to design, manufacture and service essential technologies for our clients. Every member of NOV plays an important role in putting customers first and making NOV better every day. And I'd like to thank our team for their dedication and their unwavering focus. With that, we'll open the call to questions. Operator: [Operator Instructions] The first question today will be coming from the line of Jim Rollyson of Raymond James. James Rollyson: Nice results and obviously, great bookings and ending backlog. And I guess, Clay, nothing like starting -- going into a little bit of slowness before we get to the nice vision you have for where this is all going down the road with a record backlog. And maybe if I can ask about that, your energy equipment business, looking at it the way things have trended this year, you've had pretty solid growth year-on-year every quarter in capital equipment and then you had aftermarket kind of be a drag. And I'm wondering, with the backlog you have and kind of the timing and that as you look out, can you continue to put up pretty decent year-over-year growth like through '26 even in a maybe a bit of a softer near-term market because of that backlog? Clay Williams: Yes. I think it will certainly help on that side. What we're concerned about, Jim, and we referenced this in our prepared remarks, is the general softness in -- every -- look, everybody in the oilfield is worried about the overhang of OPEC barrels. And as those come in, what they're going to do to commodity prices. So I think quicker turn items like aftermarket and spares and that, I think people are going to be very circumspect about what they spend in that area. But yes, so far, so good on the capital equipment side of energy equipment and which is we also noted, is really driven by our production-related equipment. That's risen in our mix from south of 20% of the mix to now north of 30% of the mix for the segment revenues and has really dominated our order, something like 80% of our orders for the past few quarters have been in the production side of things. So the drillers are still very cautious on capital spend, but this is really an engine that's fueled by demand for production equipment. But as we look into 2026, we do foresee a pickup in deepwater late in the year. That's a very consistent theme we've heard from offshore drillers and IOCs both. But I also think that the year's results are likely to be tempered by continued slowing of activity here in North America and otherwise. But as you rightly point out, once we get into late 2026, 2027, once we get through the excess barrels that OPEC is putting back on the market and kind of that gets behind us, I think it's really setting up for a much stronger market for NOV. James Rollyson: Absolutely. And as a follow-up, just maybe sticking with EE. The other issue you've had this year is probably not what we thought 9, 12 months ago, but margins have actually been pretty strong there and kind of bounced around this 13-something to 14-plus percent. And I'm curious, as you look into '26, just on the mix of capital equipment versus aftermarket, the types of stuff like more production-related equipment, how do you think about the margin profile? Like is kind of '25 margin profile something we could see again in '26 when you throw in the tariffs and then the cost offsets that you're also doing? Jose Bayardo: Jim, this is Jose. I'll start off on this one. Really, we'll have to see how things play out during the course of the year. So I think Clay did a nice job of sort of describing the scenario that we envision for 2026 in general, but the timing of how things play out is always difficult to pin down. So as you pointed out, we've had really nice steady improvement in terms of the overall quantity of the backlog, but we've also seen continued improvement in terms of the mix and really embedded pricing and margin within that backlog as well. So feel really good about our positioning from a capital equipment standpoint going into 2026. The real variable is going to be as it relates to, to a lesser extent, book and turn type items. A bigger driver is obviously going to be the aftermarket piece. But really, as we sit here today, we feel pretty good about the way that, that is shaping up. I think as Rodney touched on in his prepared remarks, line of sight towards recontracting a lot of the offshore fleet is looking more and more promising. When those rigs are recontracted, keep in mind that once a contract is signed, it's typically 9 to 12 months before they start to turn to the right. But once those contracts are signed, they're typically picking up the phone and calling us for additional spare parts to replenish those rigs and get them ready to get back to work and also doing any potential upgrades. But -- so the setup is very good, but the timing is a little bit uncertain. So it really just depends on what happens through the course of the year. But as Clay mentioned, what's really exciting to us is the setup for 2027. We talked about the -- when sort of these cycles in our various components of our business converge, significant increase in the amplitude of our earnings when that happens. And what we've seen happen over the last several years is we start off with North America. The North America trends down. Then we saw a reactivation cycle for the offshore rig drilling space, and that sort of tapered off. But we got a pickup in offshore production-related equipment, and that's the bright spot in the portfolio right now. And towards the latter part of 2026 and the latter part of -- and into 2027, that's when we sort of see those -- more of those cycles converge, particularly as it relates to all things offshore, but also think we could see a really nice continued activity for international shales and do think that North America will have to run a little bit harder as well just to maintain flat production, if not sort of grind things just a little higher. So sorry for a long-winded response, but I think the setup for NOV is really good over the next couple of years. Clay Williams: Lisa, do we have another question? Lisa, are you there? Operator. Hello, operator? Hey, Marc, you on the line [indiscernible]. Marc Bianchi: I wasn't hearing anything on my end either. I guess you had a really strong quarter of orders in Energy Equipment. How are you thinking about fourth quarter and beyond? Can we see clicking along at a 1 or better book-to-bill from here on? Or what's the general outlook? Clay Williams: Marc, what I'd tell you is orders here are always lumpy. We're always very hesitant to give too much guidance because a lot depends on some large orders. Going into the fourth quarter so far, we've got line of sight on a couple of large interesting orders. One, we feel pretty good about, another may be a longer but. What I'd tell you is that kind of given the caution, I think, that's out there, my expectation is for the fourth quarter, orders probably will slip a little bit below 100% book-to-bill right now. But if we do land that second order, I think that may help put us over 100% book-to-bill. But my best guess right now is probably just a tad short. But I'll stress again, we've had 4 years of great orders. I think our backlog is up 40-something percent, 43% since 2020 and over 100% book-to-bill trailing 12 months. And obviously, Q3 is very strong at 141% book-to-bill. So we don't get too worried about one particular quarter. What's more important is the longer-term trend and the longer-term trend for NOV for the past few years has been very solid. Marc Bianchi: Yes, indeed, it has. The other question I had was just on the -- there was $65 million of other items, and I think write-down of long-lived assets and inventory were mentioned. Can you say how much of that was the inventory? And how much of a benefit to margin was that in the third quarter, if at all? And how much is it benefiting kind of going forward? Rodney Reed: Yes. Thanks, Marc. Our other items were really an output, as we mentioned in our last quarter earnings call, that we're going through some detailed business process reviews. We're looking at product lines, subproduct lines, business units facilities for high-return opportunities under a return lens. And as we've continued to go through that process over the last 90 days, we have had some facility consolidations, facility closures, some exiting of certain subproduct lines, which, to your point, the output was some inventory charges that those inventory charges don't have any impact to margins going forward. Those -- that inventory is scrapped and does not have any margin impact going forward. Operator: Our next question comes from the line of Arun Jayaram of JPMorgan. Arun Jayaram: Clay and team, I was wondering if you could maybe elaborate a little bit about the build-out of unconventionals that you're seeing. You mentioned Argentina, the UAE and Saudi. Maybe you could talk a little bit about what you're seeing there. I think you highlighted increased coiled tubing and wireline types of orders, but talk about the early build-out there and perhaps other countries or regions where you're seeing unconventionals get gain share. Clay Williams: Yes. Let me talk about that, and then I'll hand it over to Jose to talk about maybe our demand for intervention and stimulation equipment. What I'd tell you that's most interesting to us is you've got very well-known programs in Saudi Arabia with the Jafurah field with Vaca Muerta in Argentina, unconventional fuels in the UAE that are being prosecuted in earnest by the oil companies that control those that are moving forward. But what's interesting to me is a number of really successful North American shale entrepreneurs now that are prospecting and looking for kind of the next basin to move to. And so there are, I think, a wave of unconventional prospecting underway in places like Algeria and Turkey and Oman and Bahrain we mentioned in our press release, Australia. And so these are really interesting technologies or transformative technologies. They have the potential to catalyze new low marginal cost sources of production. And so we're pretty excited about what that means for NOV in the future. Jose Bayardo: Yes. And Arun, just to pick up on that. So yes, there's a broad spectrum of effectively NOCs in countries that are at different stages of their development. As Clay touched on Argentina, Saudi are sort of at the more mature end of the spectrum. And then you have folks like Pakistan and Turkey that are really just starting to get started and everybody else is somewhere in between. And this is an exciting backdrop for NOV and all of these markets tend to start in a pretty similar way. In some of these less mature, very early-stage markets, we're seeing a big pickup in demand for our coring services. As you might imagine, as people try to delineate the boundaries of what these unconventional plays look like, then you typically translate from that type of work to a little bit of probing the formations, but that quickly, assuming everything goes according to plan, that quickly moves to realizing that a lot of investment is necessary in order to make things go, and that translates into investments in infrastructure, which has been driving a lot of demand for businesses like our fiberglass business with a lot of build-out of flexible pipe and rigid pipe as well to transport fluids and gas to and from locations. Also things such as chokes, manifolds, things of that nature also get gone. And that as it relates to once things get a little bit more mature, that's when we start to see a big pickup in demand for effectively more traditional service equipment, whether it's drilling equipment or intervention and stimulation-related equipment. I guess what I'll say related to intervention and stimulation equipment business in general is, obviously, that's been a pretty tough business for us over the last couple of years. Historically, that was very much a North American-centric business. Obviously, there hasn't been a lot of demand here over the last couple of years. But what we have seen here really over the last year is steadily increasing demand from our intervention and stimulation equipment business entirely related to demand from overseas unconventionals, particularly for large diameter coiled tubing units, new wireline equipment, all the things that are really necessary in order to enter into development mode from an unconventional standpoint. And so to put things in perspective, we had a greater than -- slightly greater than 150% book-to-bill this quarter. But really for the last 4 quarters, we've seen a steadily improving book-to-bill in that business. And while we're still down quite a bit from where we were over a trailing 12-month period, we're now back to being over 100% book-to-bill for that business. So things definitely heading in the right direction and see a lot more opportunities to come. Arun Jayaram: Yes. Great. My follow-up is just wondering if you could just discuss what you're seeing in terms of FPSOs, maybe provide a context of how many FIDs did you see in 2025 and maybe thoughts on how that could progress in '26 and '27 because typically, that could include chunkier types of awards for NOV. Clay Williams: Yes. So we've seen -- I think everybody has been affected by this OPEC overhang of production. And so there continues to be a little caution out there. And as a result of that, as we progress through 2024 and 2025, estimates for FIDs and for the number of FPSOs to be ordered have been kind of walking down a little bit. Year-to-date, I think there have been 3 awarded, and I think there are likely a couple more to come here at year-end. But what we're excited about is as we get into late 2026 and 2027, and we get this oil overhang behind us, again, I think it's a much brighter outlook, and I think we'll see demand pick up again. Operator: Our next question comes from the line of Stephen Gengaro of Stifel. Stephen Gengaro: I think my first question, I think it was about a year ago. It may have been a little longer, but you had talked about sort of better priced backlog that was sort of primed to start flowing through the income statement, and we've seen some of that. And I'm just curious if you could talk a little bit about the current backlog, recent orders and how we should think about the margin impact at a high level in '26 and maybe beyond? Rodney Reed: Yes. So good point there, Stephen. So as you mentioned, really throughout '25, we've seen a couple of different cross currents in particular for the EE business. One, as Clay mentioned, a significant number of our bookings throughout the year have been in the offshore production space. As we have strong technological advantages there, high barriers to entry, our margin profile is able to continue to increase in addition to good operational efficiencies over the last 12 months in some of the offshore production area, which has really driven revenue and margins up in that particular area. Offsetting some of that has been a decline in some of our aftermarket business. So we mentioned during the quarter, sort of a high teens decline in our aftermarket business, and that sort of spans across the full portfolio, principally in the drilling space. I think as Jose mentioned on the question earlier, as we look into 2026, we're still able to have strong margins on what we're quoting in our offshore production equipment. And also the team is working diligently to continue to improve operational efficiencies. So that sort of strong backlog heading into '26 should be positive on the margin side. And then part of the other equation is sort of timing of when some of the rig aftermarket, some of the offshore piece happens. And we mentioned that's probably more in the second half of '26 than in the first half. So put those pieces together and put a glimpse into some of the 2026 margins. Clay Williams: Stephen, Rodney said it well. I'm going to add to what he went through, the fact that I think our processes and our controls around the risks on signing new contracts in terms of very thoughtfully going through how we're going to execute, how we can improve our operations, how we can make sure that the scope that we're taking on is clear and we're the right company to handle that scope, the payment terms, all of the above. I think the quality of the backlog is as high as it's ever been today. And so that's why you've seen margins continue to walk up there in energy equipment, and that's strong clear contract provisions with our customers and then just an outstanding team executing these contracts after we win them is a great combination. Stephen Gengaro: Great. And my second question is more high level, and we've all been doing this a long time. And when we start hearing about U.S. production plateauing. We've been hearing that sort of theme from a couple of companies and that activity is not high enough to sustain production. Do you guys see that? And do you think that is a critical sign towards maybe getting a stabilization and ultimately recovery in U.S. land? Clay Williams: Yes. I'm going to caveat this and just full disclosure. I've been wrong on this before. So I'm hesitant to call U.S. production peak. What I would say is though, it's becoming clearer and clearer that growth is decelerating in what it used to be. 2023, U.S. production grew almost 1 million barrels a day. And the EIA now is forecasting 2026 growth to be 0. And so it's been steadily declining. The level of activity has been shrinking. I think you have not seen production declines quite as meaningful as people have forecast, but that's because what activity is going on out there is being done at very high levels of efficiency and all that longer laterals and continuing to improve completion techniques and the like. But it's just -- I think it's becoming more and more evident to a lot of people in the industry that U.S. shale, North American shale is kind of approaching the twilight that Tier 1 locations are being exhausted. Otherwise, why would you drill a horseshoe shaped well? Why would you do a refrac? I think why would you go to Turkey and look for opportunities or Algeria. So I think that all sort of signals the behavior in the industry. The production numbers points to the fact that -- I mean, this has been a fantastic horse in the horse race I described earlier, and it's produced a lot of oil and gas. 8.5 million barrels per day have been added from U.S. shale since 2008 on a $1 trillion capital investment campaign and has done a lot of good for humanity around the globe to provide oil. But I think we're seeing this basin begin to roll over. And as all basins have always done in the entire history of the oil and gas industry, and I think it's inevitable now that this technology gets applied to other basins elsewhere around the world. Operator: Our next question comes from the line of Doug Becker of Capital One. Doug Becker: So EBITDA to free cash flow conversion was 95%, even with a bit of an increase in CapEx sequentially. And so it seems like some of the structural changes in working capital management are having an effect. So I wanted to get some color on what's the outlook for CapEx and free cash flow in the fourth quarter. But more importantly, just do these structural changes put a little bit more of an upside bias to free cash flow conversion as we think in 2026 and 2027. Rodney Reed: Yes. Thanks, Doug. This is Rodney. I appreciate the highlight of the team's effort on free cash flow conversion for the quarter, 95% and as we mentioned, 53% on a year-to-date basis. So strong performance there. And that's been predicated on a couple of different points. One, strong project execution, as Clay mentioned earlier, good contractual terms, good collections. So when you look at things from a DSO perspective, overall AR, contract assets, liabilities, we've seen some good improvement there. And over the last 12 months, some good improvement on the inventory and inventory turn side of things. So that's led to we're at right now. And working capital as a percentage of revenue for the quarter, just a touch under 28%, 27.9%. Just a couple of pieces of commentary to help on Q4. I think that working capital percent may just get a touch better, so call that in that sort of 27% to 28% range. And really on kind of flat revenue Q3 to Q4, working capital may improve just a touch. As you mentioned, our CapEx is up just a bit year-on-year as we've had some good organic opportunities on high-return investments. So that continues to sort of flow through during Q4. And overall, feel good about 2025 sort of being in that ballpark of 55% free cash flow conversion. As we look out into '26, still early as we look at our budgets and composition of the different revenue streams. But with some of the structural improvement that we've made in working capital, I think that sort of ballpark of about 50% conversion is sustainable in the future. Doug Becker: Got it. And then, Clay, I really appreciate the reluctance to talk too much about orders on a go-forward basis because they are so lumpy. But a lot of constructive commentary about the intermediate-term outlook. And is it a fair way to think about this if we see the offshore drilling pickup that seems to be widely expected in late '26, maybe early '27 -- is that a point where we'd start to see book-to-bill pretty consistently above 1? Is that a reasonable way to think about it? Clay Williams: Yes. I think it is, Doug. I think that will be additive to the demand we're seeing for production equipment. And honestly, right now, within energy equipment, it's the demand for offshore drilling equipment that's really missing. And I think that comes back in late 2026, that will be additive. And I think that's a good thing for us. I also think, again, I can't say too many times, the clearing of OPEC overhang and a more constructive commodity price outlook, I think that will help in all categories of equipment demand. Operator: I would now like to turn the conference back to Clay Williams for closing remarks. Sir? Clay Williams: Thank you, operator, and thank you all for joining us this morning. The company looks forward to discussing its fourth quarter results with you in February. Operator, you may close the call. Operator: Thank you, sir. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Welcome to the Regeneron Pharmaceuticals Third Quarter 2025 Earnings Conference Call. My name is Shannon, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Ryan Crowe, Senior Vice President, Investor Relations. You may begin. Ryan Crowe: Thank you, Shannon. Good morning, good afternoon and good evening to everyone listening around the world. Thank you for your interest in Regeneron, and welcome to our third Quarter 2025 earnings conference call. An archive and transcript of this call will be available on the Regeneron Investor Relations website shortly after our call concludes. Joining me on today's call are Dr. Leonard Schleifer, Board Co-Chair, Co-Founder, President and Chief Executive Officer; Dr. George Yancopoulos, Board Co-Chair, Co-Founder, President and Chief Scientific Officer; Marion McCourt, Executive Vice President of Commercial; and Chris Fenimore, Executive Vice President and Chief Financial Officer. After our prepared remarks, the remaining time will be available for Q&A. I would like to remind you that remarks made on today's call may include forward-looking statements about Regeneron. Such statements may include, but are not limited to, those related to Regeneron and its products and business, financial forecast and guidance, development programs and related anticipated milestones, collaborations, finances, regulatory matters, payer coverage and reimbursement, intellectual property, pending litigation and other proceedings and competition. Each forward-looking statement is subject to risks and uncertainties that could cause actual results and events to differ materially from those projected in that statement. A more complete description of these and other material risks can be found in Regeneron's filings with the United States Securities and Exchange Commission, including its Form 10-Q for the quarter ended September 30, 2025, which was filed with the SEC this morning. Regeneron does not undertake any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, please note that GAAP and non-GAAP financial measures will be discussed on today's call. Information regarding our use of non-GAAP financial measures and a reconciliation of those measures to GAAP is available in our quarterly results press release and our corporate presentation, both of which can be found on the Investor Relations website. Once our call concludes, the IR team will be available to answer any further questions. With that, let me turn the call over to our President and Chief Executive Officer, Dr. Leonard Schleifer. Len? Leonard Schleifer: Thanks, Ryan, and thanks to everyone for joining today's call. For my remarks today, I will summarize our third quarter top line performance provide an update on EYLEA HD regulatory matters, briefly discuss our recent pipeline progress and close with some comments regarding our discussions with the United States government to lower drug costs for American patients while preserving innovation. I'll then hand the call over to George, who will provide more details on our pipeline progress. From there, Marion will review our commercial performance. And finally, Chris will detail our financial results and guidance. Regeneron delivered a solid third quarter, driven by double-digit net sales growth for 3 of our leading products. Compared to the third quarter of last year, worldwide net product sales for Dupixent increased by 26% and Libtayo by 24% at constant exchange rates, while EYLEA HD in the United States grew by 10%. Regeneron had Dupixent global net sales for the third quarter were $4.9 billion as recorded by Sanofi, with strong growth continuing across approved indications and geographic regions. In the United States, Dupixent net product sales grew 28% compared to the third quarter of last year, while maintaining its leadership position in both new-to-brand prescription share and total prescription share across all indications approved prior to this year. Dupixent is now approved in the United States to treat 8 distinct diseases driven by underlying type 2 inflammation, including diseases of the skin, gut and respiratory system, spanning age groups from infants to the elderly and with more than 1.3 million patients globally being actively treated. Dupixent is one of the most widely used biologic medicines. Dupixent's approved indications could potentially address more than 4 million patients in the United States alone, positioning it to remain a strong growth driver over the near, medium and long term. Global Libtayo net product sales were $365 million, up 24% on a constant currency basis compared to the third quarter of last year. In the U.S., net product sales grew 12%, where Libtayo continues to be the market-leading immunotherapy for advanced non-melanoma skin cancers while building share in lung cancer. Earlier this month, the FDA approved Libtayo in high-risk adjuvant cutaneous squamous cell carcinoma, making Libtayo the first and only PD-1 antibody indicated for this setting. While it only has been a few weeks since approval, our launch is already off to a great start, and we look forward to treating the up to 10,000 addressable patients in the United States. who could benefit from this medicine. Moving to EYLEA and EYLEA HD. Affordability issues continue to dampen branded anti-VEGF category growth. As announced in June, we initiated a matching program for up to $200 million in contributions to the Good Days Retinal vascular and Neovascular disease fund. But I am disappointed to report that the match in the third quarter was under $1 million due to lack of donations from other potential contributors. We remain committed to matching future donations to this fund through the end of the year. Despite affordability headwinds, EYLEA HD had a strong performance in the third quarter with U.S. net product sales reaching $431 million, an all-time high, driven by robust physician unit demand growth, partially offset by a lower net price. We continue to believe that future product enhancements such as a 4-week dosing interval, the inclusion of macular edema following retinal vein occlusion, or RVO, and a prefilled syringe administration are needed to fully unlock EYLEA's HD commercial potential. Earlier this month, we were notified by Catalent Indiana, LLC, an affiliate of Novo Nordisk that the FDA classified their facility as official action indicated or OAI. And to date, the issues identified during the July 2025 inspection have not been completely resolved. On that basis, the FDA issued a complete response letter yesterday for the prefilled syringe supplemental BLA with the sole approvability issue relating to unresolved inspection findings at Catalent. We continue to execute on our previously announced plan to submit an application to add an alternate prefilled syringe filler by January 2026, which would trigger a 4-month FDA review. We have also been diligently working with an alternate vial filler and have already submitted an application to include them in the EYLEA HD BLA with a PDUFA date in late December. This would provide an additional opportunity for the FDA to approve the sBLA for every 4-week dosing and RVO, given we believe there are no other outstanding review issues for this application. Moving briefly to our pipeline, which George will soon discuss in more detail. We continue to make significant investments in R&D that have yielded notable progress across several key programs. In just the past 3 months, we have announced positive Phase III or registration-enabling data for 6 distinct programs spanning immunology, neurology, allergy and rare diseases. Over the next several months, we look forward to rapidly expanding pivotal programs in hematology/oncology, thrombosis, obesity and other metabolic diseases as well as allergies, all of which we believe represent an impressive next wave of innovative medicines discovered or developed by Regeneron. Finally, I'd like to take a moment to address our ongoing progress toward reaching an agreement with the U.S. government to help lower the cost of medicines for American patients. We are having constructive discussions with the administration, and I'm pleased to share that our priorities are closely aligned. Both Regeneron and the administration are deeply committed to ensuring that American patients have timely and affordable access to groundbreaking medical breakthroughs. We likewise share the goal of preserving the United States position as a global leader in biotech innovation and manufacturing. For more than a decade, George and I have argued that foreign governments have benefited from American innovation without sharing the burden of its cost. We are hopeful the efforts of this administration can level the playing field and convince high GDP nations to contribute their fair share rather than relying on the United States to shoulder the vast majority of this responsibility. By addressing this imbalance, we can ensure a more equitable global system that supports continued advancements in medicine while improving affordability for U.S. patients. Furthermore, we agree that investing in U.S. manufacturing is not only vital for creating jobs and strengthening our economy, but for safeguarding national security. In fact, in testimony before Congress in 2014, Regeneron highlighted the importance of prioritizing biotech manufacturing and innovation in the United States. Regeneron has already made significant commitments in this area, including our plans to invest over $7 billion in infrastructure and manufacturing facilities in New York and North Carolina over the coming years. We remain optimistic about finding common ground with the university -- with the administration, excuse me, that strikes the right balance between achieving our shared priorities while advancing Regeneron's mission of harnessing the power of science to deliver life-changing medicine to patients. In closing, Regeneron's business continues to perform well with impressive commercial execution driving strong financial results in the third quarter. Our pipeline is poised to deliver scientific breakthroughs that can potentially help treat millions of patients and translate into meaningful commercial opportunities. The commercial team remains focused on maximizing growth drivers from our in-line brands while successfully launching new products and indications. Finally, we continue to prudently deploy capital with the goal of delivering long-term value to shareholders. With that, I'll now turn the call over to George. George Yancopoulos: Thank you, Len. Over the last few months, as Len just mentioned, we have delivered multiple important data readouts, showcasing the strength of our robust pipeline and the potential to drive future growth with positive pivotal data for Dupixent for our C5 program, our cat and birch allergy programs as well as in our rare disease programs. I will also update progress in oncology, anticoagulation and other programs. Starting with immunology and inflammation. Dupixent continues to deliver remarkable outcomes in addressing indications driven by type 2 inflammation, potentially adding to its existing approvals for 8 diseases in the United States. We are anticipating the FDA's acceptance of our submission for Allergic Fungal Rhinosinusitis, or AFRS in patients aged 6 years and older based on positive data that we plan to present shortly. This represents yet another potential opportunity for expanding Dupixent's label. Moving to our IL-33 antibody, itepekimab, which was studied in COPD for which it met its primary endpoint in 1 of 2 replicate Phase III trials. We and Sanofi are contemplating another Phase III trial for itepekimab in COPD pending feedback from regulators. Itepekimab development is also advancing in other respiratory diseases, most notably our ongoing Phase III studies in chronic rhinosinusitis with nasal polyps, where our genetic evidence is compelling. Moving to our innovative and multipronged allergy program. As previously announced, our Phase III studies of our antibodies for cat allergy and for birch allergy have yielded statistically significant and clinically meaningful outcomes on primary and key secondary endpoints. These results represent the first proof of principle that targeting allergens with highly specific monoclonal antibody cocktails can achieve improvements in both ocular itch and redness. Importantly, in prior clinical trials, our cat and birch allergy approaches have delivered impressive and durable therapeutic benefits across nasal, respiratory and skin allergy symptoms. In the coming months, we plan to present these results at an upcoming medical meeting and initiate confirmatory Phase III studies for these programs. In the U.S. alone, these therapies could help approximately 1.6 million people suffering from severe cat allergies and the approximately 1.4 million people suffering from severe birch allergies. Regarding our innovative severe food allergy program, enrollment and dosing are progressing well in our small proof-of-concept trial combining linvoseltamab and Dupixent. The first 3 patients have responded remarkably with greater than 90% rapid reductions in the allergy-causing immunoglobulin E levels following a short course of linvoseltamib treatment, which are then maintained and continue to decrease with ongoing Dupixent maintenance. Full enrollment of this small initial study is still expected over the next few months. Based on insights gained from the program so far, we are advancing the development of next-generation agents designed to specifically and safely deplete allergy-causing plasma cells, the first of which is expected to enter clinical trial next year, alongside several other promising novel candidates in immunology and inflammation. Moving on to oncology and starting with Libtayo, which was recently FDA approved as the first and only immunotherapy for adjuvant treatment of high-risk cutaneous squamous cell carcinoma following surgery and radiation based on the only successful clinical trial in this setting, the CPO trial data that showed a notable 68% reduction in risk of disease recurrence or death. This approval expands and extends Libtayo's leading position in non-melanoma skin cancers. Moving to fianlimab, our LAG-3 antibody study in combination with Libtayo. Our pivotal trial in metastatic melanoma is ongoing with enrollment for our progression-free survival cohort completing in last January, and results are now anticipated in the first half of the coming year due to slower rates of event accrual. Lynozyfic, our BCMAxCD3 bispecific has been approved in the United States and the EU for relapsed/refractory multiple myeloma. Lynozyfic has the potential for best-in-class efficacy in this late-line setting compared to the other approved BSMAxCD3 bispecifics with almost double the rates of complete responses as reported in the respective label. This is the basis for our enthusiasm for studying Lynozyfic in earlier lines of myeloma and even in precursor settings as a monotherapy or in limited combinations. Consistent with this, we've recently presented promising Phase II results in high-risk smoldering myeloma patients with Lynozyfic monotherapy, demonstrating a 100% objective response rate in 19 evaluable patients with all 6 patients who have been followed for at least 1 year, achieving a molecular complete response. A Phase III head-to-head study against Darzalex is planned to start in the coming months with Darzalex having demonstrated a 9% complete response rate in this setting. In addition, we have observed rapid normalization with Lynozyfic monotherapy in previously treated light chain amyloidosis patients, including patients who have previously received and failed a Darzalex-containing combination chemotherapy. Finally, I would like to highlight that Lynozyfic has demonstrated an 83% overall response rate as a monotherapy in newly diagnosed multiple myeloma patients with responses deepening over time. Updated results will be reported at a medical meeting later this year. Altogether, these data give us confidence in terms of pursuing Lynozyfic as a monotherapy or in simplified combination in early lines and precursor settings of myeloma. Though I won't go into detail on odronextamab today, I want to highlight that our Phase III study evaluating odronextamab as first-line monotherapy against the standard of care in follicular lymphoma patients is fully enrolled. Similarly to Lynozyfic, odronextamab demonstrated potentially best-in-class efficacy in late-line patients, driving our enthusiasm for this approach in the earlier line settings. I'd also like to remind you that in the lead-in cohort for this Phase III study in first-line follicular lymphoma, odronextamab monotherapy demonstrated a 100% complete response rate, further reinforcing the potential of odronextamab in this setting. Moving on to our C5 and complement inhibitor programs. Let me remind you that in Paroxysmal Nocturnal Hemoglobinuria or PNH, where deep blockade of C5 seems critical to prevent breakthrough hemolysis and potentially catastrophic events, the lead-in cohort for our Phase III study demonstrated that our once-monthly subcutaneous regimen combining a C5 antibody with a C5 siRNA may provide the best-in-class disease control with the best-in-class convenience. For PNH patients, we have also just initiated our first-in-human study of our siRNA targeting complement factor B, primarily intended for the 20% to 30% of patients who remain anemic despite optimal C5 therapy due to so-called extravascular hemolysis. Moving on to our C5 program in generalized myasthenia gravis. In the third quarter, we announced positive Phase III results for our C5 siRNA, cemdisiran. This sRNA conveniently dosed subcutaneously every 3 months showed statistically significant results for the primary endpoint, improvement in the MG-ADL score compared to placebo and numerically better results compared to other C5 inhibitor therapies in cross-trial comparisons. The convenience advantage for patients currently being treated with regular intravenous infusions, together with its efficacy and safety profile, position cemdisiran as a potential best-in-class treatment option for this debilitating neuromuscular disorder. We are planning on submitting a U.S. regulatory application for cemdisiran monotherapy in the first quarter of 2026, pending FDA discussions with global submissions to follow. Finally, for our C5 program in terms of our efforts in ophthalmology, we are hoping to complete enrollment in the first quarter of 2026 for the leading cohort of our first Phase III study in geographic atrophy with initial results expected by the end of 2026. Additionally, in ophthalmology, I'd like to note that we are initiating a clinical trial in active noninfectious uveitis of an intravitreally delivered CD3 monoclonal antibody, which is designed to locally block autoimmune T cell activity in the eye, marking the first in a new series of novel ophthalmology targets that we will be progressing to the clinic over the next year. Turning to our anticoagulation efforts, and in particular, to our Factor XI program involving 2 different antibodies designed to tailor anticoagulation therapy for each individual patient's needs. Pivotal studies in postoperative venous thromboembolism following total knee replacement surgery are in progress with data anticipated in 2027. Pivotal studies in other anticoagulation indications are set to launch in the coming months. On November 10, we will kick off a new investor event series called the Regeneron Roundtable, which will spotlight our various innovative pipeline programs, starting with our Factor XI story, in which we will provide for the first time, exciting new clinical data in trials exploring the Factor XI antibodies in catheter-associated thrombosis in a provoked subclinical GI bleeding study. Upcoming Regeneron roundtables will spotlight our opportunities in hematologic and solid tumor oncology, obesity and other areas. Moving to our growing siRNA portfolio coming out of our research collaboration with Alnylam. I'd like to highlight our ongoing clinical studies, including our PNPLA3 and CIDEB siRNAs in MASH, our SOD and HTT siRNAs in amyotrophic lateral sclerosis and Huntington's disease. And in addition, we plan to begin clinical trials for our alpha-synuclein sRNA for Parkinson's disease and our MAPT Tau siRNA for Alzheimer's in the coming months. Finally, I'd like to highlight our commitment to developing innovative new approaches in the ultra-rare disease space. In the third quarter, we announced unprecedented clinical benefit using garetosmab in our Phase III OPTIMA trial in fibrodysplasia osticans progressiva or FOP. Individuals suffering from this tragic genetic disorder progressively replace their muscle and soft tissue with abnormal bone formation encasing themselves in a horrific osseous cage. Remarkably, in the OPTIMA trial, we're able to demonstrate a greater than 99% reduction in abnormal bone formation at 56 weeks, offering great hope for this ultra-rare genetic disorder. Regeneron plans a U.S. regulatory submission by the end of 2025. We are also providing new hope for children suffering from another ultra-rare genetic disorder in which absence of the OTOF gene results in profound genetic hearing loss. As we recently described in the New England Journal of Medicine, our novel gene therapy approach provided meaningful hearing gains in 11 out of 12 treated children with several achieving normal hearing levels. The FDA recently announced that this program was the first new molecular entity selected for a commissioner's national priority voucher, and we are finalizing preparations for a U.S. regulatory submission this year. This program highlights Regeneron's commitment to advancing the leading edge of biotechnology. In summary, Regeneron has delivered a quarter filled with positive clinical readouts, advancing our pipeline and reinforcing our leadership in scientific innovation from groundbreaking advance in addressing some of the most common medical conditions to transformative innovation in the ultra-rare disease space. With that, let me turn it over to Marion. Marion McCourt: Thanks, George. Our third quarter performance highlights the strength of Regeneron's commercial portfolio. Today's results demonstrate our ability to drive growth of in-line brands and to accelerate launch opportunities, delivering our transformative medicines to even more patients. Beginning with EYLEA HD and EYLEA, total combined third quarter U.S. net sales were $1.11 billion, comparable on a sequential basis as a decrease in EYLEA net sales was offset by an increase in EYLEA HD net sales. EYLEA HD net sales grew 10% quarter-over-quarter to $431 million, again growing faster than any other innovative medicine in the category. EYLEA HD unit demand grew 18% quarter-over-quarter, which was partially offset by ongoing competitive pricing pressures within the category. As EYLEA HD grew, EYLEA's third quarter U.S. net sales decreased 10% quarter-over-quarter to $681 million, reflecting a commensurate decline in unit demand driven by the ongoing conversion to EYLEA HD, patient affordability issues and competitive dynamics. We expect a similar demand decline in the fourth quarter for EYLEA, along with ongoing pricing pressure. Together, EYLEA HD and EYLEA lead the branded anti-VEGF category based on best-in-class efficacy, safety and with EYLEA HD durability. And EYLEA HD now represents approximately 40% of Regeneron's U.S. retina franchise. Looking ahead to the fourth quarter for EYLEA HD, we anticipate sequential demand growth to moderate to high single digits as we await label enhancements. Once approved, we believe these enhancements have the potential to generate a significant positive inflection in demand. Now to Dupixent. Third quarter worldwide net sales reached $4.9 billion, growing 26% on a constant currency basis compared to the prior year. In the U.S., Dupixent's net sales reached $3.6 billion, reflecting 28% year-over-year growth. Dupixent leads the market across all established indications, including atopic dermatitis, asthma, nasal polyps and eosinophilic esophagitis. In addition, Dupixent is the main beneficiary of competitor market growth efforts based on its proven efficacy, safety, ease of access and ability to address unmet patient needs. Our recent launches in COPD, chronic spontaneous urticaria and Bullous Pemphigoid are progressing very well. Across all launches, Dupixent's differentiated clinical profile and growing physician experience are driving strong uptake. In COPD, prescribers see Dupixent's benefits across a range of appropriate patient types and recent market research found pulmonologists expected to substantially increase their prescribing of Dupixent over the next 12 months. In lung cancer, Additionally, there has been rapid uptake among chronic spontaneous urticaria patients as both dermatologists and allergists embrace Dupixent. In Bullous Pemphigoid, Dupixent is the first biologic medicine addressing a critical unmet need. Physicians are eager to transition elderly patients off steroid therapy with Dupixent offering them a safer and more effective alternative. In summary, Dupixent continues to transform the lives of patients across indications, geographies and age groups from as young as 6 months. There are currently more than 1.3 million patients worldwide benefiting from Dupixent for multiple type 2 diseases. Turning to oncology and hematology. In the third quarter, Libtayo delivered $365 million worldwide net sales, growing 24% on a constant currency basis compared with the prior year. In the U.S., Libtayo net sales grew 12% year-over-year to $219 million based on strong demand across all approved indications. In non-melanoma skin cancers, Libtayo's strong performance is based on established market leadership and ongoing category growth. We are making encouraging early progress with U.S. launch in adjuvant CSCC, where physicians are already embracing Libtayo as a new treatment option. We estimate that up to 10,000 eligible patients may benefit from Libtayo in this setting. And now in lung cancer, Libtayo is now the second most commonly prescribed immunotherapy for newly diagnosed patients. Physicians increasingly recognize Libtayo as an important treatment option based on clinical experience, versatility as a monotherapy or in combination with chemotherapy and an increasing body of clinical evidence, including recent 5-year survival data. Outside the U.S. Libtayo sales reached $146 million, growing 47% year-over-year on a constant currency basis, supported by sustained demand and ongoing launches in international markets. Moving to our new hematology therapy, Lynozyfic. We have made strong early progress in commercializing this important bispecific for fifth-line multiple myeloma patients. Positive launch indicators include physician feedback, formulary listings, pathway inclusions, completion of REMS requirements and payer coverage. While we expect modest revenue contribution in this heavily pretreated population, Lynozyfic is an important therapeutic advance to the hematology community, and we look forward to additional clinical data supporting its potential use in earlier treatment settings. In summary, in the third quarter, Regeneron delivered ongoing growth across EYLEA HD, Dupixent and Libtayo and made important progress in several launches. Our commercial portfolio is well positioned to capitalize on many near-term growth opportunities, enabling us to deliver more treatments to more patients. With that, I'll turn the call to Chris. Christopher Fenimore: Thank you, Marion. My comments today on Regeneron's financial results and outlook will be on a non-GAAP basis unless otherwise noted. Third quarter 2025 total revenues of $3.8 billion grew 1% compared to the prior year, reflecting higher Sanofi collaboration revenue, driven by strong Dupixent sales growth, and continued growth in net sales of Libtayo globally and EYLEA HD in the U.S., partially offset by lower net sales of EYLEA in the U.S. and lower Bayer collaboration revenue. Third quarter diluted net income per share was $11.83 on net income of $1.3 billion. Beginning with the Sanofi collaboration, revenues were approximately $1.6 billion, of which $1.5 billion related to our share of collaboration profits. Regeneron share of profits grew 34% versus the prior year, driven by volume growth for Dupixent and improving collaboration margins. The Sanofi development balance was approximately $900 million at the end of the third quarter, reflecting a reduction of approximately $300 million since the end of the second quarter and approximately $730 million since the start of the year. Dupixent's continued strength has enabled a rapid reimbursement of the development balance in 2025, and we now expect this balance to be fully reimbursed by no later than the end of the third quarter of 2026. Moving to Bayer. Third quarter net sales of EYLEA and EYLEA 8 mg outside the U.S. were $854 million, inclusive of $232 million of EYLEA 8 mg sales. Total Bayer collaboration revenue was $345 million, of which $312 million related to our share of net profits outside the U.S. Other revenue in the third quarter was $198 million, which included $165 million of profit share and royalties associated with license agreements. The increase from the prior year was driven by higher royalty income from Alaris and growth in our share of profits from ARCALYST. Now to our operating expenses. R&D expense was $1.3 billion in the third quarter, reflecting continued investments to support Regeneron's innovative late-stage pipeline, including our pivotal programs for Lynozyfic and Ordspono in earlier lines of myeloma and lymphoma, our Factor XI program in anticoagulation indications and our ongoing efforts in other clinical programs. Third quarter SG&A was $541 million, down 12% from the prior year, primarily driven by lower charitable contributions to an independent nonprofit patient assistance foundation. Third quarter 2025 gross margin on net product sales was 86%. The lower gross margin versus the prior year reflects a change in product mix and higher ongoing investments to support our manufacturing operations. Regeneron generated $3.2 billion in free cash flow through the first 9 months of 2025 and ended the quarter with cash and marketable securities less debt of approximately $16 billion. Through the first 9 months of 2025, we have repurchased approximately $2.8 billion of our shares, the most ever allocated to open market repurchases in any full fiscal year in our history. We continue to be opportunistic buyers of our shares and anticipate returning approximately $4 billion to shareholders through dividends and repurchases in 2025. Moving to guidance for 2025. We have updated and narrowed the ranges across our financial guidance, which can be found in our press release issued earlier this morning. Finally, as we turn to 2026, we continue to make significant progress across our innovative pipeline and anticipate advancing multiple large registrational programs in myeloma, lymphoma, anticoagulation, obesity and other hematology and solid tumor oncology programs as well as several new assets into the clinic. We believe investing in these programs can drive significant long-term value and to support these efforts, we currently expect a mid-teens percentage increase in R&D expense in 2026 relative to 2025. We will provide details on 2026 guidance for other line items early next year. In conclusion, Regeneron's third quarter results demonstrate the ongoing strength of our business and enable us to continue investing in our differentiated pipeline to deliver significant advances for patients and drive long-term value for shareholders. With that, I'll pass the call back to Ryan. Ryan Crowe: Thank you, Chris. This concludes our prepared remarks. We will now open the call for Q&A. [Operator Instructions] Shannon, can we please go to the first question, please? Operator: [Operator Instructions] Our first question comes from the line of Akash Tewari with Jefferies. Akash Tewari: It seems like your team has retooled your commercial strategy on EYLEA, and it seems related to kind of price. What are you doing on a ground level when it comes to volume-based discounts that's allowing you to take share from Roche and Amgen? And are you seeing more price erosion on EYLEA? Or are we also seeing that discounting on high dose? And maybe just lastly, should we continue to see volume gains and revenue gains ahead of the label enhancement potentially midyear? Leonard Schleifer: Well, I think you may have set the record for the number of questions we're not going to answer. And not because we don't want to, Marion would be love to. But I think that there's so many competitive issues ongoing there in terms of our strategy on the ground, our rebates and so forth. So I'm not sure we're able to really help you out there. Marion, I don't know if you want to add. Marion McCourt: I think I would just add that when we look at the EYLEA HD performance in the quarter, the favorability that we're seeing certainly is related to EYLEA HD, the product and the science. And retina specialists see the clinical efficacy, the safety and now durability with EYLEA HD, and that is making a big difference. Leonard Schleifer: We do see that until we get these enhancements in place, we can't, I think, see a significant upswing. Marion McCourt: Len, if you like, I can highlight what I shared a moment ago, but just to answer the question a bit more completely for EYLEA HD, I mentioned we anticipate sequential demand growth to moderate to high single digits as we await label enhancements. And we also made a comment on EYLEA that we anticipate similar levels of demand reduction in the coming quarter. And as I noted today, we saw a 10% reduction in EYLEA 2 milligram, and that was in terms of the lower demand quarter-over-quarter. I hope that's helpful. Operator: Our next question comes from the line of Geoffrey Meacham with Citi. Geoffrey Meacham: I guess for Chris or Len, on utilizing the balance sheet, you guys haven't historically done larger-scale BD, and it seems like that's going to be the case going forward. But in manufacturing, what's the appetite to further expand your plans that you've announced just so you own all elements of the -- of manufacturing. Obviously, that would be viewed pretty favorably by the Trump administration as well. Leonard Schleifer: Yes. Great question, Geoff. Just on whether or not we would use our balance sheet for large deals, we certainly have no allergy to doing that if we saw the right opportunity. So it's not a question of philosophy there. It's really a question of what would make sense where we think we could create additional value. In terms of investing further in manufacturing, and as I said during our remarks, we've been talking about the need for domestic manufacturing since 2014, I think, in testimony before Congress. We mentioned the over $7 billion investment plan. But I think you do highlight one piece of the whole puzzle that we do not have adequate positioning in is the filling. But I'm pleased to say that we would expect our filling plant to come, which we've invested quite a bit in, Jeff, -- it's now ready to go, and we expect it to come online during the coming year. So that's a great question, and it should help us sort of control all aspects of the standard biologics manufacturing. Operator: Our next question comes from the line of Chris Raymond with Raymond James. Christopher Raymond: Just maybe a question on EYLEA HD. Marion, I think I've heard you talk a lot about the importance of the labeling enhancements. And Len, I just heard your comment. about share and how important they are. But I think we've come to understand maybe the primary need here and the reason for these enhancements and why they're important is for certain clinics to have dosing flexibility so they can center their inventory around one drug. But just maybe, Marion, as you've seen this market evolve, can you talk about how that clinic inventory policies have evolved over time and especially how private equity in the space may be influencing this? Or is this really more of a -- as you're looking for share with clinics that don't necessarily have relatively aggressive inventory policies? Marion McCourt: So Chris, my comment would be that the retina community and certainly retina KOLs look for the ability to select the right product for their patients. And I'm not an expert in inventory, but I can share with you that EYLEA HD is a newer branded product in the category, 2 years in the market now, certainly availability, not only inventory-wise, but payer coverage-wise. And then as I mentioned a moment ago, the most important characteristics of the product is this element of profound clinical efficacy, safety that people really can count on. And then, of course, with EYLEA HD, they're getting for appropriate patients, the ability to have durability that is very, very important for the patients and their caretakers. Operator: Our next question comes from the line of Terence Flynn with Morgan Stanley. Terence Flynn: George, you mentioned it sounds like likely you and Sanofi are going to do another Phase III trial here for IL-33 in COPD. Can you just talk about any new insights you might have learned that drove the differential outcome in the prior 2 Phase III trials? And then what you think you can change or optimize in a third trial here to improve the likelihood of success? George Yancopoulos: Well, due to competitive issues, I'm not going to really comment on most of your questions there. And as you said, we're going to have a meeting with the FDA, and that's going to help us decide on our strategy going forward. Operator: Our next question comes from the line of Tyler Van Buren with TD Cowen. Tyler Van Buren: Congratulations on the quarter. Can you elaborate on the probability of the late December decision on the RVO and every 4-week dosing filing with the new filler resulting in an approval? And just a quick follow-up would be, is this the same alternate filler that you used for the recent Libtayo adjuvant cutaneous squamous cell carcinoma approval? Leonard Schleifer: No, it's a different filler. It's a complicated sort of time line here because the new filler has to undergo its review and probably an inspection and review. And it's unclear when that would get done. Ideally, if that could get done before our November time line for the approval for the PDUFA date for the RVO that would really be perfect, and we could get it all wrapped up in late November. If it turns out that they have to go to December to get the filler approved, hopefully, that would be as far as it have to go. But of course, the FDA looks at all these things pretty carefully. This filler has a very good track record, but it's got to undergo the inspection and so forth. So I suspect that if they got through that in December, then we could rapidly resubmit or maybe the application would still be on file. We don't know exactly. We're going to have discussions with the FDA. But we believe that there is nothing left to do on that application other than to get the filler in place. So we think we've had very good discussions about label and indications and all that's fine. But it's not over until it's over, obviously. But ideally, to summarize, if we could get the filler online before the late November date, it could all be wrapped up then. If not, we would expect and hope that, that filler would get approved in December. And then rapidly, we would immediately resubmit and the FDA hopefully could act immediately. That's sort of -- that's to date that we can tell you. Ryan Crowe: A lot of complicated situation. Operator: Our next question comes from the line of Evan Seigerman with BMO Capital Markets. Evan Seigerman: Just taking a step back, can you walk me through some of the internal changes you've made with your regulatory manufacturing teams to prevent the CRLs that we've seen of recent and ensure that the products that should be approved get approved and get to patients as quickly as possible? Leonard Schleifer: That's a very pointed question. And I really want to address it head on. The issues that we have had have not been internal regulatory problems. We have a terrific relationship with the FDA. Our regulatory team includes people who used to work at the FDA or people who've been in the industry doing this for decades. there's no shortage of expertise or relationships on a regulatory front. We've certainly asked that question. The Board always asked that question, and there's no issue there. On the manufacturing front, we recognize that it would be more ideal if we could have our own filling. We would have expected to have that by now, but we got delayed dramatically during COVID because of supply chain issues in manufacturing. As I said, we hope that filling will come online next year. In terms of getting backups and what have you, it's a relatively complicated situation. We've been working on backups for quite a long time now. The problem, as you might imagine, is that for good reason, the FDA is very finicky about showing where you're going to make the product, literally what equipment it's going to touch and then you have to do stability testing and all that over and quality testing, all that for a given filler. And that takes quite a bit of time, quite a bit of resources. So in summary, I don't want to sound defensive at all. We have looked at this. It is not a regulatory problem for us. It is, in some respects, a manufacturing issue in terms of getting online our own filling. Having backup fillers in place is complicated. We're trying to do that. And -- but our biggest problem, frankly, is the FDA has now paid quite a bit of close attention. And I might point out that the biggest companies in the world have had the same issue with fillers, even with the same filler, and they've called us to know how is it going. But they just don't talk about the CRLs that they get, and we know that they're out there. So I'm not sure that we're worse off in that regard. But wherever we are, I'm not happy about it, and we're not happy about it, and we're trying to rectify the situation. I hope that gives you a glimpse into our thinking. Operator: Our next question comes from the line of Brian Abrahams with RBC Capital Markets. Brian Abrahams: Just on the pipeline front on the Factor XI antibody program. I don't want you to front run your roundtable, but I know you guys recently started a large Phase II study for the antibodies in Afib. So I'm just curious what you guys are looking for out of that study and maybe out of other Factor XIs in development to move into registrations in that and other large indications and really accelerate that program. George Yancopoulos: Well, the Phase II study is a run-in study into what we anticipate to be our Phase III pivotal program there. And we are in pivotal programs in other settings where anticoagulation can be important. And of course, what are we looking at? We're trying to understand as well as we can, the benefit-risk ratio for our 2 distinct antibodies. We think in this program, it's all going to be about benefit risk. We think that, frankly, in some ways, decreases in bleeding risk are going to be, frankly, more important than, in some cases, the anticoagulation effect. As long as you have anticoagulation effect, but if you have really a safe way of achieving it, we think there's a plethora of settings where these 2 antibodies can respectively find their place and particularly in places maybe even much larger than the SPAF indication, where right now, use of anticoagulants is very limited because of the bleeding concerns. That's what's really limiting the utilization of anticoagulants more widely across many, many, many more settings. And so we think that our approach using 2 antibodies is going to allow us to really customize and tailorize how individual patients are treated, where we can optimize, we can pick the antibody perhaps with the least bleeding risk for the patients who are most concerned about that while providing a different antibody with maybe higher anticoagulation capability when that's needed. So we think there's a lot of opportunities here beyond staff. We think that's where the major opportunity is today. We do not think that's where the major opportunity is going to be going forward in the future. We're going to where we think the future is, not necessarily where the current is right now. Leonard Schleifer: And in the future, you'll be having a roundtable to tell them about that. Ryan Crowe: Correct. November 10. Operator: Our next question comes from the line of Carter Gould with Cantor. Carter Gould: Len, you highlighted the sort of the meager matching thus far for -- with the foundation and you sort of -- I guess you framed it remaining committing to that funding until the end of the year, which I guess sort of alluded to a potential terminus. At some point, maybe at the start of the year, does it warrant taking a different tack if you don't see any other people match your commitment? Leonard Schleifer: Yes. I mean I'd like not to tell people don't bother make a commitment because we're going to take care of it. That's not our approach. Our approach will be that we will look at it fresh next year and see what the best strategy is to help patients. Good question, though. Operator: Our next question comes from the line of Cory Kasimov with Evercore. Cory Kasimov: So on the heels of your positive Phase III data for cemdisiran, I'm interested, can you outline how you see the commercial opportunity evolving for gMG and what your plans are in Europe with this asset? Leonard Schleifer: So before we get to that, maybe, George, could you just remind everybody what's out there and what the limitations of the current therapies are because I'm not sure everybody is on the same page on that. George Yancopoulos: Right. Well, right now, there are 2 major classes that are being utilized in this space. One, of course, is the C5 class. The other is the FcRn class. In terms of the C5 class, as we know, most of those are administered using these large intravenous infusions, which are very inconvenient for the patients. And in terms of the FcRn class, those are given via also intravenous infusions approaches right now or ultimately, they may move to large volume subcutaneous approaches that are also somewhat difficult to self-administer. But in any case, the issues also have to do with safety and efficacy. The thing that's exciting about our program is unlike the FcRns, which either when you use weekly treatment, you get less benefits, at least cross studies from these standard scores or with the episodic treatment where you have a U-shaped curve where the patients respond deeply, but then almost revert back to baseline before you give them their next dose. The C5s allow you to have stable, deep control through the entire dosing period. And cross-study comparison, our agent seems to have in terms of the standard measure that is being used to evaluate these the best cross-trial efficacy that's stable and continuous throughout the dosing period. Now one important feature of all these agents, obviously, is they all work by suppressing the immune system through various degrees, either the FcRns or the C5 via their inhibition of the complement cascade. They both result potentially concerns with efficacy in the case of the C5 is mostly meningococcal infections. As you've probably seen with the FcRn class with longer usage, they've seen serious infections, for example, resurgence of EBV and even fatal EBV infection. So those are concerns with everything that's available in the class. The thing that's exciting about our program is not only do we seem to have at least potentially best-in-class and stable efficacy with dosing using the most convenient dosing regimen, which is subcutaneous once every 3 months. Nothing like that has ever been seen for this class, delivering this sort of efficacy. But because we only partially inhibit the complement pathway, there is the potential, which we will have to get data to support going forward that it may offer certain safety benefits for patients. So the exciting thing about the program is we certainly have the most convenient dosing regimen. We seem to have the most consistent efficacy with cross-study comparisons, the deepest control and the fact that we don't completely inhibit the target in this class, there is the long-term opportunity that we may be able to show that we may have better safety for patients as well here. So it's a very exciting profile, I think, to potentially be able to deliver for these classes -- these class of patients who are really needing better treatments in terms of convenience, in terms of efficacy, but also in terms of safety. Marion? Marion McCourt: Sure. So everything we're doing in the launch strategy for commercialization is based on the very encouraging clinical profile that George is describing. So we're very excited about this opportunity. We will be launch ready, and we do feel for this really important category in patients with unmet need. that we potentially have a very highly differentiated product to bring into the marketplace. Operator: Our next question comes from the line of Simon Baker with Rothschild & Conpany, Redburn. Simon Baker: My first ever question on the call. I just wanted to go back to your comments, George, on intravitreally delivered CD3. You're trying it initially in uveitis. I just wonder what the scope of your ambition was in that setting, given the role of T cell infiltration in glaucoma, which obviously be a much bigger indication. Any thoughts on where this could go would be much appreciated. George Yancopoulos: I didn't hear what you said about glaucoma. What in glaucoma? Simon Baker: So there's some evidence that glaucoma is caused in greater or less a part by T cell infiltration in the eye. So I just wondered if using CD3 antibodies in this setting would potentially encompass that indication as well as uveitis? George Yancopoulos: Yes. So we're very excited about our CD3 antibody program, as you mentioned. We believe that this is the world's first complete blocker of CD3 or T cell function that's ever been evaluated in the clinic. There have been partial blocker, partial agonist to date. We think that going into the eye in uveitis, which a lot of data suggests that most, if not all of these uveitis are related to T cells. If we can block the T cells locally without because the doses that we're going to be using are very low, they're not going to be having systemic effects. you can have really profound benefit in this high unmet need without subjecting patients to any sort of global or systemic immunosuppression. So we really think this is a very novel, very different approach to active noninfectious uveitis. We think this is the perfect setting to try our CD3 antibody. We have been working a lot on glaucoma. I'm glad that you brought it up. We I believe, based on our Regeneron Genetics Center, which are world leaders in understanding the genetic basis of disease, we've, I think, uncovered the most important drivers genetically of glaucoma. And we will be rolling out in the very near future, our strategy and our programs in a very near clinical program in glaucoma as well. So I'm glad you brought it up. I'm glad you're interested in it, but these are going to be 2 very different distinct programs. We're going to have our CD3 program for noninfectious uveitis, and we're going to be rolling out a very special and very exciting program in glaucoma based entirely on our internally discovered genetics capabilities. We think that these programs really have the opportunity to create entirely new franchises in ophthalmology. The way we think about it, one could be the EYLEA for uveitis, the other could be the EYLEA for glaucoma. So stay tuned. Ryan Crowe: Thank you, George. Very exciting. I think we have time for 3 more questions, Shannon. Operator: Our next question comes from the line of Alexandria Hammond with Wolfe Research. Alexandria Hammond: On the upcoming Libtayo LAG-3 readout, it seems like the goal is to outperform Opdualag. But could you share your confidence in demonstrating a static benefit against KEYTRUDA? And as a follow-up, can you tell us a little bit more about the open-label Phase III trial you have ongoing against Opdualag? Is it just another show of confidence that your combo can be more potent than the currently approved option? George Yancopoulos: A lot of questions in there. But first and most importantly, -- our study is ongoing. As you said, we are trying our combination versus KEYTRUDA. Our hope is that the KEYTRUDA will behave as it has more or less historically. And our hope is that -- remember, we have 2 arms in the study, a low dose and the high dose that the 2 arms, at least one of them will behave better than the KEYTRUDA arm. What -- the way we powered the study is that we powered it to not only hit PFS and OS and with the minimal expectation that if we have Opdualag-like activity, we powered the study so that we can win in both PFS, but also where Opdualag failed in OS. If, as you mentioned, we have better data than Opdualag, then obviously, we will significantly win even more than that. So we've powered the study for a minimal Opdualag life benefit, but so as to have a large enough OS signal so that we will win with comparable data there. Of course, the data will speak for itself. We'll see whether or not we end up having better efficacy than KEYTRUDA, better efficacy cross-study comparison than Opdualag and so forth. But we continue to be excited, obviously, about this program. There's obviously a high need here. There was very exciting earlier trial data using our fianlimab antibody. And so we are anxiously but excited about awaiting the data readout next year. Ryan Crowe: Yes, first half of next year, the timing on that. Operator: Our next question comes from the line of Chris Schott with JPMorgan. Christopher Schott: Just a quick one on the launch of linvoseltamab. Just how is that progressing versus expectations? And can you just elaborate a bit on the time lines of when you could actually get this product into some of those earlier lines of therapy given the profile that seems to be shaping up here? Is that -- is there an ability to pull that forward or accelerate that all in terms of working with FDA, et cetera? Marion McCourt: So I can take the first portion on the launch, and then I'm sure George will comment on the rest. But certainly, it's early days. But as I mentioned, the progress has been very, very good. We've seen the typical indicators when you have a successful launch ongoing. Physician feedback has been very favorable on formulary listings, pathway inclusion, REMS requirements, payer coverage. So we are pleased with what we're seeing so far and certainly the enthusiasm of the hematology community for Lynozyfic is high. Keeping in mind, this is the fifth-line setting for multiple myeloma patients, so a heavily pretreated population. But to George for earlier lines. George Yancopoulos: Well, we believe that if one looks at the totality of the data, certainly, if it was me or somebody that I cared about giving the late-stage patients any of these treatments, I think Lynozyfic would be the choice based on all the available data out there. And importantly, what this says, if it looks like it has the potential for impressively more benefit in the late-line patients, that, of course, suggests that it should have also the best benefit for the early-stage patients. Because of that, we've taken on a lot of very aggressive programs in the early stages, not only in first-line myeloma and in second-line myeloma, but in the pre-malignant settings, as I summarized, we now have data in most of these settings, either as monotherapy or in very limited combinations, most of which we've now presented to varying degrees. And the data really is stunning and unprecedented. We're having high rates of seeing molecular complete responses in smoldering in amyloidosis, a premalignant condition, but where the protein made by the abnormal cells can cause problems. Once again, unprecedented monotherapy activity in the first-line setting, we've described that. And in later line settings with new combinations that we're also trying, unprecedented levels of activity. So we think that this program really has the potential to change the face of treatment for this disease indications in all of its manifestations, whether it be pre-malignant precursor settings, whether it's early line disease, whether it's second-line disease or whether it's for the late-stage patients. So I think this is an exciting time for the field. And I just want to remind you that in many ways, our odronextamab program is quite similar in that particularly in follicular lymphoma, where we look like we have the best late-line data, we're going aggressively in earlier line disease. And once again, we've released the data leading cohorts of Phase IIIs as monotherapy and so forth. Once again, unprecedented efficacy in these small initial cohorts that we're looking at, which really get us excited that these bispecifics really have the chance to really change the hematologic oncology space in their respective settings. Leonard Schleifer: So let me just add that before we go to the next question. One is, I think inherent in what George is saying there is that all bispecifics are not created equal. The team spends an enormous amount of time with all the technology at hand to select and create bispecifics that we think are different. fundamentally different, and that's why we think we're seeing better data. I just also want to emphasize, we're making a huge commitment here. We expect to conduct as many as 10 registrational trials for Lynozyfic, including, as George outlined, a broad registrational program in frontline or even earlier myeloma patients, both for transplant eligible and ineligible. This is a big space. It's a $30 billion market potential. Darzalex alone is annualizing at $15 billion. You saw some cross-study data that suggests that we can outperform. We've had some success where Darzalex has already failed in the IGA space, and we've had some success in cross-study comparisons in the smolder -- so I think this is pretty exciting, as George outlined. It's a huge commitment. You expect to spend a lot and go very -- as fast as we can. Somebody asked about can we accelerate with the FDA. We're certainly going to talk with the FDA and advise them that we think we have the best program, how can we work together. George Yancopoulos: You meant the amyloidosis, not IgA. Leonard Schleifer: Sorry, I meant amyloidosis. Ryan Crowe: Thank you, George. We also look forward to having a Regeneron roundtable on lenozpic in December of this year. So let's move to our final question, Shannon. Operator: Our last question comes from the line of Salveen Richter with Goldman Sachs. Salveen Richter: You spoke to novel targets here in I&I and ophthalmology. On the GA program, in particular, can you speak to what the FDA may be looking for in potential study designs, whether it's slowing GA lesion growth or vision improvements and whether you need to evaluate against current agents? And just remind us on the I&I side when we might hear about these novel targets. George Yancopoulos: Well, in terms of GA, we've already designed and planned our pivotal readout study for geographic atrophy. We are able to go against placebo, and we're primarily looking at slowing down of growth together with, of course, vision control. And as I said, we have data from our -- the cohort A from our Phase III trial, where we expect readout in the second half of 2026, which really will help inform whether this novel systemic approach, which have a lot of advantages in terms of the issues of having to bilaterally inject 2 eyes multiple times as opposed to being able to systemically treat we'll know whether there's a real opportunity there or not from that data. I think that in terms of our I&I programs, I think you'll probably be hearing about one of the first one -- additional ones additionally to the CD3 program, which is obviously a related I&I and ophthalmology program. You'll be hearing it roll out over the next couple of months with hopefully a new clinical program initiating next year. Ryan Crowe: Okay. Appreciate everyone's patience. We went a little over time, and I appreciate your interest in Regeneron. I apologize to those who remain in the Q&A queue who do not have a chance -- you do not have a chance to hear from today. As always, the Investor Relations team here at Regeneron is available to answer any remaining questions you may have. Thank you once again, and have a great day. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Thank you for standing by. Welcome to the Kiniksa Pharmaceuticals Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Jonathan Kirshenbaum, Investor Relations Officer. Please go ahead, sir. Jonathan Kirshenbaum: Thank you, operator. Good morning, everyone, and thank you for joining Kiniksa's call to discuss our third quarter 2025 financial results and recent portfolio execution. A press release highlighting these results can be found on our website under the Investors section. As for the agenda for today's call, our Chief Executive Officer, Sanj K. Patel, will start with an introduction and overview of our business. From there, Ross Moat, our Chief Corporate and Commercial Officer, will discuss our IL-1 inhibition franchise and provide an update on ARCALYST commercial execution. Then Kiniksa's Chief Financial Officer, Mark Ragosa, will review our third quarter 2025 financial results. And finally, Sanj will share closing remarks and kick off the Q&A session, for which Dr. John Paolini, our Chief Medical Officer; and Eben Tessari, our Chief Operating Officer, will also be on the line. Before getting started, please note that we will be making forward-looking statements today that are subject to risks and uncertainties that may cause actual results to differ materially from these statements. A review of such statements and risk factors can be found on this slide as well as under the caption Risk Factors contained in our SEC filings. These statements speak only as of the date of this presentation, and we undertake no obligation to update such statements, except as required by law. With that, I'll turn it over to Sanj. Sanj Patel: Thanks, Jonathan, and good morning, everyone. Year-to-date, in 2025, we've continued to execute and meaningfully advance our commercial business and clinical development portfolio. The use of IL-1 alpha and beta inhibition with ARCALYST has increasingly become the preferred treatment for recurrent pericarditis, driving significant ARCALYST revenue growth and positioning our franchise for long-term success, both with ARCALYST and KPL-387. We continue to be excited about the potential of our IL-1 inhibition franchise and fully intend to remain the market leader in recurrent pericarditis. Given the fact that as last reported, we were only 15% penetrated into the multiple recurrence patient population, we expect to continue to grow ARCALYST revenue. To this point, as announced this morning, we've raised our full year net sales guidance to between $670 million to $675 million from our previous guidance of $625 million and $640 million. We also believe KPL-387 could be an important advancement in the treatment of options available for patients, potentially increasing penetration and growing the recurrent pericarditis market. We remain on track to report data from the Phase II dose focusing portion of the Phase II, Phase III trial in the second half of next year. Additionally, we are pleased to report that early this month, the FDA granted KPL-387 Orphan Drug Designation for the treatment of pericarditis, which includes recurrent pericarditis. Importantly, we have maintained a robust financial position while continuing to create value without relying on the capital markets. Turning to the growing adoption of IL-1 alpha and beta inhibition with ARCALYST, we've introduced and advanced a fundamental shift in the treatment paradigm for this disease. Ross will share more details about this in a moment. In the third quarter, ARCALYST revenue grew to $180.9 million, which represents a growth of approximately $24 million over the previous quarter and approximately $69 million compared to the third quarter of 2024. While we're pleased with this growth, we continue to believe in the significant opportunity for additional growth ahead. As of the end of the second quarter, we were only 15% penetrated into the multiple recurrence opportunity, and we continue to see ARCALYST utilized earlier in the course of the disease. As previously stated, approximately 20% of ARCALYST prescriptions have been written for patients following their first recurrence. For patients who failed NSAIDs and colchicine, physicians are more readily turning to targeted IL-1 alpha and beta inhibition with ARCALYST rather than risk on an unnecessary flare by treating patients again with a previously unsuccessful treatment. Overall, the progress we've made reflects the medical community's growing adoption of IL-1 pathway inhibition and speaks to the future value creation of our IL-1 inhibition franchise. With that, I'll turn it over to Ross. Ross Moat: Thank you, Sanj. The growing understanding of recurrent pericarditis being driven by the cytokines, interleukin-1 alpha and beta has been a key driver behind the growth we've seen in the adoption of ARCALYST. As an increasing number of health care professionals update their approach to how to treat recurrent pericarditis with targeted IL-1 immunomodulation, we've seen a substantial increase in the number of active commercial patients on ARCALYST. Specifically, this is a result of our team driving increases in 2 key areas. Firstly, in Q3, new patient enrollments grew by their highest level in a quarter since launch. This is represented in the growth of prescribers of more than 350 in the quarter, leading to a total prescriber count launched to date of more than 3,825, including around 28% or more than 1,000 prescribers who have written ARCALYST for 2 or more patients. Secondly, once on treatment, patients are staying on ARCALYST for longer, which speaks to both the duration of the disease and patient satisfaction on ARCALYST. At the end of Q3, the total average duration of therapy increased to approximately 32 months. These two levers increased the number of active commercial patients and contributed to our ability to raise our revenue guidance for the full year 2025. Our commercial organization has been highly focused on evolving the treatment landscape for patients suffering from this chronic, highly debilitating disease by increasing education and driving the utilization of interleukin-1 alpha and beta inhibition towards becoming the new standard of care for recurrent pericarditis. We have built a highly effective commercial infrastructure and built upon many years of established relationships with the recurrent pericarditis community to improve the care for patients. In the 4.5 years since the launch of ARCALYST, we've continued to hone our messaging and we've improved our effectiveness through utilization of AI and digital marketing to inform which physicians to visit and importantly, when they're most likely to see a recurrent pericarditis patient. Thanks to the compelling clinical and real-world data generated in RHAPSODY and RESONANCE, our payer approval rate remains very high, and we continue to be focused on delivering excellent support to patients through Kiniksa OneConnect, our patient services program. This combination of robust data, access and support enables health care professionals to feel confident that their patients will get on to therapy, be well supported and receive the type of efficacy we've seen in the published literature. As a result of the continued growth in patients on ARCALYST, today, we raised and tightened our full year 2025 ARCALYST net sales guidance from between $625 million to $640 million to now between $670 million and $675 million, which is a $40 million increase in guidance between the midpoints. Our increased guidance reflects the robust trajectory of ARCALYST revenue in 2025, while also accounting for typical year-end industry dynamics, which is consistent with our historical fourth quarter performance. As you've heard, we're pleased with our solid execution and progress and are incredibly excited about the opportunities we have ahead. As we continue to focus on maximizing the growth of ARCALYST, we are also excited about the opportunity to advance the care of recurrent pericarditis patients in the future with KPL-387, our development program. This is our fully owned monoclonal antibody antagonist targeting the IL-1 receptor to inhibit both IL-1 alpha and beta. The totality of data show that inhibiting the activity of both of these key cytokines is a core component of delivering a highly efficacious treatment for recurrent pericarditis. With this program, we're advancing a validated mechanism with the potential to address key patient needs and expand penetration into the addressable market by enabling a convenient monthly subcutaneous dose in an auto-injector. Surveyed patients and health care professionals have indicated a preference for a highly efficacious IL-1 alpha and beta inhibitor with this target profile. Specifically, approximately 75% of all surveyed recurrent pericarditis patients report that they would prefer the KPL-387 target profile over those of available commercial and current investigational therapies. On the physician side, more than 90% of health care professionals stated a high likelihood of prescribing KPL-387 for new patients as well as being receptive to switching current patients upon a patient's request. It's also worth noting that health care professionals broadly agree that the introduction of KPL-387 would expand the IL-1 alpha and beta inhibition market overall. As we've previously announced, the dose focusing portion of the Phase II/III development program of KPL-387 is currently underway, and we expect those data in the second half of 2026. With that, I'll turn the call over to Mark Ragosa to review our third quarter financials. Mark? Mark Ragosa: Thanks, Ross. This morning, I will cover our third quarter 2025 financial performance. Our detailed results can be found in the press release we issued earlier today. There are several items on this slide that I'd like to call your attention to. Starting with our income statement on the left-hand side. First, ARCALYST revenue grew 61% year-over-year in the third quarter to $180.9 million with adoption of IL-1 alpha and IL-1 beta inhibition for recurrent pericarditis continuing to drive significant gains in active commercial patients and duration of therapy. Second, operating expenses grew 29% year-over-year in the third quarter to $156.8 million, primarily due to collaboration expenses, which were driven by continued strong ARCALYST collaboration profit growth. And third, due to strong revenue growth against more moderate operating expense growth, net income was $18.4 million in the third quarter of 2025 compared to a net loss of $12.7 million a year ago. Next, the right-hand side of this slide provides the calculation of ARCALYST collaboration profit, which drives collaboration expenses. ARCALYST collaboration profit grew a significant 118% year-over-year to $126.6 million in the third quarter as profit split eligible COGS as well as commercial and marketing costs held steady against higher sales. Lastly, at the bottom of this slide, we continue to expect our current operating plan to remain cash flow positive on an annual basis. And in the third quarter, our cash balance increased by approximately $44 million to $352.1 million. As you've heard from Sanj and Ross, we further advanced our commercial business and clinical portfolio as well as maintained a strong balance sheet in the third quarter. As a result, Kiniksa added to its significant momentum and remains well positioned to continue to help patients as well as to create additional value in both the near and long term. With that, I'll turn the call back to Sanj for closing remarks. Sanj Patel: Thanks, Mark. As you've heard, Kiniksa continues to execute both commercially and clinically, and we are well positioned to build significant future value as we grow our IL-1 alpha and beta inhibition franchise. As ever, we are committed to bringing additional treatment options to patients that are suffering from debilitating diseases with unmet need. I'll now turn the call back to the operator for questions. Operator: And our first question comes from the line of Geoff Meacham from Citi. Mary Kate Davis: This is Mary Kate on for Geoff. So you're seeing duration increase here for ARCALYST, which is encouraging. Could you comment on maybe the patient and physician feedback you're hearing from these longer users? Sanj Patel: John, do you want to take that? John Paolini: Sure. So in general, what we're seeing certainly in terms of the academic literature is an appreciation of the duration of disease and therefore, the necessity of treating to that duration of the disease in order to minimize the amount of recurrences that patients experience. So what we know from the literature is that the median duration of disease is 3 years with 1/3 of patients still suffering disease at 5 years and 1/4 at 8 years. And so the other data that we have, in fact, which we recently showed at the European Society of Cardiology meetings is that continued treatment without interruption resulted in a 99.5% reduction in event rates post treatment compared or on treatment compared to pretreatment. So that creates a very powerful message, if you will, for clinicians that treating to the duration of the disease is the best way to manage the disease. Ross Moat: Thanks, John. And maybe just to add on top of that as well in terms of the health care professional patient feedback that we get, generally, we received very positive feedback for those patients that have been on therapy for quite some time and a growing amount of time up to now 32 months and an average total duration of therapy. What we see on the health care professional side is generally due to the high access rates that we get, the health care professionals see their patients get on to therapy reasonably quickly and easily, thanks to that higher approval rate. So that kind of provides confidence that their patients are going to get on to therapy and helps them to then look for future patients, knowing that their patients will get on to therapy. And then for the patients themselves, the fact that they've been on therapy for longer, I think, is also part of the evidence of doing well on therapy. We continue to hear very high satisfaction from patients on therapy. And I think that backs up what we've seen both in the clinical world and the real-world evidence of how highly efficacious and well-tolerated this drug is. And as a reminder, it's been designed to be used over the course of the treatment -- the duration of the disease and to match that duration of the disease with the treatment duration. So this has really been designed as a long-term therapy to address what is a chronic multiyear and highly debilitating disease for most patients. So the feedback has really been very good from both health care professionals and patients overall. Operator: And our next question comes from the line of Anupam Rama from JPMorgan. Anupam Rama: Congrats on the quarter. Can you talk a little bit how you guys have sort of incorporated the updated ACC guidelines into your sort of marketing efforts? And what the early innings -- what you've learned from the guideline update? Because I think that was just a couple of months ago, right, in August of this year. John Paolini: Anupam, thanks for the question. I'll start off with a brief summary of the concise clinical guidance and then hand it over to Ross regarding your question about incorporation of the guidance into the field work. So specifically to the concise clinical guidance, yes, this is really -- this came out in August and represents an affirmation of what we've seen from the literature and actually driven by the data that we've helped to generate, which is positioning IL-1 pathway inhibition as second line after NSAIDs and colchicine, which is a real advance in the treatment paradigm to be truly steroid-sparing. And so that was driven by the initial data from the RHAPSODY program, where half the patients were treated second line after NSAIDs and colchicine. And then that was then picked up from our RESONANCE registry showing year-on-year after the approval of ARCALYST, a reduction in the use of corticosteroids and a rise in IL-1 pathway inhibition led by ARCALYST in the treatment of these patients. And so that was then picked up by JAK advances and JAK imaging in the thought leader literature. But then ultimately, it culminated, if you will, in the concise clinical guidance, which is a real affirmation from a practice entity to provide guidance to clinicians. So that creates that strong foundation that Ross and his team have been building on. So Ross, over to you. Ross Moat: Yes. Thank you, John. So I think it was really much needed guidance that we were pleased to see given that this is really the first U.S.-focused guidance publication that's really out there. We're utilizing it certainly within a promotional perspective and incorporated it within promotional materials. And as John said, it's really an affirmation of the type of messaging that we've really been providing since launch, so it's wonderful to have further publications from experts in the field, affirming the type of approach and a new approach to managing this disease compared to historic available drugs and in particular, around the utilization of corticosteroids, which we've always promoted ARCALYST as really a steroid-sparing agent and a drug which should be utilized ahead of corticosteroids. And having this type of publication out there, say, which we have incorporated within our materials now as well from a promotional perspective is a huge help, knowing that the use of corticosteroids is probably not the most advanced way of treating this condition now that there is a targeted immunomodulation approach, specifically looking at the key driver of this disease, which is interleukin-1 alpha and beta and being able to inhibit that, we really see as the modern way of treating this disease, and we hope will become the new standard of care. Operator: And our next question comes from the line of Roger Song from Jefferies. Jiale Song: Great. Congrats for the quarter. My question is related to the first recurrence. It seems your revenue is driving very well, penetration continue to be very good. And then how should we think about the first recurrence if that's a population you will start to think more about it? And then what could drive further penetration into that population? Ross Moat: Yes. Thanks, Roger. This is Ross again. Yes, as you noted, we have seen an increase over time in how physicians are utilizing ARCALYST within the first recurrence of recurrent pericarditis. And as a reminder, that really is the breadth of the label. The label is completely agnostic to the number of flares a patient must have gone through and suffered from before they become eligible for this targeted immunomodulation therapy. So we have promoted it to recurrent pericarditis overall. But certainly, early on in the launch, we did see that physicians were utilizing it more within the 2-plus recurrence group, which is a 14,000 patient population in any given year. We've seen a lot of utilization there. But I think as physicians become more and more comfortable and familiar with how to prescribe the drug and then going back to the first question that the physicians and patients have a good experience when they're on the drug despite they get access to therapy and see the type of results that we've seen in the clinical world, that provides greater confidence of using it earlier on in the disease. And I think what we're seeing is physicians taking mindset of why should we let patients continue to suffer from additional flares before they become eligible for this targeted treatment. So we have seen now around 80% of our patients that have prescribed ARCALYST within the 2-plus recurrence group and around 20% of all of those that have prescribed ARCALYST within the first recurrence group. And obviously, that has grown in percentage terms over time. But as we said in the prepared remarks, we are incredibly excited about the future opportunity, knowing that we announced midway through this year that we were around 15% penetrated into the 2-plus recurrence group without even taking into account those patients in the first recurrence. So the opportunity ahead to serve many, many more patients while we're happy with our current commercialization, the future is certainly there for us to address and help many more patients in the future. Operator: And our next question comes from the line of Eva Fortea-Verdejo from Wells Fargo. Eva Fortea-Verdejo: Congrats on the quarter. Two from us. First on ARCALYST, can you discuss the gross to net dynamics for the quarter? And second, on KPL-387, what are the -- what will be the drivers of your decision on the Phase III dose given that, if I recall correctly, the Phase II is powered to demonstrate a statistical difference? Mark Ragosa: Thanks. I guess first on the gross to net for the quarter year-to-date, it was 8.9%, down from 9.5% year-to-date in the second quarter. So lower and in line with our historical pattern where we see it highest in the first quarter due to industry dynamics such as benefit plan resets and co-pay support and then lower in the second and the third quarter and then moving slightly higher in the fourth quarter as industry dynamics begin to play a factor again. John Paolini: And Eva, thanks for the question about KPL-387 dosing. So importantly, the Phase II portion of the study is a dose focusing type study rather than a formal dose-ranging type study. And that is because our modeling has shown that the 300-milligram subcutaneous dose, which in healthy volunteers last for almost 2 months, should provide sufficient coverage for monthly dosing. And so therefore, the Phase II study is designed really anchored on that 300 milligrams subcutaneous every month dose and then looking to see that 300 milligrams given every other week, so does not provide additional efficacy and that lower doses exhibit weakness, which would then all affirm the use of the 300-milligram subcutaneous dose level. And so that's how we will look at that information and move forward into Phase III. Operator: And our next question comes from the line of Nick Lorusso from TD Cowen. Nicholas Lorusso: Congrats on the great quarter. Can you discuss what drove the strong increase in the number of prescribers this quarter compared to last quarter and what the plan is to continue this uptake? Also, what proportion of recurrent pericarditis patients do the 3,800 current ARCALYST prescribers actually see? Ross Moat: Sorry, Nick, can you just repeat the last part of the last question? I just. Nicholas Lorusso: Yes. What proportion of recurrent pericarditis patients do the 3,800 prescribers see? Ross Moat: Okay. So thanks very much. Let me answer the question, and please come back if he doesn't answer it fully. Yes, so we've seen that there's been a significant increase in the number of prescribers. This is actually in Q3, the highest increase that we've seen in any quarter launch to date, and that's more than 350 new prescribers coming in who have never prescribed ARCALYST before prescribing it for recurrent pericarditis that takes the total to more than 3,825 and about 28% of those -- of that total group have written for 2 or more patients. I think the things that lead into that is just more confidence, more awareness of ARCALYST as a treatment choice. I'm sure the ACC guidance has also been somewhat of a help towards that, just providing more validation, if you like, of the way of how to treat this disease. But our team have been very targeted in their approach, both our sales team in the field calling upon health care professionals. We've done a lot of work to really try to understand where the patients are presenting into. And as a reminder, this is a disease space where it's actually the patient population is pretty widely dispersed. So there's the opportunity to go into many physicians. There's the opportunity for recurrent pericarditis patients to go into many physicians. So I think we're getting better at both honing our messaging as well as understanding the patient throughput and not only which physicians these patients are going into, but also using more innovative technology to play through when we believe those patients are going to be visiting health care professionals. So we're using a lot of kind of AI and digital innovation approaches to guide our field team. On the other side of that, we're also very focused on digital marketing and making sure that our messaging around ARCALYST and recurrent pericarditis goes far and wide across the population outside of our in-person resources. So there's a lot of tactics that we have to try to drive that. I mean we've seen some substantial growth, and that's certainly a big part of the Q3 results that we've seen. But as we know, there's still a significant opportunity ahead for us. So we're very focused on continuing the breadth -- growing the breadth of prescribing as well as being very focused on once someone has prescribed once, helping them to support and find the second patient and the third patient and onwards because we know there's a significant population out there who unfortunately still get a very high level of either underdiagnosis or misdiagnosis as evidenced in our Harris poll, which showed that there was an average of 2.7 misdiagnoses before patients end up with a correct diagnosis of recurrent pericarditis. So we have an awful lot of work still to do, but the opportunity to grow the breadth and depth is pretty significant. Operator: And our next question comes from the line of Paul Choi from Goldman Sachs. Kyuwon Choi: Congratulations on the quarter. I have a few questions. My first is for Ross, and thanks for all the details on the slides. For the 45% of patients who restart versus the other sort of half or 55% who don't, can you maybe walk us through why they're not restarting and just sort of what the commercial efforts are to chase these patients? My second question is for Mark. Both the collaboration expense and tax rate came in higher than I think the Street we were modeling. Can you maybe just remind us if there are any one-offs on both those line items for this quarter? And if that should be the sort of the run rate going forward in terms of our modeling? And my third, maybe for John is a competitor will have Phase II proof-of-concept data in RP in the not-too-distant future. Can you maybe just remind us of how you're thinking about this? Are you assuming clinical success and how you think the data might compare to Rhapsody? Ross Moat: Thanks very much for those questions, Paul. I'll make a start on the first one then hand over to Mark and then to John for the final question. So thank you very much for that. So your initial question on ARCALYST is around the 45% restart rate in those patients that are not restarting and why is that? Actually, we have a slide that provides a bit of detail on the duration of therapy on our corporate deck as well. And this ultimately shows that the average time of the initial treatment is now around 17.5 months, up from 17 months at our last earnings call. The median is around 12 months. So the fact is that depending upon when a patient starts on therapy and how long they've suffered -- suffered with the disease prior to the initiation of ARCALYST is one of the several factors that goes into a health care professionals' judgment call on how long a patient needs to be on therapy for. So when patients stop, as I say, on average initially of 17.5 months, there's around 45% of those patients that come back on to therapy. As a reminder, when patients do come back on to therapy, it's generally very quick in terms of around 8 weeks or within an 8-week time period for the vast majority of the patients that restart, which makes perfect sense when you think around the washout time and the tenacity of the underlying disease. For those patients that don't restart therapy, obviously, we don't collect very much data on that. So it's difficult to know precisely why patients don't come back on to therapy other than to make assumptions on that, which could be around the fact that they are just through the disease and they stop and don't suffer from symptomology again and don't come back on to therapy. But the good news is when patients do come back on to therapy, whether it's within the 8-week time period or indeed much longer, which is for a minority of patients. But when they do come back on to therapy, it's generally a very easy and quick process for them to do so. Generally, there's a payer approval already in place. It's quite easy to get the next shipment of ARCALYST ready. And we know that when patients go back on to therapy after suffering symptomology again, they come back under control very quickly with ARCALYST. So that's what we've seen around the initial and the restarts. And obviously, that's the totality of adding up the treatment periods, which for some patients is several stops and restarts over time. That's what takes us to the average total duration of therapy now of 32 months, up from 30 months last reported. Mark? Mark Ragosa: Great. Yes. And thanks, Paul, for the question. As it relates to sort of your P&L questions, we don't provide specific guidance, but clearly, collaboration expense was up quarter-over-quarter and year-over-year and largely due to ARCALYST sales growth. As we kind of detailed in the prepared comments, collaboration expenses are largely driven by continued ARCALYST sales growth, which is very strong in the quarter. I would say regarding tax, the drivers remain the same as they have in past quarters as well. So tax on income earned in the U.K., Switzerland and the U.S., net of [indiscernible] , R&D and stock-based comp credits. John Paolini: And Paul, this is John. Thanks for your question about the competitive landscape. So yes, the field is awaiting data from an inflammasome inhibitor Phase II data. And so in that sense, not so much Rhapsody, but rather those data are structured in some way similar to the Phase II data that we had reported for rilonacept back in 2019 at the beginning of the program, which is relatively short-term therapy and mostly single active arm. And so in that sense, yes, you would expect with near-term short-term therapy, especially if you have an inflammasome inhibitor and an inflammasome is, of course, the driver of IL-1 beta, which then causes IL-6 production, which goes to the liver, which is where the C-reactive protein comes from, you might expect to see a good inflammasome inhibitor, just like colchicine should bring C-reactive protein down. But the point is that the inflammasome is relatively downstream in the pathophysiology of recurrent pericarditis. So as you know, when the pericardiocyte is injured, IL-1 alpha is released as a preform cytokine as an alarming. And that sets off a localized inflammatory response, which itself causes pain and damage. It does then trigger the inflammasome, which then causes the recruitment of that broader inflammatory response. But that's why we're really focused on blocking both IL-1 alpha and IL-1 beta in order to control the disease. And that's what we showed in RHAPSODY in a longer Phase III program where you have continued treatment initially over 9 months, but ultimately over 18 months and then ultimately out to 3 years, where we showed a 99.5% reduction in events once patients were on treatment. And that the only events that occurred were during the setting of brief study drug interruptions. And so in that sense, a drug like ARCALYST is designed to be given long term, and it remains to be -- to control the disease, and it remains to be seen whether other strategies could be successful. But that kind of sets the bar, if you will, for what effective therapy looks like. Operator: And our next question comes from the line of David Nierengarten from Wedbush Securities. David Nierengarten: I had one on the transition arm of the 387 study. And I was just wondering if you were biasing the study to different prior therapies. So are half the patients going to be previously treated with steroids? Or is it just an even split among prior therapies? John Paolini: Thanks, David. I appreciate the question. So your question is about the transition to monotherapy dosing and administration study, which is a supplemental study as part of the total filing package. Yes, so this study is designed to help inform clinicians how to move patients on to KPL-387 from other prior therapies. And so that includes really the totality of therapies that are available, so NSAIDs and colchicine, corticosteroids and other IL-1 pathway inhibitors. And it's a global study. So it covers those practice patterns across the world. And so how the study is designed is to capture that information and to test the efficacy and safety of those dosing paradigms that are used in order to make that transition to KPL-387 monotherapy and is designed to capture the necessary information for each one of those types of transitions in order to provide critical information, if you will, for the label to advise clinicians. But there is not necessarily nor does there need to be any type of prespecified hypothesis or specific population balance other than giving the necessary information to inform regulatory authorities, physicians on how that works. Operator: This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Sanj Patel, Chairman and Chief Executive Officer, for any further remarks. Sanj Patel: Thanks, operator. Thanks, everybody, for joining the call today and for the questions, of course. We look forward to the remainder of the year and providing additional updates in the future. And in the meantime, we will crack on. So thank you. 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, thank you for standing by. Welcome to the American Tower Third Quarter 2025 Earnings Conference Call. As a reminder, today's conference call is being recorded. [Operator Instructions] I would now like to turn the call over to your host, Spencer Kurn, Senior Vice President of Investor Relations. Please go ahead. Spencer Kurn: Thank you, and good morning. Welcome to our Third Quarter Earnings Call. I'm Spencer Kurn, Head of Investor Relations for American Tower. Joining me on the call today are Steve Vondran, our President and Chief Executive Officer; and Rod Smith, our Executive Vice President, Chief Financial Officer and Treasurer. Following our prepared remarks, we will open the call for your questions. Before we begin, I need to call your attention to our safe harbor statement. It says that some of our comments today may be forward-looking. As such, they are subject to risks and uncertainties described in American Tower SEC filings, and results may differ materially. Additional information as well as our earnings materials are available on our Investor Relations website. With that, I'll turn the call over to Steve. Steve? Steven Vondran: Thanks, Spencer. Good morning, everyone, and thanks for joining the call. As you can see from our published results, we completed a great quarter that delivered double-digit growth in attributable AFFO per share as adjusted. Leasing activity remained robust across our tower and data center businesses that was complemented by near-record services revenue. These top line trends, combined with focused execution of our strategic initiatives, have enabled us to increase our guidance for the year across all of our key consolidated metrics. At the midpoint of our revised guidance, we now expect to deliver attributable AFFO per share as adjusted, growth of approximately 7%. Net of FX headwinds and financing costs, our outlook implies attributable AFFO per share as adjusted, growth of approximately 9%, which reflects the fundamental strength of our core operating model. Before turning the call over to Rod to review our detailed financial results and updated outlook, I'd like to spend a few minutes discussing the industry backdrop and what it means for American Tower. The past few months have been an interesting and active time in our industry, with spectrum moving between key players and signals of a more consolidated U.S. carrier market. During my 25 years at American Tower, I've navigated many instances of carrier consolidation and spectrum deals, and our experienced team has a strong track record of delivering market-leading solutions that meet the needs of our customers while enhancing our strategic positioning. Although each transaction has been unique, there's been one consistent trend. The tower industry benefits when its customers become healthier. Financially strong customers tend to invest more heavily in their networks to keep pace with demand for mobile data consumption, which in turn drives greater demand for our best-in-class tower portfolio. Demand for mobile data, the backbone of our business model, continues to rise at a torrent pace. In the U.S., the most recent CTIA survey showed that mobile data consumption in 2024 increased approximately 35% year-over-year for the third straight year; driven by growth in mobile customers, 5G-enabled devices, usage per device and fixed wireless access. To put this into perspective, at this pace, mobile data consumption would continue to double every 2 to 3 years. Experts believe that the rapid growth in mobile data consumption will require a doubling in overall network capacity over the next 5 years, which in turn will require a significant increase in cell sites that benefit our tower business. We, therefore, remain quite optimistic about the opportunities that this industry landscape presents even before considering the likely tailwinds from AI-driven mobile data demand. We're also paying close attention to developments within satellite-based networks. We have a firsthand view through our board representation at AST SpaceMobile and regularly evaluate satellite capabilities with engineers and technology consultants. Our assessments are deeply rooted in data and firmly endorse the view that satellite-based networks will remain complementary to terrestrial towers due to the capacity and economic constraints inherent to the satellite model. And these challenges are only magnified with considering the evolving nature of wireless communication technology as growth in mobile data consumption compounds. In the U.S., this demand continues to drive robust levels of leasing activity. Application volumes in the third quarter remained elevated and heavily weighted towards amendments, but with a growing share of colocations. On average, approximately 75% of our towers have been upgraded with 5G equipment. So there's still considerable runway for growth as carriers complete their 5G coverage rollouts and shift their attention to network quality with densification activity. We also see positive trends across our other tower portfolios, where data consumption has grown at a CAGR of roughly 20% to 25% since 2020. 5G mid-band coverage is still progressing and stands at an average of roughly 50% in Europe, 20% in Latin America and 10% in Africa, with emerging markets lagging developed markets and cell sites per capita. Our international customers, especially in our emerging markets, continue to invest in 4G and newer 5G networks, and we're well positioned to capture future upside as our less mature markets lease up over time. Strong industry tailwinds also continue to propel our data center business. This quarter, CoreSite signed record retail new leasing revenue and experienced healthy growth in our larger deployments as well, driven by strong demand for hybrid cloud and multi-cloud deployments and positive pricing actions amidst tight supply dynamics. We're also seeing significant new demand from early-stage AI-related workloads like inferencing, machine learning models and GPU as a Service for neoclouds. It's becoming increasingly important for AI workloads to be co-located with hybrid installations. Our CoreSite facilities are perfectly suited for this as they have a rich ecosystem of network and cloud interconnection, coupled with purpose-built capacity design to support AI and other high-density deployments with features like liquid cooling. All of these positive trends in demand and pricing reinforce our expectation for CoreSite to achieve mid-teens or higher stabilized yields and to achieve these targets faster and with better visibility as pre-leasing and sales pipelines accumulate. I'm confident that American Tower is well positioned to benefit from these demand drivers across our tower and data center businesses. Our portfolio of assets is unmatched in quality, scale and operational excellence, and we focused our company around four strategic priorities to optimize long-term value creation, maximize organic growth, expand margins, allocate capital with discipline and position our balance sheet as an asset. We maximize organic growth as the best operator of towers and distributed real estate in the world. Our contractual and asset management expertise continues to deliver industry-leading organic growth while passing along superior service, operational benefits and efficiencies to our customers. We expand margins by leveraging our global scale and world-class teams to drive cost efficiency. We've generated approximately 300 basis points of adjusted EBITDA margin expansion since 2020, and we see room for continued expansion as we streamline operations. We look forward to communicating more details on future efficiency initiatives as part of our 2026 outlook presentation during our fourth quarter call. Our capital allocation philosophy optimizes long-term shareholder value creation. After funding our dividend, we evaluate internal uses of CapEx, inorganic opportunities, debt repayments and share buybacks against each other to drive the highest possible risk-adjusted returns for our business. This approach has recently prioritized developed tower markets and CoreSite to improve the quality of our earnings and durability of growth. And as you saw in our results this morning, it informed our decision to repurchase $28 million of shares since quarter end. And our balance sheet with an investment-grade credit rating and leverage now below 5x, which is the lowest among our tower peers, provides a cost of capital advantage and superior financial flexibility to pursue our growth objectives. Taken together, our strategic priorities are designed to deliver our goal of industry-leading AFFO per share growth. Since assuming the CEO role last year, I'm increasingly impressed by my team's ability to execute these priorities and deliver value for all of our stakeholders. I'd like to thank our incredible employees for delivering yet another impressive quarter. I'm confident that our team will continue to expertly manage our best-in-class assets and provide unmatched service for our customers in the future. With that, I'll hand the call over to Rod to discuss our detailed third quarter financial results and updated 2025 outlook. Rod? Rodney Smith: Thanks, Steve, and thank you all for joining the call. As you saw in this morning's press release, we delivered another strong quarter and raised our full year outlook. Before diving into our third quarter results and our revised full year outlook, I'll share a few highlights. First, total revenue grew nearly 8% year-over-year, driven by steady consolidated organic growth in the mid-single digits, another strong quarter of U.S. services contribution and double-digit growth from CoreSite. Second, adjusted EBITDA also grew nearly 8% year-over-year as strong revenue growth was complemented by 20 basis points of cash margin expansion. Third, attributable AFFO per share as adjusted grew approximately 10% year-over-year as strong adjusted EBITDA growth was enhanced by disciplined management of below-the-line costs. Finally, we are raising our full year outlook across property revenue, adjusted EBITDA, attributable AFFO and AFFO per share. The outlook raise is supported primarily by FX tailwinds, U.S. services outperformance and net interest benefits as compared to prior outlook. Our expectations for organic growth and CoreSite revenue growth remain in line with our prior outlook. Now let's dive into our results. Turning to third quarter property revenue and organic tenant billings growth on Slide 5. Consolidated property revenue grew nearly 6% year-over-year. U.S. and Canada property revenue was flat year-over-year and grew approximately 5% when excluding noncash straight-line revenue and Sprint churn. International property revenue grew approximately 12% year-over-year and nearly 8% when excluding noncash straight-line revenue and FX impacts. Finally, data center property revenue grew over 14%, driven by a record quarter of retail new leasing and consistent pricing growth. Moving to the right side of the slide, we delivered consolidated organic tenant billings growth of 5%, in line with expectations, driven by solid demand across our global portfolio. Our U.S. and Canada segment grew approximately 4% organically and greater than 5% when excluding Sprint churn. As a reminder, this was our final quarter of Sprint churn. Organic growth in our International segment was nearly 7%, reflecting double-digit growth in Africa and APAC, steady mid-single-digit growth in Europe and low single-digit growth in Latin America as expected. Turning to Slide 6. Adjusted EBITDA grew nearly 8% year-over-year as strong revenue growth was enhanced by disciplined cost management. Moving to the right side of the slide, attributable AFFO per share as adjusted grew approximately 10% year-over-year, supported by robust EBITDA growth and prudent management of below-the-line costs. Now let's turn to our revised full year outlook. As I mentioned, we are raising guidance across all of our key consolidated financial metrics. Starting with property revenue outlook on Slide 7, we are raising our outlook by $40 million at the midpoint, which implies approximately 3% year-over-year growth or approximately 5% when excluding noncash straight-line revenue and FX impacts. We are reiterating organic growth assumptions across all regions and continue to expect organic tenant billings growth of approximately 5% and data center growth of approximately 13% year-over-year. The increase in outlook was driven by $50 million of FX tailwinds, a $5 million increase to pass-through revenue and $5 million of incremental non-run rate revenue in the U.S. This was partially offset by $20 million of revenue reserves in Latin America, primarily related to our previously disclosed legal dispute with AT&T Mexico over the calculation of tower rent. As we disclosed in September, we reached a positive interim agreement with AT&T Mexico, whereby AT&T Mexico has paid American Tower the majority of withheld payments and will resume monthly payments of the majority of tower rents owed going forward. The remainder of the rents not paid to American Tower are to be deposited into an irrevocable escrow account administered by an independent trustee. The funds in escrow will be released in accordance with the final ruling of the arbitration or by mutual consent of the company and AT&T Mexico. We remain confident in the terms of our master lease agreement with AT&T Mexico and expect to prevail in the arbitration. Per our conservative reserve policies, our 2025 outlook assumes approximately $30 million of revenue reserves for the full year, of which $19 million are already reflected in our results through the third quarter. We expect future reserves of approximately $8 million to $10 million per quarter until the arbitration is settled. The arbitration is scheduled for a hearing in August of 2026, and the final ruling may come at a later date. Moving to adjusted EBITDA on Slide 8. We are raising our adjusted EBITDA outlook by $45 million at the midpoint, which implies approximately 4% growth year-over-year or approximately 7% growth year-over-year, excluding noncash net straight-line and FX impacts. The increase to outlook was driven by $30 million of FX tailwinds and $15 million of upside from consolidated operating profit, primarily driven by U.S. services outperformance. And finally, moving to our outlook for AFFO on Slide 9. We are raising our attributable AFFO outlook by $50 million, which now implies growth at the midpoint of approximately 7% year-over-year on an as-adjusted basis or approximately 9%, excluding financing costs and FX impacts. The increase to outlook was driven by $20 million of FX tailwinds, $15 million of cash adjusted EBITDA and $15 million of upside from other items, consisting of $15 million of upside from net interest expense and $5 million of upside from cash taxes and minority interest, partly offset by $5 million of higher capital improvement CapEx. Turning to Slide 10. Our 2025 capital plan remains consistent with our prior outlook. We continue to expect to distribute approximately $3.2 billion to our shareholders as a common dividend in 2025, subject to Board approval and expect $1.7 billion in capital expenditures. $1.5 billion of our capital expenditures are related to discretionary projects of building approximately 2,150 new towers at the midpoint and $600 million of data center spend. Importantly, we expect 80% of our discretionary projects this year to be in developed markets, consistent with our capital allocation philosophy that Steve reiterated earlier. Moving to the right side of the slide, our balance sheet remains strong. With our net leverage now at 4.9x, $10.7 billion in liquidity and low floating rate debt exposure, we have significant financial flexibility. We'll remain disciplined in how we utilize our balance sheet and allocate capital to optimize long-term shareholder value creation. Subsequent to quarter end, we have executed $28 million of share repurchases, and we will continue to be opportunistic in utilizing the remaining $2 billion that the Board has authorized for share repurchases. Turning to Slide 11. And in summary, we are pleased with our results year-to-date, which demonstrate the fundamental durability of our business model. Robust mobile data consumption growth and demand for our interconnection-rich data centers underpin a long runway of growth opportunities for American Tower. With our best-in-class portfolio of towers and data centers and strong balance sheet, we are well positioned to capture these growth opportunities and deliver on our goal of the industry-leading AFFO per share growth. And with that, operator, we can open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Michael Funk from Bank of America. Michael Funk: So Steve, a quick one for you. So services revenue continues to come in above expectations, ours and the Street. Typically, that was a leading indicator for domestic deployments. So I would love to hear your thoughts on how that potentially factors in deployments in 2026. And then maybe to feather in another one, any thoughts you can also offer on how the AT&T EchoStar spectrum acquisition might impact deployments from AT&T and your expectations with that company? Steven Vondran: Sure. Thanks for the question. So I'll start with the services piece. We've had a healthy pipeline of activity this year in services, and it has -- it's a near record year. You have to go back to when we actually own construction management firms back in the early 2000s to find a better service to the year for us. So we're very excited about the activity levels that we've seen. We also have a larger construction management component this year than we've had in prior year. So that's a little bit of what's kind of feathering into that. But that's indicative of the carrier activity that we're seeing. And as we said from the beginning of the year, we're seeing robust activity across the board. And that's continued build-out of the 5G mid-band spectrum throughout the networks and also some early phase densification that we're seeing as well. So we're excited about the activity levels that we're seeing there. We'll refrain from guiding to 2026 until February on that. But we do see a healthy pipeline building, and we do think that our services business will be a good robust contributor in 2026 as well. So we're feeling very good about what we're seeing and hearing in terms of how that pipeline is building next year. In terms of the spectrum sale, again, we'll learn more about that and share more about that in February in terms of 2026. What we've typically seen with the carriers is that when they buy spectrum, they want to deploy it. And there is certainly a lot of opportunity to continue to deploy mid-band 5G on our sites. And so we're looking forward to working with AT&T and helping them in what they decide to do next year. But until they've announced their build plans, it's probably not appropriate for me to comment in terms of what we think they're going to do on that. Operator: And your next question comes from the line of Nick Del Deo from MoffettNathanson. Nicholas Del Deo: First, on the spectrum front, the FCC now has marching orders to auction a lot of spectrum over the coming years. Some of it at potentially much higher frequencies than the mainstream spectrum that we've seen deployed to date, I think potentially as high up as 10 gigahertz. Obviously, it's going to depend on what bands are ultimately selected. But broadly speaking, how are you thinking about the relevance of your tower portfolio for potentially supporting some of these much higher frequency bands given their propagation attributes? Steven Vondran: Yes. Thanks for the question. Look, I'm excited to hear that those bands are coming to market because towers are going to be the primary way those bands are deployed even up into that 7, 8, 9, 10 gigahertz. And that really underpins the beauty of the tower model and the long-term growth that we're going to see on the portfolio. And so when I see what's kind of been identified by the government, some of that, there's a little bit more mid-band to support 5G. But a lot of those spectrum bands that you just referenced are the 6G bands that need to be freed up and allocated for the U.S. to be competitive in the 6G market. So we're excited to see that, that's been identified that they're working on making that available. And we're looking forward to seeing how that plays out. As we've seen in the past, the higher the frequency, the lower the wavelength, which means you will need some densification of sites. So as we look out across the landscape of the remaining tranche of 5G and also 6G, we think that, that bodes very well for long-term growth for us because carriers are going to densify their networks. It will give them more bandwidth. You'll see new use cases coming out. And there's some really exciting things coming out in kind of the early discussions about 6G and what it supports. So we're very supportive of those bands coming to market and being auctioned, and we're looking forward to working with our customers to get those deployed as soon as they can. Nicholas Del Deo: Okay. Great. Can I ask one on CoreSite as well? I saw your pre-lease share was down to 6% this quarter. I think historically, that's been driven by sort of larger customers taking big flows of space. I guess should we think about the 6% is, again, just the product of the ebb and flow of larger deals? Or are you kind of purposefully saving the space that you're developing for more of a retail SKU? Steven Vondran: There's no slowdown in the deal flow. We are still seeing incredibly robust demand. What you're seeing in that dip on pre-leasing is us putting some stuff that was in construction to service. So you're really just seeing that move from pre-leasing to actual leasing. And that pre-leasing [Technical Difficulty] new projects to build new sites. So that's just a function of the flow of the construction, not a deal flow at all. Nicholas Del Deo: Okay. Okay. So no underlying changes there. Good to hear. Steven Vondran: Yes, we're still seeing huge demand drivers in CoreSite. Nicholas Del Deo: Yes, Demand across the space is strong. I was wondering more if it was more of a purposeful shift on your part to hold space for retail where you don't see as much pre-leasing, but it doesn't sound like that's the case. Steven Vondran: No. Still sticking to our knitting in terms of how we do business. Operator: The next question comes from the line of Jim Schneider from Goldman Sachs. James Schneider: I was wondering if you could maybe -- understanding that the cost optimization program, you can give us more details when you report Q4 results. But can you maybe give us a sense of how you would frame the opportunity in terms of rough order of magnitude? Directionally, how that when you do announce it should flow through the model? Would that be sort of a onetime thing or something that would layer in over the course of several quarters? And then maybe directionally, what are the considerations you're thinking about in terms of the sizing that opportunity? Are you trying to sort of get a sense about what is happening with the churn activity on your potential customers? Or is there any other considerations that are kind of top of mind as you scope that out? Rodney Smith: Jim, thanks for the question. So I'll start off by highlighting the fact that cost efficiencies is one of our strategic priorities. You've heard Steve and I talked about that over the quarters and the years as well. So it's something we've been focused on for a while here. I would point to a couple of things that have resulted from the work that we've done over the years. If you go back to 2020, since that time period, we've been able to expand our EBITDA margins by about 300 basis points. That comes from solid, steady organic growth. It includes absorbing the Sprint churn, but it's complemented in a material way by the cost efficiencies that we've driven into the business over that time period. You've seen a couple of years where SG&A actually stepped down multiple years in a row. This year, it's about flat. So we're holding things very steady after reducing SG&A quite a bit over time. So we've got a very efficient business globally as it stands today with strong margins and as I pointed out, expanding margins. So we do see the future opportunities as incremental improvements to an already efficient business, not necessarily a step function change. With that said, Steve has talked about, and we did hire or create a new role of Chief Operating Officer. That is a global role, but no fills that role. And it's focused on simplifying our operations across all areas in areas like supply chain technology, service delivery, network operations. And the goal there really is to improve service quality across the board by making things simpler and bending the cost curve down over time, particularly in the direct cost area. That should help us continue to maintain strong margins out into the future in a way to complement steady organic tenant billings growth. With that said, we do look forward to our next earnings call when we finish up 2025, talk about the fourth quarter results and get into the '26 outlook. At that point, we will have a little bit more detail around cost efficiencies and improvements that may come from the COO position. James Schneider: That's helpful. And then maybe as a follow-up, your data center business, I think you're guiding effectively to the midpoint of your prior guidance. A lot of your peers have sort of taken up their guidance. And obviously, the data points, as you pointed out in terms of new business are very, very positive across the whole ecosystem. So can you maybe give us a sense about whether there's anything happening under the hood that would sort of mute the upside you're seeing at least in the current business for the next couple of months into the end of the year? Steven Vondran: Yes, I'll take that one. No, there's nothing that would mute our expectations for the business. We continue to believe that sustained double-digit growth is possible as long as we can keep building the capacity to absorb the demand that we're seeing out there. And we continue to see increased demand for the space in CoreSite from our core customer, which is the enterprises that need to be colocated in that facility for hybrid cloud deployments. And what's exciting about the way that customer is evolving is they're actually also expanding their installations to put inferencing there. So a lot of those key enterprise customers are expanding their installations to have their inference colocated with their hybrid cloud deployments. And so there's a very long tail of that activity. So I think all the trends that we're seeing in the space reinforce the fact that there's a huge growth path there for us. So there's nothing muting that. I think we were just pretty close on our expectations for the year. And we pride ourselves on being pretty accurate on that. So nothing to be concerned about there. And in fact, we're excited about the future of CoreSite. Rodney Smith: Jim, I would also just complement Steve's answer here with a couple of pieces. We are seeing strong double-digit growth. You see that in our numbers. And of course, Steve outlined that, that was in line with our expectations certainly. I'll highlight the fact that, that is well above the underwriting assumptions that we made when we originally purchased CoreSite. So the business is performing exceptionally well, driving upper teens in terms of stabilized yields on assets. That's why you're seeing a little bit more CapEx going into that business. We're up to a little over $600 million of CapEx. And we -- not only are we seeing a robust pipeline, and we're able to be selective in terms of who we bring into these facilities, we're also seeing strong pricing ability on our end, which is driving a cash mark-to-market well up at the end -- the top end of the range that we had outlined. A couple of other things that I'll highlight here. The business is well positioned going forward. We have about 296 megawatts of power available and held for future development. That's a nice runway as we look out into the future to be able to provide condition space to meet the demand that we see coming. We also have about 42 megawatts under construction currently. That's the highest we've seen in CoreSite in quite a while here. So we're building a lot of facilities to meet the demand that we've already taken in. Those couple of record years of sales and new business that we've seen over the years, we're now delivering on that. That's another reason why you're seeing a little bit of a touch down in terms of pre-leasing because we're just building so much into this curve. So these CoreSite assets, interconnection-rich, network dense, they're really well positioned for the future, not just from a demand perspective, but from a pricing perspective as well as making sure we're in a good position to meet the demand going forward. Operator: Your next question comes from the line of Ric Prentiss from Raymond James and Associates. Ric Prentiss: Steve, I appreciate your comments in the beginning. Obviously, it's 25 years, you've seen a lot of spectrum deals and M&A. I wanted to just touch on one, UScellular T-Mobile deal is closed. Can you remind us again your exposure to UScellular? And then also, interestingly, T-Mobile on their earnings call talked about a charge where they were going to be reducing some cell sites that were not UScellular. That's one of the first times I've seen kind of carriers without a deal kind of saying they're reducing things. Do you have any extra color on what T-Mobile was talking about there? Steven Vondran: On the second question, I don't have any color on that, Ric. In terms of the UScellular portfolio, it's pretty modest. They represent a little bit less than 1% of our U.S. revenue, a little bit less than 0.5% of our global revenue. And there is a chunk of that, that's up for renewal next year, which we've talked about previously. We haven't given a specific percentage, but there's a good chunk of that up for renewal next year. And so we'll give more guidance on what we expect on that in February in terms of churn coming from that. But just given the overall exposure, we'll still be in that 1% to 2% historical range for churn, we believe. Ric Prentiss: Okay. And then on the DISH EchoStar AT&T deal, are you guys open to like doing a negotiation with DISH to kind of get an NPV value because we're watching that just trying to see how long Charlie Ergen wants to keep making tower payments, but you have good contracts, it seems. So just trying to get a sense of openness to trying to say, can we resolve this sooner rather than over 11 years. Steven Vondran: Yes. Well, Rick, we've got a long track record of maximizing the value to our shareholders through our contract structures and any negotiations that we do. And so you can assume that we're going to retain the discipline we've always had on that. I think it'd be premature to speculate on what something might look like on that. Now what you will see in our 10-Q when we file it is you'll see that we did receive a letter from DISH saying that they believe they're excused from making payments under the MLA based on the spectrum sale. We disagree with that. And in fact, we filed suit. We filed a declaratory judgment action to ask the court to confirm that we own the remainder of the rent under that agreement. And just to remind folks, that agreement goes through 2036. And this represents about 2% of our total property revenue, about 4% of our U.S. and Canada property revenue. And so we're focused on defending our contract and making sure that everyone acknowledges that it's a valid and enforceable contract through 2036. And then we will have whatever discussions make sense that are going to maximize long-term growth. But again, we feel good about our contract. We feel good about the collectibility on it, and we will continue to do the right thing for our shareholders for the long term on that. Ric Prentiss: Makes sense. One last one for me. Obviously, nice to see stock buybacks come in and kind of an endorsement of where you feel your stock price is at. Also finally, your leverage is below 5.0000. How should we think about the M&A environment out there for external growth, stock buyback and where are we at as far as private versus public multiples, which is kind of the capital allocation question between stock buyback and M&A? Rodney Smith: Yes. Ric, thanks for the question. So you hit all of the relevant topics, of course. And let me start out by just highlighting our capital allocation philosophy here. As you've seen over the years that you've followed us, it's very consistent and a disciplined approach to capital allocation. Everything we do in capital allocation is really centered around optimizing long-term shareholder value. With that said, the first priority in capital allocation is dividending out 100% of our REIT taxable income, which this year will represent about $3.2 billion. Of course, that's subject to our Board approval. Next is the internal CapEx programs. We invest roughly $1.5 billion to $2 billion a year historically in internally generated capital programs. And we focus those on the highest risk-adjusted returns we can put that money into at the time. And in today's environment, that is mean we're more heavily focused on prioritizing developed markets, U.S., Europe on the tower side as well as CoreSite, of course. Then it comes to evaluating M&A up against share buybacks and also just continuing to pay down debt. All three of those are options for us. Today, we don't see anything compelling that's material on the M&A side. We have been slightly over our leverage target recently for the last couple of years. As you know, Ric, we've been working diligently to strengthen the balance sheet, improve the credit quality of the business. We're now BBB+. And in this quarter, we're below 5x. That is helped a little bit by the services contribution to EBITDA, which you can see in our numbers the full year implies a step down in EBITDA for Q4. That will put a little pressure on our leverage number certainly. And depending on how the euro and the U.S. dollar react, that could move around our U.S.-denominated total value of our European debt. With that said, it is possible that we could go back up to 5x later in the year. But we are around 5x or below 5x in what we believe is a sustainable way. So that gives us more flexibility. And share buybacks are certainly an option. You saw us buy back about 28 million shares. We put that up against M&A opportunities around the globe. We're still seeing in developed markets specifically, private multiples on the M&A side for towers are still elevated relative to the multiples of public tower companies. But there's more than that, that goes into our decision-making. We just think we have a really compelling set of assets. We think buying back shares in this environment makes a lot of sense for us given our ability and confidence in this business generating upper single-digit AFFO per share growth over time before you account for the impacts of FX and interest rates. So we've got a really solid portfolio. We're improving the quality of earnings, so it's getting better along the way. So that's how we think about it. The share buybacks are completely opportunistic. As we continue to delever, we will have even more and more financial flexibility to allocate capital in that -- in a way towards either M&A or share buybacks, and you kind of know what we favor at the moment. Operator: The next question comes from the line of Eric Luebchow from Wells Fargo. Eric Luebchow: Just curious, there's been some chatter around some of the new spectrum sales and your ability to monetize them, for instance, the 3.45 that AT&T is getting, which they already have in the network just requires software upgrade. Any just kind of high-level commentary on how you think some of this additional spectrum could impact future densification demand that you're starting to see in your footprint, as you mentioned? Steven Vondran: Yes. Thanks for the question. So generally speaking, when carriers get more spectrum, that's good for us because they end up deploying that spectrum, and it typically requires them to do network augmentations that are monetizable events. Now on any given site, depending on the specifics of the site, there could be a software push that may not be an event at that moment. But over time, what we've seen is that more spectrum results in more leasing revenue for us. Even if they're able to do it with software pushes and kind of as an initial instance, that doesn't necessarily mean that they won't be able -- won't need to densify over time. If you think about the growth of mobile data in the U.S., the latest CTIA report had it at about 35% year-over-year. And all the experts we talk to believe that mobile data usage will continue to rise at a robust percentage and the needs for the networks to augment themselves that you're going to basically twice as much capacity in 5 years as you have today. And everyone that we talk to believes that, that will come in part through spectrum, in part through efficiencies in the technology, but mostly through densification. So even the spectrum that's being considered by the FCC to be auctioned plus the spectrum that's kind of out there in the market, we think that plus technology will solve about half of the issues that they need to solve in terms of quantity of data produced. The other half is going to have to come from densification. And so over time, we believe that, that densification is going to be right in line with what we originally thought. We always thought there'd be more spectrum that came to market. It could affect the timing a little bit in the near term, and we're kind of watching that to see how that plays out. But we don't think it changes the medium- to long-term outlook for growth in our business or the need to densify the networks over the medium to long term. Rodney Smith: Eric, I would just add on the application volume that Steve mentioned, we see our overall applications up about 20% year-over-year. That's supporting the good news that we've had in services, but it also reflects kind of the activity level that we're seeing in the marketplace. We're seeing a higher growth rate in the applications for colos. That's up more like 40% or so. So we are seeing the beginning of this shift or an increase in colocations, which could be the beginning of densification. Now with that said, our colocation applications still represent a modest percentage of our overall apps, but we are experiencing an increase in a faster growth rate than the overall applications, which we think is good news. Eric Luebchow: Yes. I appreciate that. And I guess just to follow up on one more question. I know you had one customer that came off their MLA earlier this year, they're on like an à la carte type of leasing arrangement. Any update on them? It sounds like things are progressing as planned. I think there was some revenue contribution that got shifted into 2026. And is there any kind of active discussions on maybe putting them back on a holistic MLA? Or are you kind of happy with the current arrangement you have with them? Steven Vondran: We've always been agnostic as to whether we're under a comprehensive MLA or not because the underlying business that they need to do with us doesn't change, whether they're on a comprehensive agreement or not. And we've proven over a couple of decades now that we're successfully able to monetize those deployments, whether they're holistic structure or an à la carte structure. You can assume that we're always talking to every customer all the time. I mean the ink doesn't even dry on a contract before you're talking about the next iteration of it. So those are always ongoing discussions, but there's really nothing to report on that. We're there to support the rollout. And the only real difference for us is it makes a little bit of a timing difference sometimes under the comprehensive agreements. It's kind of more fixed and more predictable, and it's a little bit more variable on an à la carte basis. But if you're thinking about the medium to long term, we're going to get that revenue either way, because it's just -- it may come in a little bit more fits and starts versus that kind of cadence that we can lay out in the contract. Operator: Your next question comes from the line of David Barden from New Street Research. David Barden: It's great to be back. So I guess two, if I could. So the first one for you, Rod, would be just to follow up on Ric's question, which is to just make sure that DISH is current. And under what circumstances would you guys contemplate beginning to take a reserve given the fact that there's this ongoing lawsuit between the two of you? And then on a happier note, I would guess -- I don't know how to phrase this question, but what are the tower implications potentially for a space-based player that now owns terrestrial spectrum to see some new deployments that we weren't contemplating in our multiyear model in the past? Steven Vondran: I'll actually take those just because we're already talking about DISH. So at this point, DISH is current. And so we wouldn't take any reserves because they're current today. And we expect them to pay. And that's the reason we kind of preemptively filed the lawsuit is to make sure that there's no interruption in that. So it's premature at this point to even talk about or think about reserves on that. When you think about the space-based player, it really depends on how -- if they're just complementary to the other carriers and they're reselling to the other wireless carriers, then they probably won't deploy a lot on the ground themselves. Now there may be some teleports or there's a few things that are ground-based to support those networks, but that wouldn't be of any scale to be material in terms of the opportunity. If they decide to offer direct service, then they might well decide to complement their satellite network in terrestrial sites because the satellites don't penetrate buildings well, they don't work in dense and urban areas. So that certainly could be an upside that none of us have even contemplated. But at this point, we're not forecasting any of that. We're not putting that in any of our guidance going forward. So our long-term algorithm that we've laid out for you guys does not contemplate that extra carrier in there. That would be all upside for what we've laid out. Rodney Smith: David, I'll just welcome back. It's great to have you back on the call. David Barden: Thanks, Rod. And I'll use that as an opening to ask one follow-up. I appreciate it, guys. So just as we think about SpaceX deployments, the growth of fixed wireless access with growing spectrum availability, the BEAD funding kind of pushing fiber out, the WISP Marketplace is under threat. I know that they can, in rural markets, be a customer. Is there any reason to believe that kind of the threat to the WISP market is a threat to churn as we look forward in the business model? Steven Vondran: Look, we have a lot of great customers that are WISPs, and that's been a component of our vertical market segment for a long time. So they do comprise a very small percentage of our overall revenues. Some of those WISPs have struggled for a long time. So we do see churn every year in that, and that's kind of taken care of in our normal churn, that 1% to 2% that we see it as normal churn. So it wouldn't surprise me for some of those guys to have some trouble, again, consistent with what we've seen in the past. But I don't see anything in there that would make me think we're going to fall outside that normal range of churn, 1% to 2%. Operator: The next question comes from the line of Michael Rollins from Citi. Michael Rollins: Just given the comments on EchoStar, I just had a couple of other follow-ups. The first one is you mentioned it's about 4% of domestic revenue currently. How much is EchoStar anticipated to contribute to growth over the next couple of years based on the contractual minimums that you've established? And then secondly, you referenced, I think, the long-term guidance just a few moments ago. Do you still believe American Tower is on track for its long-term domestic leasing growth guidance? And if you pull out EchoStar from that, can you share what the organic growth looks like ex EchoStar? Steven Vondran: So in terms of the contributions for the future years, we haven't been specific about that, and that's not something I want to get into the specifics of. Again, we'll issue guidance for next year in February on it. When you think about our long-term U.S. organic growth guide that we put back -- put out back in 2021, we're seeing a robust pipeline of activity from the three major carriers, and we're feeling very good about the activity levels that we're seeing there. And if you think about that guidance was put out more than 5 years ago, and we've been pretty spot on in terms of the guidance for the first several years of that. Now looking out toward the last couple of years, there are a couple of events that were not in our viewshed when we put that guidance out in 2021. We did not expect T-Mobile to buy UScellular, and we didn't expect DISH to sell the spectrum and kind of exit the network market. And we'll be factoring those into our guidance that we think about next year. But in terms of how that affects '26 and '27, I don't want to get specific about that until we actually issue guidance in February on that. But again, the long-term growth perspectives, the medium- to long-term view of our business, our U.S. business contributing mid-single digits, that doesn't change with the changes in DISH. And we'll get more specific about those last 2 years of that multiyear guide in February. Michael Rollins: Can I just follow up to that with one other? So when I think about when you gave that multiyear guide several years ago, there was significant change going on in the industry. And so you kind of gave us this north star, if you would, of where you think growth is going over an extended period of time. Do you think that conditions have changed enough and the timing is there where maybe not just giving a view for the next couple of years, but maybe giving new multiyear guidance when you come out with the fourth quarter results. So kind of giving us a more extended view, an updated view of where that's going. Steven Vondran: Look, we'll figure out what we're going to say in February on that. What I would say is we've given you guys a long-term growth algorithm that we think is kind of directionally what you should be thinking about for the longer term with our business. And nothing in the recent events really changes that long-term growth algorithm. What drives growth of the tower rents and the equipment on the towers is the growth in mobile data consumption. So as long as we continue to see mobile data growth in the U.S. and abroad at the types of clips that we're seeing, then we believe that the need to augment networks is going to continue to roll out just the way we've foreseen it that supports that algorithm. Now it's possible that you're going to see even more data growth than that because all the assumptions that are out there and the historical growth we've seen doesn't include much AI. So as AI becomes a larger component of our daily lives and that makes its way on to the mobile devices, it's possible that growth is going to be even higher. But in terms of our kind of long-term growth algorithm, we believe that somewhere in the mid-single digits is where you should see the organic growth in the developed markets, a little bit higher in the emerging markets. And that's probably as specific as we're going to get from a long-term guide on that. And again, we'll give you guys more color on the next year in February. Operator: Your next question comes from the line of Richard Choe from JPMorgan. Richard Choe: I just wanted to follow up on the U.S. business quickly. What is driving the $5 million in incremental non-rate revenue there? And then a second question on the U.S. data center business, I guess, the quarter-to-quarter growth was kind of a little bit lower than what it's done recently. Was there some churn there that was a little bit higher than normal? Rodney Smith: Richard, thanks for the question. Regarding the $5 million, that's just small non-run rate type activity. So nothing really to worry about and nothing specific that I would point to as well. And that really is the same issue with the differences in the data center business, really just onetime items here and there. There's always fluctuations quarter-over-quarter, but nothing material. Richard Choe: Got it. And then on a bigger picture one with the cost efficiency review that you're going to talk more about next quarter, could that also kind of lead to some strategic changes and also kind of, call it, CapEx changes and priorities? Steven Vondran: I'll take that one. Right now, we're really looking at how we can get the efficiencies in the business through things like supply chain, kind of getting a little bit some of the best practices across borders, automation, there's some AI opportunities in there. There's nothing specific in terms of the capital. Now we do spend capital in the U.S. in particular, to buy our land. And that does help manage the land cost on it, and we also get very good returns on the capital. It's possible that we could find some opportunities to do that more aggressively in other geographies, but that's something that would come later down the line. That's not one of the near-term things that we're focused on. But that's the only thing I can think of that would be any kind of a shift in capital. And that really wouldn't be a shift, that might just be flexing up a little bit more on that opportunity if we found the right chance to do that. Operator: And the final question comes from the line of Benjamin Swinburne from Morgan Stanley. Benjamin Swinburne: Maybe just one more on EchoStar. I know that maybe there will be more info in the queue, Steve. But are there anything we should be thinking about in terms of what's next? It sounds like you expect them to continue to pay you. But is there any, I don't know, court date or any other process info you want to share with us at this point as we think about the situation moving forward? Steven Vondran: No, we just filed it. So there's nothing on the docket yet to point to on that. And again, we think this is very straightforward. We think that we have a valid enforceable contract. We don't think that anything has changed in the marketplace that would hamper the enforceability of that through the remainder of the term. And like I said, we just preemptively filed that because we think it's the right thing to do to protect our shareholders' interest on that. Benjamin Swinburne: Okay. And then just one more. You guys obviously went in and bought back some stock. The stock has been under pressure. I think the multiple we're seeing towers trade at, including AMT, at the lower end of where it's been in a long time. And actually, the spread between data center stocks and towers has widened out significantly as well. I guess it's a long wind up just how you think about CoreSite's and the value of this asset. Is there -- do you look at that sort of the value of data center assets in the public and private markets relative to what's embedded in your stock? It seems like you're not getting credit for it today. Is that a relevant factor as you think about the right ownership structure for this business? And are you seeing more synergies between the two businesses? And you've talked about that over the years and whether that's starting to come together in your mind more? Steven Vondran: Yes, I'll take that one. Look, we think that CoreSite is a great fit with American Tower. And we still believe the long-term synergies of having towers and a highly interconnected ecosystem will ultimately play out with opportunities at the edge for us. So we believe in that future. And in the meantime, we have an asset that's performing phenomenally well. And as to the components of the stock price and things like that, we're in this business for the long term, and we're thinking about the long-term value creation for the shareholders. We're not looking at a kind of a snapshot of where that valuation falls. And so we're -- our focus is maximizing the value of that asset and continuing to work with the industry partners to prove out the edge over time. So when we're thinking about a stock buyback, that's really us being opportunistic. We're just looking at the value of the stock and our other available uses of our capital, and we think that's a good use of our capital. And so we made the decision to buy some. And so it really has nothing to do with CoreSite or that business. It's really all about what we think the value of the enterprise is. And with CoreSite, we're committed to growing that thing as fast as it can grow as long as we're sticking to our business model and our return profile. And we'll look forward to proving out the edge over time. Rodney Smith: Benjamin, I don't think I mentioned this earlier, but I would just highlight that we do have a Board authorization for a buyback program up to $2 billion. So we're just beginning to tap into that. So we do have capacity there already approved by the Board in terms of buybacks. Operator: This concludes today's question-and-answer session. I will now conclude today's conference call. Thank you for participating. You may now disconnect.
Operator: Hello, and welcome, everyone, to the ATI Third Quarter 2025 Results Conference Call. My name is Becky, and I'll be your operator today. [Operator Instructions] I will now hand over to your host, David Weston, to begin. Please go ahead. David Weston: Thank you. Good morning, and welcome to ATI's Third Quarter 2025 Earnings Call. Today's discussion is being webcast online at atimaterials.com. Participating in today's call to share key points from our third quarter results are Kim Fields, President and CEO; and Don Newman, Executive Vice President and CFO. Before starting our prepared remarks, I would like to draw your attention to the supplemental presentation that accompanies this call. Those slides provide additional color and details on our results, capabilities and outlook and can also be found on our website at atimaterials.com. After our prepared remarks, we'll open the line for questions. As a reminder, all forward-looking statements are subject to various assumptions and caveats. Those are noted in the earnings release and in the accompanying presentation. Now I'll turn the call over to Kim. Kimberly Fields: Good morning, everyone, and thank you for joining us. Q3 was another strong quarter for ATI, delivering results ahead of our projections, advancing our long-term strategy and strengthening our leadership in aerospace and defense. Our teams continue to perform at a high level, meeting growing customer needs and driving sustained value. Let's start with a quick overview of our Q3 results. Revenue was up 7% year-over-year, once again exceeding $1.1 billion. Adjusted EPS was $0.85, $0.10 above the high end of our projected range. Adjusted EBITDA totaled $225 million. Excluding approximately $10 million related to the sale of oil and gas rights, $215 million of adjusted EBITDA exceeded the high end of our guidance by $5 million. Adjusted EBITDA margin exceeded 20%, our highest since the pandemic and almost double 2019's margin. Both segments delivered excellent profitability. Our High Performance Materials & Components segment margins were above 24%. And Advanced Alloys & Solutions segment above 17%, driven by strong pricing, mix and increasing aerospace and defense content. Cash generated from operations year-to-date reached $299 million, a $273 million improvement from last year. We also returned $150 million to shareholders this quarter through share repurchases, with $120 million remaining under our current authorization. Given this performance and our outlook for Q4, we are raising our full year guidance across the board. Adjusted EBITDA for 2025 now forecast between $848 million and $858 million, a $28 million increase at the midpoint. Adjusted free cash flow now forecast between $330 million and $370 million, a $40 million increase at the midpoint. Don will share more details on this in a moment. With 1 quarter left in 2025, I want to highlight three key themes driving ATI's continued momentum and future outlook. First, we have strong demand in our core markets, with aerospace and defense leading the way. Total A&D revenue rose 21% year-over-year in the third quarter, fueled by record defense performance and sustained demand in jet engines. This quarter, A&D reached an all-time high of 70% of total revenue, marking an important milestone in our strategy. Long-term agreements and differentiated materials are supporting consistent growth through 2026 and beyond. I'll detail what I see in these markets. Our largest market, jet engines, now 39% of total revenue, grew 19% year-over-year in Q3, with MRO representing about 50% of total engine sales. Next-generation programs such as LEAP and GTF continued to accelerate with strong production and aftermarket demand. You probably heard OEMs make those forecasts in their recent earnings calls. This sustained momentum supports long-term growth for ATI's proprietary alloys and forged turbine discs. Our order book extends into the mid-2027, underscoring tight supply and the strength of our customer partnerships. As a priority supplier, we've gained additional share in content where others have faced execution challenges while maintaining pricing that reflects the value of our capabilities. Looking ahead, we expect Q4 jet engine revenue growth in the high single to low double digits. For the full year, jet engine growth is expected to exceed 20%. With multi-decade customer agreements and increasing platform demand, ATI is well positioned for continued share gains and profitable growth through this aerospace cycle. Airframe sales grew 9% year-over-year and 3% year-to-date this quarter, supported by the ongoing ramp in Boeing and Airbus production and timing of customer orders. Boeing's production rate increase of 42 per month on the 737 and Airbus' A320 target of 75 per month by 2027 signal healthy sustained demand. We expect Q4 airframe revenues to finish modestly above 2024 levels as airframers adjust their inventory to production needs. ATI's expanded titanium capacity and advanced processing capabilities are driving share gains and improved pricing across OEM platforms, enhancing our mix of higher-value structural components and supporting continued margin expansion. Next year, we anticipate high single-digit growth in airframe revenues, driven by steady production ramps, increased ATI content and favorable pricing under new long-term contracts that start at the beginning of 2026. Beyond 2026, as build rates rise, ATI's airframe business is poised to grow faster than overall industry volumes, reflecting our differentiated titanium portfolio and deep customer alignment. Defense markets remain exceptionally strong. Revenue increased 51% year-over-year and 36% sequentially, reflecting broad-based strength across naval nuclear, rotary craft, missile and armored vehicle programs. Our diversified product base benefits from both U.S. and allied spending growth. We continue to qualify our new programs entering early production. ATI's defense business has now delivered 3 consecutive years of double-digit growth, outpacing defense spending. Highlights this quarter include being named Supplier of the Year by General Dynamics U.K., underscoring customer trust and ATI's performance and reliable delivery. Missile and propulsion programs are expanding rapidly. ATI's advanced materials are increasingly specified in [ THAAD ] and PAC-3 systems, where production is accelerating to meet recapitalization demand. We're also supporting emerging initiatives like Golden Dome, positioning ATI for above-market growth into the next decade. Emergent naval nuclear also contributed meaningfully to Q3 performance, showcasing the resilience and scale of our defense portfolio. With expanding qualifications, multiyear visibility and growing international participation, defense is set for continued record performance as modernization and replenishment programs ramp worldwide. Bottom line, A&D remains the foundation of ATI's growth. My second key theme, operational excellence and disciplined execution are the backbone of our performance. This quarter, the team delivered strong productivity gains. Across ATI, we're delivering what we call the triple threat: higher uptime, improved first pass yield and expanding manufacturing capabilities. We have examples across the company. In our nickel remelt operations, output increased by double digits. In the isothermal flow path, heat treat cycle time improved 3x. Accelerated throughput is lower in cost and freeing capacity for our crucial jet engine products. At our Specialty Materials business, we also expanded powder atomization capacity by over 25%, improving yield and quality. We expect to see the benefits of this improvement in our first half 2026 shipments. Our Specialty Rolled product business achieved a new record for monthly coil shipments, another demonstration of increased throughput and efficiency. Specialty Alloys and Components unlocked more than 20% additional capacity in the zirconium sponge process. This was accomplished through standard work and maintenance optimization requiring minimal capital investment. As a reminder, ATI is the leading producer of high-purity zirconium at scale in the Western world. This material is important to national defense, energy and aerospace. It's a small but highly profitable part of our business today, with significant growth potential ahead. Collectively, these initiatives have expanded available capacity by roughly 10%, with the greatest impact in our differentiated [ mode ] products and contribute to our margin gains. These are not just operational wins, they enhance reliability, increase asset utilization and drive long-term earnings growth. By securing additional customer qualifications on new equipment and products, we're building the foundation for ATI's next chapter of performance and profitability. My third theme this quarter, our strategy and investments continue to drive long-term value. Our strategy is working. With 70% of revenue now coming from aerospace and defense, ATI is firmly focused on our most differentiated, high-value materials and markets. Our nickel investment expands differentiated capacity at the top of the value chain. You'll recall, we're the sole-source producer for 5 of the 7 most advanced super alloys in the jet engine. Before we decide to invest, each project undergoes a disciplined review process, requiring projected internal rates of return above 30% and clear alignment with long-term customer contracts. In many cases, our customers are funding alongside us, reinforcing shared confidence in the demand outlook and guaranteeing needed capacity is in place for the future. We'll continue deploying capital with focus and discipline, prioritizing differentiated products, high-return investments and strategic partnerships that sustain ATI's leadership and create long-term value. I've been recently asked by a few investors whether investing in nickel melt capacity will negatively impact our pricing. The short answer is no. Our focus is on our most differentiated products. This is about expanding the competitive moat while supporting the engine ramp and our customers' ambitious growth targets. In summary, strong aerospace and defense demand, a relentless focus on operational excellence and a strategy that's creating long-term value resulted in Q3 being ATI's strongest quarter of the year. We're well positioned to extend our momentum to finish 2025 strong. And with that, I'll turn it over to Don. Donald Newman: Thanks, Kim. I'll provide some additional detail on our financial performance and discuss our outlook for the fourth quarter and full year. In Q3, we once again delivered results ahead of expectations. Adjusted EBITDA was $225 million, including a $10 million gain from oil and gas rights sales. Excluding that, EBITDA of $215 million represents a 19% year-over-year and 6% sequential improvement, with margins at 20% or 19.1% excluding asset sales. Strong price, mix and volume performance, particularly in defense and jet engines, drove this outperformance, resulting in nearly $10 million of operational upside versus our prior guidance range midpoint. Year-to-date, our sales are up 7% and adjusted EBITDA is up 19% over the prior year, excluding asset sales. This reflects improved mix, cost discipline and incremental margins, which remain near 50%, demonstrating the leverage of our business model. Segment performance was strong. HPMC EBITDA margins expanded to 24.2%, up 50 basis points sequentially and 190 basis points year-over-year. AA&S margins improved to 17.3%, a 290 basis point increase sequentially and a 250-point increase year-over-year. This reflects gains from ongoing transformation and efficiency efforts. Cash generation also remained strong. Through the third quarter, we have generated nearly $300 million in operating cash flow, supported by working capital improvements and strong earnings. We continue to monetize noncore assets, including the oil and gas rights sale and a small noncore machining divestiture, all while keeping capital investments focus and discipline. Gross capital expenditures year-to-date totaled $188 million. Managed working capital as a percentage of sales remains around 36%, with opportunity to improve. We expect a strong finish to the year. The seasonal working capital release and projected strong Q4 performance position us for robust fourth quarter cash generation. Now let's look at our guidance for the fourth quarter and full year. Building on Kim's comments, we are raising full-year guidance to reflect stronger performance and visibility through year-end. Adjusted EBITDA, $848 million to $858 million, up $28 million at the midpoint. Adjusted EPS, $3.15 to $3.21. Free cash flow, $330 million to $370 million. CapEx, $260 million to $280 million. That's unchanged from prior guidance. Q4 adjusted EBITDA is projected at $221 million to $231 million, a sequential 5% increase, excluding oil and gas gains. The midpoint of $226 million is driven by continued growth in jet engine forgings, improved price and mix and sustained strength in defense programs. Turning to margins. Based upon our continued strong performance, I expect consolidated margins in Q4 will exceed 19% and full year margins will be in the range of 18.5%. At the segment level, HPMC Q4 margins should continue to increase, exceeding Q3 margins of 24.2%. AA&S Q4 margins are expected to be between 16% and 16.5%, consistent with sales mix expectations. We expect another strong quarter of cash generation supported by collections and improved working capital efficiency. We are on track for $330 million to $370 million in adjusted free cash flow this year. This is a $40 million increase to the midpoint of the range. Gross capital expenditures will stay within the planned range of $260 million to $280 million, partially funded by proceeds from sale of noncore assets. Cash generated from sales of noncore assets and businesses totaled approximately [ $30 million ] year-to-date and $76 million in 2024. Our focus remains on high-return, customer-supported investments that enhance mix, margin and long-term competitiveness. Each quarter this year, we have increased EBITDA, margins and cash generation. Q4 will build on that performance, creating momentum that we will carry into 2026. With that, I will turn the call back over to Kim. Kimberly Fields: Thanks, Don. As we shared on September 11, Don has elected to retire from his role as CFO following our fourth quarter call. We'll have more to say about Don and his outstanding career next quarter, but I want to take a moment now to thank him for his leadership and many contributions that help put ATI in the strong position we're in today. The search for Don's successor is well underway. We're considering both internal and external candidates to identify the best possible leader. I'll share progress on the search in the months ahead for a seamless transition. Our disciplined financial strategy will continue. Before we turn to Q&A, I want to reflect on what makes ATI a compelling aerospace and defense story. When we began this transformation several years ago, ATI served a wide range of products and customers with limited concentration in our most differentiated materials. Fast forward to today and the transformation is clear. ATI is an aerospace and defense leader with more than 70% of our revenue coming from these high-value markets. In 2019, our margins were roughly half the 20% we delivered this quarter and our growth rates were more susceptible to price and input cost swings. Today, we are structurally stronger, anchored in differentiated materials, long-term customer relationships and sustainable pricing power. We've made tremendous progress, but we're not finished. The path forward centers on three levers: First, strategic pricing and mix optimization. Demand continues to outpace supply in key markets like jet engines, defense and specialty energy. We're optimizing our product mix at our most valuable assets to capture higher-value opportunities. Our long-term agreements and strategic pricing actions capture the value we deliver, securing the price, terms and pass-throughs that reflect our differentiated materials and the reliability our customers depend on. These long-term partnerships also underpin future investments and joint technology development, ensuring we expand capabilities in alignment with customers' needs. Our second lever is operational excellence and productivity. Across ATI, yield and throughput improvements are expanding capacity without adding capital. Product and process innovation drive efficiency and reliability, supporting record margins and cash generation across both segments. Our third lever is focus and simplification. We apply an 80-20 mindset, investing where ATI creates the most value and exiting where we don't. We're redeploying capital to high-value, high-growth areas. ATI is more agile, more profitable and better positioned to deliver long-term value. These levers are driving continued margin expansion, strong cash generation and higher returns on capital. Customers recognize ATI's reliable track record, long-term contracts and technical expertise, reinforce the surety supply our partners count on. ATI's foundation is strong. We're profitably growing, expanding margins and generating robust cash flow, trends we expect to continue well into the next decade. We're ahead of schedule on our 2027 growth and margin targets, and our business model provides clear visibility through 2030 and beyond. Even as customers build schedules fluctuates, ATI continues to gain share across A&D, optimize its asset base and deliver consistent growth and increasing returns. Our differentiated materials, technical expertise and integrated capabilities create a durable competitive moat, one that aligns closely with our A&D partners. We've accomplished a lot, and we're just getting started. With that, let's open the line for your questions. Operator: [Operator Instructions] Our first question comes from Richard Safran from Seaport Research Partners. Richard Safran: Don, congrats to you on the retirement, and thanks for all the help over the years. I appreciate it. Okay. So Kim, I heard your opening remarks, but I'm not exactly sure I understand what's changed since 2Q to drive the revised outlook and the guidance increase. So maybe you could discuss what's changed in your outlook and going to the moving pieces that drove this guidance increase we see today? Kimberly Fields: Sure. Thanks, Rich. So let me start with the guidance is reflecting that stronger-than-expected A&D performance. Particularly in defense, we had a tremendous quarter. And we see the A&D growth and momentum in third quarter continuing through the rest of this year and frankly, into 2026. We delivered $225 million adjusted EBITDA. And excluding the oil and gas rights, that's $215 million. HPMC was over 24% in margin, AA&S was over 17%. And the operational productivity that I talked about is really starting to flow through, and we're seeing that in those margin numbers. Free cash flow continues to be a standout at $299 million year-to-date, up $273 million from last year. So as we look at the momentum that we built in the third quarter, we see that. We anticipate that strength going into Q4 across A&D and frankly, continuing into 2026. So overall, strength in markets and strength in our position and the returns that we're getting on the investments from an operational mix and pricing. Richard Safran: This next one is a somewhat related two-part question about nickel and titanium. You have a lot of single-source nickel alloys, I'm talking about things like Rene 65. On the OE side, you're facing [ rate 52 ] at Boeing, [ rate 75 ] at Airbus. There's aftermarket demand. So first part, what are you doing to manage this melt capacity you discussed in your opening remarks? Second part, Kim, I think you recently said ATI is now the #1 source of flat-rolled titanium products to Airbus. What actually does that mean? And how does that translate eventually to the P&L, if you would? Kimberly Fields: Sure, sure. So you're right. We continue to see record demand for premium nickel alloys, especially those used in next-generation engine products like LEAP and GTF as well as defense, which, as I just mentioned, we had a fantastic quarter. So we're seeing demand across all of those market segments. And meeting that demand this year has really been focused around that productivity and reliability, higher melt yields, more downstream processing, the increased testing capacity in our Forged Products business. Those actions are delivering these strong results that you're seeing in how we supported that more than 20% jet engine growth this year as well as the margins at HPMC over 24%. So we're going to continue to focus on expanding process efficiency and customer co-funded projects. And as I mentioned in my remarks, these investments will exceed 30% IRR, our internal rate of return targets and ensure that supply assurance without adding unnecessary melt capacity. But at the same time, as you said, this demand that we're seeing this year is going to continue to grow. The other OEMs have said on their earnings calls, they're expecting this to continue to build and accelerate through the decade. And so we're also looking at selectively expanding our melt capacity to support that long-term growth, particularly in these high priority -- or I'm sorry, proprietary alloys, those hot sectionalities I talked about 2 quarters ago, those 5 of 7, not the standard nickel alloys. So we're doing very purpose-built type of capital expansion. And these projects are being developed in partnership with our customers. They're backed by long-term agreements, they have co-funding to ensure the new capacity and capabilities align with the future needs of this market. And as I mentioned, all these products are well in excess of the 30% target. So it's important to remember, those proprietary alloys, in many cases, we are sole sourced on those 5 of 7 in the hot section with very, very long qualification times and difficult learning curves and are under LTAs for decades. So we're managing it in the short term, both from a productivity standpoint to continue to improve our output from our current asset base and then in the long term, selectively investing purpose-built assets for those hot section alloys where we have those sole-source and long-term agreements. On the second question, you asked me around Airbus. Yes, that's, like I said, is a great success story. I'll just remind everybody before COVID, we weren't shipping anything to Airbus at that time. We had just signed our first contract with them, we hadn't even started shipping. We went into COVID, Ukraine was invaded. And quickly, they need to engage and get us up to speed became an imperative. And today, as I mentioned, when I say we're the #1 flat-rolled supplier in the industry -- or I'm sorry, in the product portfolio that we're selling them, that means we're the majority supplier today. The share-based contracts allow us to expand that share in content as they continue to ramp and grow. There's mechanisms for pass-through for metal, inflation, tariffs. And we effectively, starting next year, doubling our Airbus revenue and expanding those margins. So the benefit, as you asked to the P&L comes through that stronger mix, consistent volume, expanded content and share and the higher margins from the premium titanium plate and sheet. Yes. I just want to mention here, there's been -- go ahead, sorry. Richard Safran: Just on your melt comment, are you effective -- if I understood you right, are you effectively saying you're managing to the high-margin products, is that what... Kimberly Fields: We are, yes. In both the short and the long term, yes, we are optimizing the mix. So you see that in some of our aero like and other categories and growth. So we are managing to the highest value mix in the short term and optimizing the throughput and output and then in the long term, putting purpose-built assets in partnering with our customers for that. Operator: Our next question comes from Myles Walton from Wolfe Research. Myles Walton: I was hoping to dig a little deeper into the engine mix that you have going on with MRO being 50% of total engine sales. How much of that do you have a sense is in-production MRO work or in-production engines being MROed versus out-of-production engines being MROed? Kimberly Fields: Well, for us, as I look at our mix, we have a higher content on the next-gen engines that are out, the LEAP, the GTF. So what we're seeing is continued MRO and continued heavier shop visits, where, as I've mentioned, those forge discs that we make are typically the #1 place that they're going to start looking if they're coming in for -- either for just a typical upgrade as they're continuing to increase life and efficiency as well as the normal scheduled maintenance visit. So I would -- for us, it's mainly the next-gen engines that we have the higher content. That's where those powder alloys and those proprietary alloys that I just talked about really are predominant. And that's what drives that increased efficiency and life in those engines. Myles Walton: Okay. And a lot of the engine OEMs are talking about mid-teens type growth into next year. Is that something that would be in line with the level of growth you'd expect in your engine end-market? Kimberly Fields: Yes, I'd say that's in line with how we're thinking about it. We do see -- as you said, they are sharing, and we see that continued growth in demand, not just in the short term but through the whole decade. And because of our LTA or long-term agreements and our relationships, customers -- we have very transparent communications, we're aligned. These alloys in their hot section being a sole source or proprietary supplier really affords us the opportunity to partner closely. And to your point, we do see the growth, as they're saying, next year, but also through the decade. And then we're looking at investments to ensure that we're continuing to support that. Operator: Our next question comes from Phil Gibbs from KeyBanc. Philip Gibbs: Good morning. So excluding the oil and gas rights, you were ahead of the midpoint by about $10 million in the quarter for your adjusted EBITDA, should we think about that based on some of the comments you were providing earlier that maybe half of that is operational and half of that is due to the stronger or strong defense sales you had in the quarter? Kimberly Fields: Yes. I mean, I think that's fair. We've done work across all of our assets. Defense, like I said, that was really a bright spot, and the team did a fantastic job. We had -- defense continues to grow at double digit for us and that pace across missiles, nuclear naval and rotary programs. But we had some demand come in last quarter, that is going to continue through the rest of this year and into next year, that really allowed us to focus. And you saw some of the numbers moved around a little bit as we prioritize those shipments to those customers. But we expect that double-digit growth in defense to continue into 2026, missiles, like systems like [ THAAD ] and PAC-3 are continuing to expand. And we were blending those mature programs we have with some of these new cutting-edge programs like the MV-75 and the F-47. So yes, it comes from both, the productivity, which we'll continue to keep focusing on, so that we can keep meeting the demand that from an A&D standpoint, does continue to come in very strong. Philip Gibbs: So Kim, the defense sales levels overall, do you expect those to continue in the fourth quarter? Or was some pulled into the third quarter? Kimberly Fields: No. I mean -- so we did have some significant shipments from the forging business in the third quarter, and we will see that moderate a bit as we go into the fourth quarter. But as I look forward, the strength and momentum of the demand coming from these defense programs are going to continue to build as we come through the fourth quarter and into 2026. Now that said, jet engine overall, you will see that uptick in the fourth quarter. As like I said, we prioritized some of our assets and shipments in the third quarter for some immediate defense needs. That will start to come back, and it will be up. Philip Gibbs: And then lastly, on the net working capital side, that was a pretty strong improvement in terms of the free cash flow bridge. Where is that coming from predominantly? Is it mostly inventory? Or is it some inventory and payables? Just curious on that. Donald Newman: I'll tell you, I'll take that question. Part of the improvement that we saw in working capital really throughout the year, but especially in Q3, was tied to our management of accounts receivable. Now we are making progress certainly on the inventory side of the house, we've improved our efficiencies and our intensity there. But for accounts receivable, we put in place a securitization facility. And that securitization facility, we did execute some of the AR factoring in the period. And so that benefited some of our working capital efficiencies in Q3. But as you take a step back, though, and you look at the full-year guidance when it comes to free cash flow, clearly, we're making progress, both operationally and the cash that's generated through operations. And we are making progress across the working capital, especially AR and inventory, to improve that part of our cash generation. Operator: Our next question comes from Gautam Khanna from TD Cowen. Gautam Khanna: Congrats, Don. I know we have you for a little longer, but congrats. Guys, I had a couple of quick questions. You did mention, in 2026, you expect airframe sales to be up high single digit. And I wanted to ask if you had any other preliminary color you could provide on 2026 with respect to other end-markets, like jet engine? Maybe if you could just opine generically on incremental margins at HPMC? Any sort of parameters you'd give us as we start to pencil in '26? Kimberly Fields: I'd say, as you mentioned, I'll just -- I'll talk about the guidance. I'll let Don talk a little bit about the incremental margins, which we do see expanding. But for 2026, as you mentioned, we're expecting that airframe growth to be steady throughout the year, maybe start modestly and grow as we get to the back half of the year and accelerate as the planned increase rates start to take effect. From an engine standpoint, we do see, as I mentioned, continued growth and strength in that space. We're not giving specific guidance on every market. We wanted to share some things around airframe because there was a lot of questions on that last quarter. But as we're finalizing our plans, we'll give official guidance in the first quarter and share all of those numbers. But that said, we are seeing and anticipate demand for jet engines to remain exceptionally strong through next year and into 2027 based on our order book and what we see already today. Don, do you want to talk about margins at all? Donald Newman: I would love to. So to your point, yes, we've been seeing some really excellent performance around our incremental margins. Year-to-date, we're approaching 50%. And so we're really pleased with that. It's not a surprise to us. We've talked in the past about what our expectations were over time when it comes to incrementals. The standing rule that we've shared with -- or the standing guidance that we've shared with you guys is assume incrementals live in the 30% to 40% range, think about 40% as aligned to HPMC expectations, 30% more aligned to the AA&S part of the house. But we expected, as our mix was improving, as price was being captured, as efficiencies were being delivered; that our incrementals would improve. Now we've seen that in the first several quarters of this year. And the question -- the basic question is, "Okay, is this an indicator of a new incremental that we should be modeling to?" I would say at this point, we would continue to recommend the 30% to 40%. In the future -- in the near future, I would expect management will share with investors and analysts if that margin needs to be increased to a higher level. But I can tell you from my standpoint, while I'm really happy with the performance we're seeing. When I'm modeling the business, I still use that 30% to 40% range. And -- but I do expect that we will see the improvement that we have indicated as time unfolds here. Operator: Our next question comes from Andre Madrid from BTIG. Andre Madrid: Don, congratulations. Again, I'm glad we have you for one more, but it's been a pleasure. So you called out naval nuclear is one of the main drivers at defense, but maybe could you just give us a status update there on the zirc supply chain and how things are going there vis-a-vis China? Kimberly Fields: Yes. So obviously, the news continues to change, depending on if we have a trade deal or not. But I'd say, from the supply chain side on the zirc product, it's been very stable. We haven't seen any impacts or anything that is concerning from our standpoint. I will mention that -- I think I've mentioned this in the past, we've also built stockpiles, both the raw materials as well as finished products, to make sure if there's any intermittent impacts that as we can see through some of these trade negotiations, that we're able to maintain that and manage that. And so we're in a really good position from the supply chain side of things. When I look at the market, though, I'm expecting positive momentum as we go into Q4. We used these last couple of quarters, frankly, to upgrade some of our equipment with some customer-funded capital because again, our customers are looking at some of our capabilities and seeing tightness with the demand that they've got coming both nuclear, defense as well as energy, gas turbine energy. So we did put some upgrades. So we do anticipate to see some of those benefits starting to come through. And the demand fundamentals are solid. So we're working on new qualifications and new material to get qualified for those applications as well. Andre Madrid: Got it. Got it. And in terms of the stockpile, if you can share -- I mean how much -- how long of demand does that reflect those stockpiles? Like how? Is it like a year or 2? Kimberly Fields: I would say, we generally -- on finished products, we have almost 2 years, probably around 2 years of inventory. And on the raw material side, we have over a year of materials. You have to remember, these raw materials are not -- especially the raw materials for zirc, it's not a very high -- and it's only half. So let me [ quantify ], it's only half of the raw materials that we put in to make our zirc product, and it's not a very high dollar amount. And so we're able to hold large amounts of inventory in that raw materials. And as I said, we haven't had this jump to pull into that or use any of that. We're actually -- we're maintaining and managing it. We haven't seen disruptions this year. There's been good flow, and it hasn't been threatened as of yet. But again, if there's any bubble or any momentary disruption, I think we're in a good position to maintain through that. Andre Madrid: Got it. Got it. And if I could just squeeze one more in, I mean, you said MRO is roughly half of engine. What was that percentage previously, pre-COVID and whatnot? Kimberly Fields: Yes. Pre-COVID, I would say, typically, what our [indiscernible] 20%, 25%. And we've seen that accelerate rapidly. And you know all of these things, Andre, as you look at shop visits and the airlines waiting on planes to get delivered to some of those older planes are staying in service longer. I think the other aspect is the next-gen engines. They're continuing to drive [ lifing ] and efficiency, so they're doing upgrade packages. So all of those are coming to bear. And again, they all hit squarely into that hot section, those forge discs, that have so much wear that basically provides a threat for the engine and the plane to get off the ground. And so we are seeing, like I said, a substantial increase. And I won't talk for the OEMs. They're sharing it publicly, but they're sharing with us that they're seeing this to continue through the decade as we go forward and these engines get into their first and second shop visits. Andre Madrid: Kim, that's super helpful color. I'll leave it there. Operator: Our next question comes from Seth Seifman from JPMorgan. Seth Seifman: Thanks very much. Nice results and nice remarks. And Don, thanks for everything. So I guess just starting out, you mentioned in the HPMC business kind of a change in the structure of a contract, I think, something that goes -- that moves it more towards just recognizing your value-add on work rather than all the materials. Is there -- do you anticipate more happening there? And kind of -- what kind of determines when that happens and when it doesn't? Donald Newman: Seth, it's Don. So let me take that one. You're right. In the quarter, we highlighted because we were wanting to explain the movement in our jet engine revenue sequentially. We highlighted that we had a contract, a particular contract that we had converted from a materials and conversion structure, which means we would buy the material and convert the material and sell the product to our customers. We converted at the request of our customer, that contract to a conversion only. What that means is if we don't buy the material, they provide the material. And the long and the short of that is you have less revenue that you recognize. It doesn't negatively impact your bottom line, and it can actually be a help to your margins. So that's the background there. Is it a trend? Well, it's not unusual in our business to have conversion contracts. We don't see a trend that the material contracts will transition to conversion contracts. It was, I would say, generally an isolated situation where it shifted over. That particular contract had about a $10 million effect on revenue from Q2 to Q3. That particular contract will be with us through the end of this year. So you'll see that same effect in Q4. But no, not a trend and no messaging around this particular change. Seth Seifman: Excellent. Great. And then I think this probably follows up a little bit on Andre's question, but specialty energy in the slides, you talked about it being kind of a longer-term growth market. In recent years, there's been a little bit of growth, but not a lot and down this year. And so how do you think about the timeframe for that? And is it sort of linked to -- should we think about it more linked to developments in nuclear energy or anything else? Kimberly Fields: Yes. I would say we're going to start to see growth in that market segment next quarter, and that's going to continue to accelerate as we go into 2026. For us, and you're right to point that out, it's both. It's both gas turbine. And I'd say that is going to be in the immediate the next few quarters. You'll see that will be what's behind that growth, and you'll see that continue to increase. We are in the process of developing some new materials there and getting qualified. And so there is significant demand there. I'd say on the nuclear side, as you said, we are in a unique position. We're one of the only western suppliers of some of the zirconium in the [ tracks ] or tubing form that is really needed for the commercial nuclear facilities globally. And so that business, as I mentioned, we did some upgrades, we put some capacity, freed up some bottlenecks there. And so we're going to see that continue to grow. I know they're trying to fast track some of those nuclear facilities and bringing them back online. And we're seeing that demand come in now in orders for that today. So both of them, but I'd say the gas turbine really being driven by the data centers and the demand for energy. And for both, this is a market that we don't spend a ton of time. We talk a lot about aerospace. But it really leverages our differentiated materials, our breadth of materials, zirconium, hafnium, as well as titanium and nickel products. And those capabilities, I know we've mentioned it. I probably underemphasized the capabilities of our assets and the flexibility of those to be able to flex into some of these markets where there are very few, if any, in the Western world that have those capabilities in that product form. So we are seeing a lot of demand. I'm very excited about the future for energy for us. I do think it's a small part of our business today, but I do see that growing, and it's a very profitable part of our overall portfolio. Operator: We currently have no further questions. So I'll hand back to Kim Fields for closing remarks. Kimberly Fields: Thanks. Well, thank you, everybody, for the call today. As I said, we had a fantastic quarter. I'm very pleased with the results that we've demonstrated in the third quarter and the momentum that we see going into the fourth quarter and frankly, into 2026. Next quarter, we'll share our official formalized guidance. But just to close on, we're going to stay focused on where we're most differentiated, those advanced materials and forgings for aerospace and defense. The next phase is really around growing our content per platform, scaling those co-funded investments and improving operational leverage. We continue to see that mix grow. And A&D is going to continue to grow faster probably than our other markets, as we go into next year. And that momentum will continue from Q4 to 2026. Over time, like I said, the bottom line is our transformation is working. We're seeing that in both our margins, our mix and our overall growth. Now it's really about compounding that performance for the rest of this year and into 2026. Thank you guys for your time. I really appreciate it, and I'll talk with you later. Operator: This concludes today's call. Thank you for joining. You may now disconnect your lines.